Apple stock (AAPL) is one of the most actively traded stocks in the world with an estimated trading volume of almost 40 million shares. In this article, we will discuss the various aspects of Apple stock trading, including the determination of its intrinsic value by means of different methods of valuation, technical analysis, and the different items by which it can be traded: its underlying securities, futures, bonds, and CFDs.
Apple’s primary company operates through its flagship iPhone app and also designs and produces iPads, MacBooks, Watches, AirPods, and HomePods. They are powered by software applications like iOS, macOS, WatchOS, and TVOS operating systems.
The Services portfolio includes the App Store, cloud storage, Apple Music, Apple Pay, AppleCare, and licensing storage. The adoption of the Apple Watch has helped Apple improve its role in the wellness and personal health monitoring sector.
Additional services include Apple Arcade, Apple Wallet, Apple News+, Apple TV, and Apple TV+ subscription services.
There are two basic ways in which you can make a fundamental analysis:
(i) The bottom-up
Bottom-up includes looking at individual businesses and estimating their sales, cost structure, and balance sheet (assets versus liabilities) in order to obtain a general understanding of the worth of the company.
Top-down means looking at higher-level macro-economic indicators to decide if those asset groups are worth investing and, if so, which sectors within them are better (e.g. tech, cyclicals, staples, etc.) and which businesses are better (to buy) or worst (to sell).
Top-down is widely used in macro disciplines, where these types of traders would look at things like economic capacity usage to assess where we are in the business cycle, debt-to-income ratios for debt sustainability, and risk premiums within and across asset classes. In our article on the three main economic and market balances, we discussed these principles in greater detail.
Some investors will use a mix of both methods, define asset classes and sectors that suit well from a top-down viewpoint, and find the best companies to invest in within that context.
Bottom-up review of the Apple stock
Fundamentally, the worth of a company is the amount of cash that you can carry back to the present with your life discounted.
Following the principle that a dollar today will be worth more than a dollar tomorrow or in any future time, any cash received in the future period will be discounted back using the necessary return on investment (also called the discount rate) to calculate its present value.
Figuring the amount of these cash flows at the discount rate is commonly referred to as discounted cash flow analysis.
Determining business valuations is more of a “game” – there is no perfect numerical answer. Everyone has a certain expectation for returns, and the future inevitably has a wide range of potential outcomes.
And since the cash flows of equities are theoretically permanent, minor adjustments in expectations of a future income stream which have an outsize shift on the security price. This compares with other types of bonds where the cumulative return earned over a number of periods/years is calculated in advance and more theoretical focus is placed on the risk of default.
Case of Apple Discounted Cash Flow
In order to evaluate the inherent value of Apple as a company, we need to make fair estimates for the coming annual period and beyond. To keep it easy, we can simply input values such as revenue that rises by a certain percentage year on year. The assumptions should be consistent with reasonable standards.
For example, in the fiscal year 2020 (FY2020), we may assume that Apple will receive $280 billion in revenue.
Apple is a relatively large, profitable company, and its profits do not fluctuate too much year after year. The EBITDA margins are just short of 30%. Depreciation as a percentage of revenue is equivalent to 4%. Its effective tax rate is about 15%.
Some variables related to its balance sheet, such as cash (an asset that contributes to the value of a company), its debt and effective expense, and its outstanding stock, must also be entered.
We will need to know its capital expenditure and R&D investment, which is basically what it spends to get back into the business and help it expand. If we set this equal to depreciation, this balances the effect on cash flow.
Generally, cash flow is the sum of the following:
Cash flow is =
+ either [Net income] or [Net operating profit after tax (NOPAT)] *
+ Depreciation and amortisation
/-Any net improvement in working capital ( e.g. inventories, receivables, payables)
– Capital spending
*Net profits are used by calculating only the equity of the company as the interest cost (debt) is subtracted. NOPAT is used to measure the market value of the company, which requires the capitalization of the debt.
We also need to know the appropriate rate of return. Stocks have traditionally gained around 5-6 percent in excess of cash. Cash yields essentially nothing in most of the developing world, or negative returns even in nominal terms, so 5-6 percent as a necessary return might be fair.
