Estimation of Apple Inc. stock fair value

Bc. Anastassiya Shamshurina

Master's thesis

Abstract:

SummaryThis Diploma Thesis focuses on the intrinsic value of stock estimation for Apple Inc. one of the leading technological companies nowadays. Fair value estimate is one of the most important factors to consider before investment. The first part of the thesis consists of theoretical background connected to the topic name. It contains definitions of stock market, stock valuation, technological sector and stock itself. At the same time, it describes models and approaches that can be used for the evaluation of the fair value of firm. There is section explaining advantages and disadvantages for each of the stated methods and time when it is suitable to apply them. The second part includes calculation which mentioned in the first part of the diploma models and tables and graphs required for the estimations. Graphs contain the data regarding the development of the free cash flows of the company and dividend patterns over the time series of data. There is comparison part which includes calculations for one of the main company’s competitors and its results are compared with Apple Inc. at the recommendation part. And finally, all the results are stated in the discussion part and conclusion is made to help investors understand if shares are good for the potential investment.1.Objectives and Methodology1.1.Objective The main goal of diploma thesis is evaluation or so-called assignment of fair value to Apple Inc. shares form investor’s side. After evaluation is done, the goal is to determine the stock (company) position on the market, if shares are underpriced or overpriced. Based on company’s analysis through various models and by using company’s financial quarterly and annual reports. Received information will help to answer the question if company is the one to be invested in or not. If we have to buy the shares when it is underpriced, hold shares in satiation when current shares’ price is the same as estimated fair value or sell existing shares in case it is overpriced, when current price of a stock is higher than the calculations. The above information will help investors to make the right choice regarding the corporation. From economic point of view the calculation will also help to predict probable supply and demand on the shares, through the right estimation of the shares fair price. Also looking at competitor’s performance. As well there is the review of various factors that have influence on the change in the stock price and its growth or decline. Theoretical part explains such terms as share, fair value, investing, models for fair value estimation, as dividends discount model and others also financial analysis containing reports information of Apple Inc. Given information shows position of a company on the market. Practical part contains financial, fundamental and technical analysis. 1.2.MethodologyLiterature review was conducted through the methods of induction and deduction, synthesis and extraction from chosen sources. Analytical part is done through using of quantitative, qualitative, mathematical and economic methods. Evaluating it with the help of models and various comparisons with current price and as well competitor’s position on market. Afterwards collected information is transformed into recommendation for investment. Data for evaluation was derived out of the official website of Apple Inc. The company’s estimations are compared with its competitor Microsoft to show position of firm more precisely. And check whether it is better to invest in any of these firms. In order to conclude the answer for the fixed goals for this thesis two research questions were set: Research question 1: Are all the methods of fair value estimation going to give the same results? Research question 2: how well does the fair value estimation relate to the actual market price ?All data for the analysis conducted in the thesis were obtained from internet sources, CULS library, online and other sources. As well, th

Abstract:

