Let’s look at Apple (AAPL) assuming that its capitalization is a function in which the independent variable is the company’s revenue. Despite this simplification, we will get a fairly high-quality (R2=0.83) linear model which has been forecasting the balanced level of the company’s capitalization rather well over a 10-year period of time:
As you can see, Apple’s current capitalization is approximately 35% above the balanced level within the bounds of this model. There has been no such large deviation over the entire period of the study.
How can we explain this fact without assuming that Apple’s capitalization is overvalued?
Has the company’s gross margin grown significantly?
Alas, Apple’s current gross margin is below the average for the last 10 years:
Have the revenue growth rates increased significantly?
The answer to this question is “no” as well. Moreover, according to analyst average expectations, Apple’s annual revenue in 2018 will be $264 bn, and in 2019 it will be $281 bn, which means an increase of less than 7%, i.e. almost twice as slow as Apple’s TTM revenue growth in fiscal 3Q 2018.
Source: Yahoo Finance
By the way, it’s interesting to note that within the bounds of this model, Apple’s annual revenue of $282 bn corresponds to the company’s balanced capitalization of about $900 bn, which is still much lower than the current level.
Now let’s consider the model in which Apple’s capitalization is determined by its EBITDA:
It should be admitted that the quality (R2=0.79) of this model also deserves consideration. At least within the bounds of this model Apple’s capitalization in 2013 and 2016 is perfectly correctly identified as undervalued. At the same time, the company’s current capitalization is approximately 40% higher than the balanced level.
And this cannot be explained by EBITDA margin growth or the acceleration seen in the company’s EBITDA growth either:
Finally, let’s consider the third model, in which FCF plays the role of an independent variable:
This model is the worst in quality (R2<0.6) of all those we have just examined, but it displaces an obvious fact. Apple’s current FCF is not record-breaking in the company’s history, nevertheless it somehow corresponds to its record capitalization.
As a conclusion…
Being extremely sincere, I must confess that in the past I wrote several articles that negatively characterized the prospects for Apple’s capitalization. And although I did not forecast the company’s share collapse, I did not expect the impressive growth that Apple has shown over the past year. But only those who do not make predictions are not mistaken.
Nevertheless, I do not give up looking for real, fundamental drivers of the company’s capitalization growth, which would rationally characterize Apple’s current price, but I have not found them yet.
I know there will be comments about Warren Buffett and Apple’s buyback program. Of course, these factors have a tremendous impact on the dynamics of the company’s shares, but they are not fundamental, and most importantly, they are temporary. And as yet, I have to adhere to the opinion that Apple’s rational capitalization is below the current level.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.