Most People Can’t Value A Company (Let Alone The Entire Market)
Recently, I’ve been asking “regular” investors to tell me how much they think a company is worth. Invariably, their answers come in the form of the share price. (You may see the issue already.)
I get it, but this isn’t an answer. I’m not asking what the share price should be, I’m asking for a valuation (usually expressed as enterprise value) of the company. Most folks don’t see the market through the lens of value, but through the lens of share price.
This is just another reason to index and avoid timing the market, in my opinion.
So, how much is Apple worth?
Well, if you ask me, the biggest company in the world is worth about $200 per share (that’s a $3tn EV) based on some assumptions. See below.
This is based on a P/E multiple of ~30x on CY23 earnings estimates of $6.73. Apple shares have traded closer to 30x P/E following the re-rating on account of Services growth as well as expectations of better execution on the product cycle, which can be expected to be a multiple investors are willing to (return to) attributing to the company’s valuation. Beats will likely be driven by more sustainable secular drivers in iPhone and Services with a larger installed base, higher share in 5G smartphones, and better Services monetization — all together turning out to be a strategic advantage for the company.
Net cash should go from $72.7b to ~100b for 2023, and EV should break $3tn with an implied EV/EBITDA of 21x (currently it looks to be about 21x with a 135,163 EBITDA if we extrapolate to 144,852 EBITDA for CY23.)
In short, the market may be in drawdown, but $AAPL is still worth its pre-drawdown prices.
THERE ARE RISKS IN INVESTING, TOO.
The primary risks seem to be decelerating/contracting handset/smartphone markets that are faster than expected, or economic conditions that shift consumer demand. If there is an increase in competitive pressures in international markets, Apple’s shares may fail to deliver on the above expectations. Furthermore, the potential for tariffs (or taxes) present their own set of risks, albeit insignificant due to Apple’s corporate/capital structure, logistics layout, geographic footprint, and past maneuvering in the face of government restrictions.
Nobody Knows Anything So Just Index And Chill?
So, that’s one way to value a company….
I get a little confused about people speculating on the price movements of companies when they have never shown me that they can value ANY company. It’s not easy, but once you’re able to value companies in each industry, you’ll understand what I mean.
If you’re not able to do valuations on your investments, then yeah, you definitely should just index and chill. You can’t outsmart something that A) you don’t understand and B) outsmarts the smartest people on the planet.
But that’s just my 2 basis points. I could be wrong.
—Avery
Totally agree and I think hordes of investors are suddenly realizing this too. Interesting to look back at the crazy valuations that many investors rationalized during the recent boom. I'm not as optimistic as you are on Apple though.