From another viewpoint, the Sharpe ratio of any asset class, or the calculation of excess returns to excess risk, is typically 0.2-0.3. Empirically, even lower and lower returns do not compensate enough for the risk and the asset may be deemed overpriced. Much higher, and it attracts competition and forwards returns will inevitably bring the bid back down.
The annualized volatility of equities is typically about 15% for the US index. They are usually higher for individual companies, as a diversified portfolio appears to be more stable than any particular business whose valuations can shift a lot during major data releases.
Apple’s average volatility, for example, is about 43 percent annualized.
However, if one is well-diversified to anything close to an index, the uncertainty of the individual security would not be the reference point on which to base the measurement of the Sharpe ratio.
If the Apple stock has around 15 percent annualized volatility, a ratio of 0.2 to 0.3 Sharpe will position the expected return; somewhere between 3 and 6 percent using the simple multiplication.
If you use 43 percent (i.e. concentrated position in Apple) then the discount rate will have to be even higher (some 8.6 to 12.9 percent) to take additional risks into account.
The discount rate of 6 to 7% is pretty normal. We ‘re going to run our study off 7%.
Fill in Discounted Cash Flow ( DCF) model
Here we will look at our line-by-line DCF model.
We tend to give it ten years off.
We set our target return on equity at 7%. Most companies, like Apple, also have debt. Debt is cheaper than equity because, in the case of a possible liquidation, bondholders are superior to shareholders. In other words, they’re paid first in such a case. Popular shareholders are compensated last.
Apple’s effective debt rate is about 2%, which reduces the company’s total capital expenditures. On a weighted average basis, the capital stock is about 93% of Apple stock capital structure. The debt is 7 percent, while the gross capital cost is about 6.65 percent. This is the discount rate on which we measure the business as a whole.
We may change the valuation to a variety of values by taking the valuation at about 6.65 percent, plus/minus 50bps. In other words, the company’s value is based on a discount rate ranging from 6.15 to 7.15 percent.
Later, to get the value of the equity, we deduct the debt and add “excess” cash (cash not required to cover near-term liabilities) to the company’s equity value. Dividing by a completely diluted share count is equal to the amount per share.
Duration of projection
Over the prediction era, we’re going to half-year cycles since this is written around halfway through the calendar year.
We also have two forecasts – the unlevered free cash flow (UFCF) and the increased free cash flow (LFCF).
Throughout this report, we use free cash flow, which is essentially the value of the business as a whole. We need to deduct the debt at the top, as noted above, in order to get to the equity. Levered free cash flow actually measures the value of the equity.
In the free cash flow estimate, we take each of the annual forecasts and discount the cash flow back to the present at our 6.65 percent discount rate (+ /-50 bps above and below).
Then we’ll add those up to find that Apple’s estimated average discounted cash flow for the next 10 years is around $538 billion. It ranges from around $526 billion to $551 billion.
Calculation of terminal value
To get to our terminal value – that is, the overall value of the company not included in our 10-year forecast span – we need to make the estimate.
There are two common ways to calculate the terminal value:
a) Growth Perpetuality Model
(b) Exit multiple model
Perpetuality Development Model
The perpetuity growth model takes the free cash flow from the final year of the forecast cycle and multiplies it by 1 plus the growth rate (i.e. the economy) and then splits the difference between the discount rate and the growth rate:
FCF * (1 + g)/(k-g)
FCF = free cash flow for the final duration
g = growth rate (i.e. economic)
(k) discount rate
In this case, we should conclude that the long-term growth rate of the economy is approximately 1.8% and that the discount rate is 6.65 percent.
The terminal year free cash flow amounted to around $88 billion (NOPAT or net operating profit after tax). Plugging all of that into:
$88 billion * (1 + 0.018)/(0.0665 – 0.018) = $1.856 billion
That’s around $1,856 billion, or $1,856 trillion. But it’s not in terms of present value.
In order to translate it into current value terms, we need to take that number and divide it by 1 plus the discount rate for the terminal year discount period (which was 9.5 years).
$1,856 billion/(1 + 0,0665)^9.5 = $1,006 billion
That’s $1,006 billion, or $1,06 trillion.