e graphs were created from data provided in the quarterly and annual reports on given products found at the Apple Inc. official webpage. Graphs and diagrams were made and calculated with the help of software Microsoft Office Excel 2007 software. 2. Conclusion The answer for the first research question is following that not all the approaches and methods for estimation of the intrinsic stock value are giving the same result. To be more precise none of the possible options for evaluation of the fair value is giving equal result, they vary per the assumptions that are stated at the first phase of each model. So that the values stated in the assumption have very high impact on the final numbers. Also, some of the estimation methods are supposed to be more exact than the others, as some more complicated to calculate and consider many numbers from the company’s income statements and balance sheets. All of the methods use different characteristics and measures of the company for calculation such as some of them use free cash flow values and others use dividends. Sometimes firm may be performing better in dividend payments or at its free cash flow for example, and that is why the outcomes from calculations will vary. In case company reinvesting it may happen that the DCF model is not correct one for estimation, because company does not have a lot of free cash. And that is why it is not applicable model for the firm. All the approaches showed different results, the closest ones to the current market price were price to earnings multiple approach that showed 153.3$/share than the DCF model estimate was 133.5$/share, the DDM showed much lower result of 83.33$/share. The medium value from all the values calculated in diploma is 101.56 $ per share. Meanwhile the current market price is 174 $ per share, all this proves that the price per shares is overvalued about 2 times. For the moment it is not recommended to invest in Apple Inc. as per above calculations it is obvious that price for the stock is overvalued, and fair values that were estimated in this thesis prove that, as they are lower than the real market price. Even the fair values’ estimations varied from model to model, still each of the estimated numbers was below the market price. Then the investors shall try to search for another company showing better results and invest in it. In order to show the position of company comparison with one of the leading competitors in technology sector was conducted. For this goal, Microsoft company was chosen. As per received results it is not useful to invest in Microsoft either. As the intrinsic value results are much lower than the current market price of stock of a company. While Apple’s shares are about 2 times overvalued shares of Microsoft overvalued more than 3 times. The answer for the second research question is following the fair value mostly does not relate to the current market price. In case it does than the stock is fairly valued. The example of Apple and Microsoft showed in this diploma proves that they are overpriced which means that the fair value of both companies does not relate to the actual market price. Because it is not the same. There are various reasons that influenced the current price of stock and the fair value. The overvaluation of the company’s stock is connected to the many important factors. These factors are connected to the death of Apple’s CEO Stive Jobs. As it is well known that he had main ideas connected to the products Apple is manufacturing and he was one of the main influencers and inspirers of the corporation’s development. And it is due to his extraordinary vision company grew up and its products became well know. The other factor which has influence is that Samsung became as popular as Apple, due to the innovations it brought to the mobile phone market and also they have phones with more powerful battery than Apple. Lately a lot of Apple’s customers complained regarding the lifetime of the battery. Latest iPhone models since the death of the CEO are not much different in its design from the old ones. As well the price of the products plays a big role, because Samsung’s products are sold sometimes for the lower prices and the quality is still high. As well boom in the company’s growth already happened, until it introduces some new features that are not yet existing they still may grow. It was profitable to invest in Apple company in 2004 for example, because by that time company had price of 92$ per share and its fair value calculated by the Discounted Cash Flow model was 184$. It means that the stock prices of company were 2 undervalued. And the thing is that the company nearly gained the intrinsic value calculated in 2004 by now and it is just 10$ less than it was predicted. It shows right now how much the shares grew up. 3. Recources3.1. Bibliography[1] BLAGODATIN, A.A., LOZOVSKIY, L.S., RAIZBERG, B.A, 2009. Financial Vocabulary [Finansoviy Slovar‘]. 1st ed. Moscow: INFRA-M. ISBN 978-16-002863-7 [2] DAMODARAN, A., 2006. Damodaran on valuation. Security analysis for investment and corporate finance. 2nd ed. United States of America: John Wiley & Sons, Inc. ISBN-13: 978-0471751212[3] GITMAN, L.J., 2006. Principles of Managerial Finance. 10th ed. United States of America: Pearson Education, Inc. ISBN 0-321-31150-7 [4] GRAHAM, B., BUFFETT, W. and ZWEIG, J., 2013. The intelligent investor. New York: Harper Collins Publishers Inc. ISBN: 0060555661[5] SCHWAGER, J.D., 1996. Technical analysis. 10th ed. United States of America: John Wiley & Sons, Inc., 1996. ISBN 0-471-02051-6 3.2. Internet sources [1] Finance.yahoo.com. (2017). AAPL Key Statistics | Apple Inc. Stock - Yahoo Finance. [online] Available at: https://finance.yahoo.com/quote/AAPL/key-statistics/ [Accessed 24 Nov. 2017]. [2] NASDAQ.com. (2017). Apple Inc. (AAPL) Stock Report – NASDAQ.com. [online] Available at: http://www.nasdaq.com/symbol/aapl/stock-report [Accessed 24 Nov. 2017].

Keywords

fair value of stock, Apple Inc., stock market, technology, innovation, fundamental analysis, financial market, technical analysis

Language used: English

Date on which the thesis was submitted / produced: 28. 3. 2018

Thesis defence

• Supervisor: Ing. Petr Procházka, MSc Ph.D.

Czech University of Life Sciences Prague

Faculty of Economics and Management

Master programme / field:
Economics and Management / Economics and Management