The U.S. stock market lost about 12% last month, and Apple has been negatively affected by dropping 11.8% in the last 7 days alone.
Goran Damchevski for Simply Wall St. News:
Investors want to know why this is happening, and on the surface there are 3 possibilities:
• Analysts are mistaken on their growth estimates and earnings will come-in weaker than projections. The alternative interpretation, is that sell-side analysts are not mistaken, but reluctant to post what they really think in fear of scaring off investors.
•. Second, is that the market is increasing the price for risk. Meaning that marginal (large, institutional) investors now demand a larger return from stocks in order to invest. This has the effect of depressing stock prices while earnings are constant.
• Third, is that the market is overreacting by fears of the unknown. Specifically, inflation (and rates) is hard to predict, and investors are choosing to be safe.
We use free cash flow forecasts from analysts covering Apple in order to estimate the value of future cash flows. For the next 10 years, we arrive at a value of the (after debt) free cash flows at US$998b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten-year period. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 6.7%…
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3 trillion or US$184 per share.
By including a 20% margin of safety for our model, we can see that Apple is approaching value territory, and investors may want to set an alert for revisiting the stock once markets settle down.
MacDailyNews Take: It’s impossible to time the market, but not as difficult to spot share prices of an amazingly strong company offered at a deep, deep discount.
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