Multiple Platform Exit
The exit multiple models are based on the FCF of the final year and multiplied by an effective valuation formula.
For example, many company valuations are expressed as multiple EBITDA (earnings before interest, taxes, depreciation, and amortization).
In this scenario, we should take our free cash flow from our final forecast year, $88 billion, and multiply it with a representative EBITDA multiple. This may be median multiple trading for publicly traded business peers. (i.e. businesses that are as similar as possible to what Apple is doing for congruence).
Whatever that multiple is, the FCF number will be multiplied by 1 plus the discount rate for the terminal year discount cycle (9.5 years).
We can also derive from the perpetuity growth model what the multiple EBITDA terminal will be. Based on these estimates, it would have been about 16x.
($88 billion * 16)/(1 + 0.0665)^9.5 = approximately $ 1 trillion
Perpetual growth vs. multiple production
The perpetual growth model is adaptive to inputs. Small variations in the discount rate and the permanent rate of growth will drastically change the terminal value.
The exit multiple models must be viewed in the light of a shift in value over time due to interest rates, the economic cycle, and the overall margins, growth, and/or profitability of the industry and individual companies within it.
The perpetuity growth model is more commonly used by researchers. While the exit multiple is more commonly used in the business world.
Absolute Valuation of the Apple stock
Sensitized through our entire valuation spectrum, based on the discount rate and the eternal growth assumption, we have a value ranging from $1.37 trillion to $1.78 trillion for the entire value of the company.
If we deduct the debt to give the equity value, we’re going to get $1.32 trillion to $1.72 trillion.
To find the acceptable per-share price, we take the value of the undertaking, deduct the debt, and add the amount of cash, then take that sum and divide it by the number of shares outstanding.
This range is from $298 to $395 per share.
As this is posted, Apple stock is $364 per share, so this metric is approximately reasonably priced.
Chart ‘Football zone’
In some presentations, investors can display their range of valuations through what is commonly referred to as the “football field” graph because of its resemblance to field yard markings.
This will display the lower, middle, or median, and upper range valuations through different parameters. In this case, Apple stock is priced at a discount rate range of 6.65 percent + /-50bps and a perpetual growth rate range of 1.80 percent + /-20bps.
Revenue and marginalization
A valuation can also be viewed by a graph that sensitizes valuation to two variables, such as sales growth and margins while keeping items like the discount rate / expected rate of return constant.
This has the advantage of seeing a variety of results depending on two significant factors – i.e. what revenue is going to increase and how much of it is going to transform into profits or cash flow.
We use sales growth and EBITDA margins in this situation. Our base case is around 4 percent year-on-year sales growth over the 10-year forecast period and the EBITDA margin is just under 30 percent. Our discount rate/equity expense is held at 7%.
The numbers that are non-coded give us a wide variety. The light green numbers give us a narrower range that is similar to our base case of assumptions, while the number in the middle gives us a form of overall median projection.
We range from 0 to 8 percent year-on-year sales growth and EBITDA margins from 24 to 32 percent.
This gives us a wide range of $191 to $534 per share, a narrower range of $251 to $419 per share, and a general median of around $326 per share.
Responsive to planned return
The discount rate is considered to be the return on investment.
If you only need a 5% return per year, you’ll be able to pay more in advance than someone who needs a 10% return per year. The higher the price, the lower the returns, generally speaking.
In this scenario, we find that someone who only wants a 5 percent return per year might be able to pay up to a fundamental value of about $560 per share (about 50 percent of the current price premium as it is written).
On the other hand, anyone expecting a 10% return a year would have to wait for a price of just over $200 a share where it was before the coronavirus crash.
The composition of capital
The financial structure of a corporation relates to how it is financed – i.e. the composition of debt and equity financing.
Debt and equity both have their pros and cons as a source of financing.
Debt is cheaper than equity since it is senior in the capital structure. The trade-off is that the settlement of the loan is a duty. Debtholders are obliged to collect a certain amount of cash at regular intervals, or the company would be in default. Aside from running a business with more debt, you don’t have to think about diluting your shareholding.
