Investing

How is Apple worth what they are worth?

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Dec 4, 2010
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How is Apple worth what they are worth?

When I look at my bank account that's how much money I have and am worth. If I spend $2 I lose $2 on my net worth.


Apple or anyone for that matter are valued at way more than they have tangible assets to justify their worth. Remember Enron or someone else who tried to buy blockbuster and even before they made a dollar from that merger or acquisition they were promising shareholders how much more money they are going to make in the future. Of course we know how that story ended.

To a laymen apple is hugely successful but how much of that trillion dollars is actually asset they have on hand?

Can someone give a condensed version on a companies worth and how they go about assessing their worth in the market?
129 replies
Deal Guru
Apr 8, 2013
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When they talk about worth of a company, they arent just talking about tangible assets. You have strength of the brand, potential future earnings, current place in the industry, who is running the company, their stocks, etc.

Apple can easily sell more than a trillion dollar worth of products in the next 10 years.
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May 22, 2003
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Because Apple is a cash cow. Currently sitting on $243 billion in cash and net income of $11.5 billion last quarter.
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Oct 13, 2009
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notenoughsleep wrote: Because Apple is a cash cow. Currently sitting on $243 billion in cash and net income of $11.5 billion last quarter.
This
Re: Procurement, Life & RFD
nasa25: say you won it in a raffle. That's what I do with like 86% of my purchases
infinityloop: Lying to your SO seems like an unhealthy long term strategy
nasa25: lmao
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Supercooled wrote: Apple or anyone for that matter are valued at way more than they have tangible assets to justify their worth. Remember Enron or someone else who tried to buy blockbuster and even before they made a dollar from that merger or acquisition they were promising shareholders how much more money they are going to make in the future. Of course we know how that story ended.
In theory, the value of a company is the discounted value of all of its future cash flows, which would be all the dividends it is going to pay in the future and whatever residue value it will provide to shareholders when it is wound up. But of course we don't have a crystal ball so potential investors have to guess at all this (both the amount of the cash flow in the future and the discount rate to present day). Based on past performance and future expectations, investors think that the total value of all these discounted future cash flows is worth way more than the company's current net worth. It is a reasonable assumption so people will buy the stock. Of course these assumptions could be wrong, Apple could be another Enron and worth nothing, but investors understand the inherent risk in buying any stock. They buy it anyway because the calculate the potential reward is worth the risk.
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Feb 9, 2009
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243 billion just in cash, jesus... to think about it, they could buy TD and RBC almost entirely in cash and not break a sweat....
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Mar 27, 2018
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Stock price is not based on the value of present assets
but on the speculation (gambling) about future revenues.

Simplifying what CheapScotch said

The stock market is nothing more than sophisticated gambling.
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Dec 14, 2010
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zinful wrote: Stock price is not based on the value of present assets
but on the speculation (gambling) about future revenues.

Simplifying what CheapScotch said

The stock market is nothing more than sophisticated gambling.
This is far from true. How come then the stock market has an annual compound growth of about 9% since 1871?

Gambling is a pure game of chance where the odds are against you and for the house, but you take it anyway for the chance of gain.

Investing is the art of practicing due diligence and reason to place money where it is most likely to grow. The future is unknown so some placements will win and some will lose, but the investor can place the overall odds in their favor through their own analysis. Some mistakes (bad outcomes) are inevitable, but some are avoidable. Diversification and due diligence to quality and valuation are 3 practices that, like counting cards, help the player immensely in terms of tilting odds in the player's favor. They do not guarantee good outcomes, but they greatly increase the probability of good outcomes.

If someone thinks that doing due diligence is a guarantee they won't have a short term paper loss next year then they have not been doing this for long enough to actually understand investing.

The performance of one's portfolio is directly related to the performance of the business that one is invested on. And there are well known methodologies to determine quality and valuation, which are the drivers of superior long term return.

Apple is valued at just 15.7 times analysts' earnings estimates for its next 12 months, compared with a forward price-earnings ratio of 16.5 times for the S&P 500. Apple increased its sales by 17 percent year over year and its earnings by 40 percent year over year in its June quarter, versus the estimated 8 percent sale growth rate for the average S&P 500 companies this year. Corporate guidance and institutional investors covering the stock provide a solid consensus. It's by no means overvalued, since its multiple earnings are reasonable and far from the overvaluation from internet bubble times, where Microsoft traded at 59 times earnings, Cisco at 179 times earnings, Intel at 126 times earnings and Oracle at 87 times earnings in 2000.

Also, Apple returned about $25 billion per quarter to shareholders through stock buybacks and dividends this year versus the approximately $11 billion per quarter last year. Buybacks lower the company's shares outstanding, resulting in higher earnings per share.

