In the last 12 months, including the most recent quarter, Apple Inc. (AAPL) had a total net income of $50,678 million. Taking this as a fair estimate of the cash flow available to equity holders, which in the case of Apple it is close, we can do a simple calculation. The one other necessary input for the calculation is the cost of equity capital. Here a reasonable estimate is 8.5%. (See Aswath Damodaran’s great blog on valuing Apple for details related to estimating this number).
If we assume that Apple’s earnings will be stuck forever at this number, the value of the equity can be approximated by 50,678/0.085 = $596,211. This translates into a per share value of $108.80. It is important to recognize that this calculation is in nominal terms – that is there is no adjustment for inflation. If we assume that the long-run inflation rate is 2%, it means that in real terms Apple’s earnings are falling by 2% each year. That seems like a very low bar for Apple to get over. Nonetheless, it leads to a valuation well in excess of the current market price. The simple calculation shows how deeply pessimistic the market is regarding Apple’s future.
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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.