Equity is more costly, but paying dividends to shareholders is not an implicit requirement. Equity is the creditor of a corporation. The value of a company is paid out after all costs and other commitments have been taken out. Issuing equity is better since you can’t “stick” to it. At the same time, the question of equity dilutes the shareholding interest of the shareholder.
Traders will also look at the financial structure of a corporation to assess how risky a business is. Generally, the higher the debt level of a company, the more volatile the equity. Both debt holders need to get their claims due before the equity holder gets anything.
Higher debt raises the probability of default. An over-leveraged company whose cash flow is unlikely to be adequate to service the debt would usually see its stock decline dramatically.
Around the same time, an organization doesn’t want to be too under-leveraged. Capitalization that is too concentrated in equity will increase the total cost of capital and reduce the profitability of the company, as the return on the capital invested will not be as high.
Namely, debt tends to lower up to a point the cost of capital for a company. But after a certain amount of debt has been added, the company will become over-leveraged in the sense that it would have trouble fulfilling its debt service obligations. This, in turn, would damage its credit rating and raise its capital costs.
Credit ratings are primarily dependent on cash flow and debt ratios (often referred to as “credit metrics”). Lower cash flow to debt ratios decreases creditworthiness and raises credit prices, as investors tend to be more paid for investing in riskier companies.
We may make assumptions as to what credit metrics relate to what credit scores and therefore to the cost of debt.
If we map this relationship on the basis of what proportion of capitalization is made up of debt, we can see that it is like an inverted U-shape with a large upswing in capital costs above a certain proportion as a company becomes massively over-leveraged.
Below is the case of Apple (note: WACC = weighted average capital cost; D = debt; E = equity)
We can calculate the effect of the debt ratio and the WACC on corporate valuation (through the same discounted cash flow approach discussed above).
As can be shown, the market value of the company is growing to a point of more debt capitalization due to its inexpensiveness compared to equity. But it decreases after a point, because debt is a duty, and so there is a point when the risks of taking on more debt are higher than the pros.
Then we can translate this into the share price as well:
Apple’s capital structure is about 93 percent of equity and 7 percent of the debt. It’s got so little leverage.
It could add more leverage to make the business more easily capitalised, but on the basis of the nature of its capital structure curve, it would not bring much value to the Apple stock price.
Apple periodically buys back its own shares to the benefit of the shareholders. This will also have the benefit of making the equity balance somewhat more efficient in its capital structure.
The composition of the capital structure and its impact on the profitability of the business is an important factor for management teams.
Activist investors can also seek to strengthen the capital structure of a business in which they have an interest. For example, an under-leveraged corporation may be asked to offer a loan to buy back equity. This would not only raise the share price but would also make the composition of the capital structure more efficient and would thus also benefit the valuation from the tailwind financial engineering.
In certain situations, a corporation might choose to pay dividends to shareholders. Dividends say, in a de facto sense, that a certain amount of income is guaranteed. Companies that cut their dividends appear to see their shares battered.
Dividends will also help diversify the shareholder base by increasing the number of investors seeking the protection of dividends, even if the dividend is a nominal sum. (Apple’s dividend yield is slightly less than 1%).
In other situations, buybacks may be favoured by a corporation instead. This will help to put the under-leveraged capital structure to a more desirable point on the curve. As has already been noted, this can not only increase the share price but also benefit in the context of financial engineering. Apple prefers buybacks to dividends now.
Top-down Simple Research
Investors using a top-down quantitative approach would first look at the overall economy before looking at individual firms.
1) How does the economy perform relative to its capacity ( i.e. production gap)?
2) What is debt servicing in relation to income?
3) What is the cash return, the return on shares, the return on stocks, and the relative risk premiums between them?
We’ve covered the broader macroclimate in other cash and bond-rate products at zero or near zero around the developed world. This brings more capital and liquidity to the stock market and drives up their values.
Tech, in particular, is doing well in “reflation” because its period is very long. In other words, most of these businesses’ projected cash flows are way out in the future. Apple is currently trading near 30x forward-twelve-month (FTM) earnings.
In response to the decrease in revenue from the coronavirus outbreak, the US Federal Reserve and other central banks have added a lot of liquidity to the economy.