Berkshire's Hathaway is the second largest shareholder of Apple. As Buffett said on an interview: "When I buy Apple, I know that Apple is going to repurchase a lot of shares. We own about 5 percent. But I know I don't have to do a thing and probably in a couple of years we'll own 6 percent without laying out another dollar. Well, I love the idea of having 5 percent go to 6 percent."


Rod
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CheapScotch wrote: In theory, the value of a company is the discounted value of all of its future cash flows, which would be all the dividends it is going to pay in the future and whatever residue value it will provide to shareholders when it is wound up. But of course we don't have a crystal ball so potential investors have to guess at all this (both the amount of the cash flow in the future and the discount rate to present day). Based on past performance and future expectations, investors think that the total value of all these discounted future cash flows is worth way more than the company's current net worth. It is a reasonable assumption so people will buy the stock. Of course these assumptions could be wrong, Apple could be another Enron and worth nothing, but investors understand the inherent risk in buying any stock. They buy it anyway because the calculate the potential reward is worth the risk.
We can't compare Apple to potentially be Enron. Although investing requires a leap of faith, it's not a mere guess either. Quality and valuation can be calculated with a degree of certainty, and estimates don't need to be precise, but one can estimate the direction. As Buffett says, "With a wonderful business, you can figure out what will happen; you can't figure out when it will happen. You don't want to focus on when, you want to focus on what. If you're right about what, you don't have to worry about when."

Enron had lots of very long dated, high exposure derivative positions marked to model. This was a big part on Enron’s business, so it was no surprise, but the value of the contracts had extreme dependence on assumptions. Not a fair comparison to how Apple report results or make money.

Enron’s reported net income grew from $584 million in 1996 to $979 million in 2000, an average of 16.9% per year, totaling 67.6% profit growth for the 5 year period. Maintaining a high earnings growth contributed to the perception that Enron was among the elite of “high performing” companies. However, Enron’s reported profits were microscopic relative to revenues. Net income did not grow at anything near the same rate as revenues, which grew a phenomenal 164.6% per year for the same 5 year period.

As a result, there was a steady decline in net profit margin, from 4.4% in 1996 to just 1% in 2001. Similarly, Enron’s gross profit margin (gross profits as a percent of revenues) declined from 21.2% in 1996 to 13.3% in 1999, and took a dramatic drop to 6.2% in the following year as earnings more than doubled. Enron’s rapidly declining profitability was not questioned by Wall Street analysts, as long as the reported net profits continued to grow at 15% plus per year – regardless of how small these profits actually were as a percentage of revenues.

The rapid decline in Enron’s gross profit margin revealed a major red flag – the increasing use of the merchant model of revenue accounting by Enron to report both revenues and costs from energy trading, and the application of MTM accounting to increasing volumes of gas and electricity sold. If you research about it, the combination of merchant model and MTM accounting allowed Enron to book the whole value of the commodity traded as revenues, rather than just the trading fees or commissions.

Even the small profits reported by Enron in 2000 were eventually determined to be only a mirage by court-appointed bankruptcy examiner Neal Batson. That report reveals that over 95% of the reported profits in these two years were attributed to Enron’s misuse of MTM and other accounting techniques. Very different than Apple's GAAP numbers, where there's no room for manipulation. But while financial analysts could not be expected to know that the company illegally manipulated the earnings, the reported profit margins in 2000 were so low and were declining so steadily that they should have merited ample skepticism from analysts about the company’s profits.



Rod
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rodbarc wrote: ............... But while financial analysts could not be expected to know that the company illegally manipulated the earnings, the reported profit margins in 2000 were so low and were declining so steadily that they should have merited ample skepticism from analysts about the company’s profits.
I think it is extremely unlikely that Apple is another Enron, but not impossible because financial analysts missed the red flags that, in hindsight, seem to be obvious. I cannot be 100% certain that financial analysts today would not make the same mistake.
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CheapScotch wrote: I think it is extremely unlikely that Apple is another Enron, but not impossible because financial analysts missed the red flags that, in hindsight, seem to be obvious. I cannot be 100% certain that financial analysts today would not make the same mistake.
Right, and that's why we have GAAP. Apple's GAAP is proportional to adjusted earnings. Enron's GAAP was negative given its structure, making a lot harder to analyze. For this reason, it's very hard to mislead analysts, because GAAP is very black-and-white. So black-and-white that the market don't price companies by its metrics, as it tends to penalize most companies often. That shows how AAPL is strong.


Rod
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rodbarc wrote: Right, and that's why we have GAAP. Apple's GAAP is proportional to adjusted earnings. Enron's GAAP was negative given its structure, making a lot harder to analyze. For this reason, it's very hard to mislead analysts, because GAAP is very black-and-white. So black-and-white that the market don't price companies by its metrics, as it tends to penalize most companies often. That shows how AAPL is strong.
Then by all means, buy as much Apple stock as you can afford.

Personally, I will stick with ETFs

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