Strategic Analysis and Valuation of Apple Inc.

Michael Hranai

Student thesis: Master thesis


The purpose of this thesis is to examine Apple Inc.’s business environment, determine the intrinsic value of one Apple share as at 31.10.2014 and subsequently conclude as to whether the current market price is under- or over-valued. To obtain the share price estimate, findings from the strategic and financial analysis are used as a basis for financial forecast and subsequent valuation. Apple Inc. (Apple) is an American multi-national corporation established in 1976 that designs and sells consumer electronic devices as well as related software, services and user content. Apple is the world’s second largest smartphone maker and the leading tablet vendor. Despite the staggering growth the company has experienced over the past decade, its growth has decelerated markedly over the last two years. What is more, the company’s growth is highly dependent on just two product categories – smartphones and tablets. The iPhone and the iPad account for over 70% of the company’s total revenues. Strategic analysis revealed that the company faces both challenges and opportunities in relation to the development of its external business environment. Decelerating growth in the company’s core product markets combined with a shift in demand to price-sensitive emerging markets as well as the emergence of Chinese producers of low-cost devices, all represent a significant threat to Apple’s future financial results. On the other hand, wearable electronic devices and mobile payments offer a robust medium-term growth opportunity. Compared to other companies in the industry Apple stands out with its ability to seamlessly integrate hardware, software, services and content into one closed ecosystem. The ecosystem locks-in customers and provides the company with a formidable competitive advantage. Apple’s decelerating growth has translated into a decrease in profitability. Financial analysis showed that both ROE and ROIC have declined considerably over the past two years. To better control for the uncertainty related to the forecasting of Apple’s future free cash flows a scenario approach to valuation was employed, with two potential scenarios of the company’s future growth. Under the base case scenario, the company’s growth is expected to gradually decelerate as its core product markets approach maturity. The growth case scenario assumes that Apple will introduce an entirely new product category that will reinvigorate the company’s growth. The acknowledged enterprise DCF model was applied to determine the intrinsic value of Apple under each scenario. Apple’s WACC was estimated at 6.93% and used as a discount factor. Finally, based on the probabilities assigned to each scenario, the intrinsic value of one Apple share as at 31.10.2014 was estimated at $153.24, concluding that the current market price is undervalued by $46.57. A sensitivity analysis showed that the estimated value is highly sensitive to changes in WACC and the terminal growth rate. Therefore, when valuing companies both WACC and terminal growth should be monitored closely.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2016
Number of pages115