This appears to favor longer-term securities because they are the most vulnerable when liquidity is applied to the system. Tech can also be seen as a form of “safe haven” in such a way that it is at the forefront of emerging new technology and less vulnerable to the wider economy than other sectors (i.e. vulnerable to financial flows and less so to economic developments).
This means that NASDAQ (with 50% of its total tech allocation) would appear to outperform the liquidity-driven reflation. Around the same time, whether it’s pulled back or doesn’t continue to grow according to expectations, tech is likely to underperform.
Combination of the two methods
Some traders will use a mix of both top-down and bottom-up primary approaches.
For example, some traders want a certain portfolio structure that helps them increase the return on-risk unit. Within each asset class, they may also want to better manage their risk and assign a certain amount to technology, consumer goods, and so on. They will then go through each sector to find the best companies and buy and sell at the right price points.
For example, in the previous section, we noted that one version of Apple’s fair value went from $298 to $395 per share. A key trader could interpret buying the stock at $298 and selling it at $395.
They can also weigh their place more heavily at the lower end of the range and less so at the higher end of the range following the ‘buy low and sell high’ standard practice. In other terms, the collection will be traded and incrementally added or sold.
Scientific Review of the Apple stock
Technical analysis is a broad-based topic involving the transformation of volume and price data to produce possible interpretations of future market movements.
Many traders often combine the basic analysis with the technical analysis. Fundamental analysis helps to establish an interpretation of where the asset can fairly be sold.
To keep it easy, if a trader thinks that Apple stock is cheap at $200 but expensive at $400, they may be searching for price signals to help them get long in the lower part of that range and sell or short-sell as the price goes up.
Some may use moving average crossovers to buy and sell signals. Such events, typically involving 2-3 moving averages, are intended to be seen as a shift in trend as they are all cross-linked from the previous trend and associated with the current one. The longest moving average is the last one to “confirm” the new pattern.
Stocks may also be affected, in a strictly technical context, by their underlying options markets.
Some stocks (like Tesla) do not have high short interest as a percentage of the market but have a significant open interest. Put open interest serves as a rest stop due to the manner in which some participants run their hedge agreements between cash equities and options.
For example, if a market maker is underwriting options, it will also hedge the exposure (due to small upside, broad downside) by delta holding the position. One delta secures a short-term option advantage by selling 100 shares per option contract.
Short-selling security may have an effect on driving down the stock. In the same way, covering a short can have the effect of causing the stock price to increase.
If a certain number of options contracts expire that are not rolled over to new positions, this will shift the hedging plans of the market makers (i.e. performed in accordance with the cash equities market) and impact the stock market. If open interest is expected to fall, the stock would be bullish, as short positions are unwound, keeping all else equal.
Of course, these movements represent strictly technical movements that do not involve anything relevant to the fundamentals of a market.
Hazards by extrapolating the past
Some traders prefer to use price levels, patterns, and various other indicators as part of their research. But it’s important not to get too hung up on a certain level or pattern or something related to anything that’s focused on what’s happened in the past.
The notion that buying and selling behavior is essentially conditioned on where price has risen or hit a low in the past (and is somehow obvious and easily exploitable) is a naive presumption.
Trading strategies that are built along the lines of “whenever X has come to price Y traditionally, it hasn’t gone below or it typically doesn’t go below, so it’s a good buy” or “when X comes to price Y but falls below it goes from a buy to a sell” are naive and risky.
Nowadays, with cheap and plentiful computing resources and numerous types of back-testing software, it’s easy for traders to recognise the methods that have succeeded in the past and what has gone badly.
By using these methods naively fails to define the cause and effect of the successful relationship. There is a danger of using the past to formulate over-adapted tactics based on historical results.
In a closed structure where the past is likely to be a very good guide to the future ( e.g. a chess game), this strategy will work well. However, such over-fitting and dependency on past data are generally not acceptable in the trade.
If the future is different from the past and the past is what the system is built on, it will eventually lead to disappointing (or even fatal) outcomes.
Apple Marketing Goods
Apple Stock (AAPL)
You can swap Apple stock in a number of ways.
The most popular route, of course, is through the stock. It’s the most liquid market open for trading. The bid / ask range is typically between $0.01-0.02 during market time.
Many brokers pay zero commissions trading on all stock exchanges.
Tools and alternatives
The options market is another way to hedge a short or long term (or something in between).
The purchaser of an option contract shall pay a premium which gives the trader the option of buying (in the case of a call option) or selling (in the case of a call option) a fixed amount of stock (100 shares per contract) at a certain price (the strike price) at the certain expiry date.
The Sept. 2022 Options Chain offers a range of strike rates on call and options.
The September 2022 500 calls are currently quoted with a spread of $25.50 to $27.00 per share.
This means that the expense of a single call option contract would be between $2,550 and $2,700. This means that sellers ask for $2,700 per deal, while buyers are looking for $2,550. To carry out the trade, the buyers have to execute the bid (sometimes called the deal) while the sellers have to execute the deal, or have agreed to it somewhere between them.
Purchasing a call option at a price of $27 per contract ensures that one’s losses are limited to the premium. If the Apple stock is less than $500 by the expiry date, it will only lose $27 per share premium. If Apple stock were to land in-the-money (ITM), the benefit would be the difference between the maturity price and the strike minus the premium.
For eg, if Apple stock is $550 at the end of the day, that’s $50 per share profit at the $500 strike price. Subtract the $27 per share premium, leaving a $23 per share profit.
The chart below shows the set downside and hypothetically infinite upside of the purchaser’s trading options. (For the seller, the reverse is true, as they collect the premium but bear the risk.)
Those searching for trade opportunities may also engage in more sophisticated strategies such as straddles and strangles.
Corporate bonds are usually the least liquid of the major securities trading markets. Many bond issues do not even actually see any amount of trade every day.
Corporate bonds are usually used by investors with longer time horizons and are less of a simple trading tool.
Many brokers are providing access to the full Apple bond offers list.
Apple’s credit ranking is currently Aa1 for Moody’s and AA+ for S&P. It is one of the most creditworthy companies in the US.
CFD (Differences Contract)
The contract for differences allows European traders and investors to exchange security price fluctuations without owning the underlying. The deal is only carried out through a broker and a customer and does not include an intermediary exchange. (The CFDs are not open to US traders.)
The benefits do not include any day trading rules, such as capital requirements or limits on trading. There are also no shorter restrictions (e.g. hard to borrow or shorter charges) provided that there is no need to find the underlying security for borrowing.
They also allow for more flexibility, given the comparatively lighter regulatory requirements, with flexibility from 2x to 30x everywhere.
Definition of CFD
Let’s assume the Apple stock is $375. The trader wants to purchase 100 shares and has a regular 50 percent margin account. This trade would have purchased $37,500 worth of Apple stock. With half purchased on the margin, the capital cost will be $18,750. The costs of the Contract and any spreadsheet charges may be appropriate.
On the other hand, for the Apple CFD trade, the broker can require a 10% margin or $3,750 for 100 shares at $375 per share.
The trader pays the spread when entering into a CFD deal. And since CFDs are less liquid markets, the spread is usually wider.
For example, if the price of the underlying stock is $375 and the trader wants to purchase the stock, the price could be $375.10. The trader will have to pay $0.10 per share price. That’s going to come to $10 on 100 shares.
The stock will then have to get the 10 cents to hit breakeven on the exchange.
If the stock was to rise to $400 per share (the bid price, i.e. the price at which it could be canceled). That would mark a gain of $25 per share. That’s $2,500 on 100 shares.
There will be a return of 13.3 percent ($2,500/$18,750) on the regular stock exchange in which the underlying stock is held.
For CFD exchange, the return on investment will be 66.7 percent ($2,500/$3,750).
The extra return on investment is, of course, due to higher leverage, which can cut both ways.
We discussed the basics of Apple stock trading in this post.
The forms of fundamental analysis (bottom-up and top-down) were covered. In the context of the discounted cash flow (DCF) analysis, we looked at ways to calculate the value of a business and methods for measuring valuation within a range.
We have discussed the basics of the theoretical analysis, combining it with one fundamental point of view and some possible pitfalls to avoid.
Some traders might only be bottom-up, looking at the sales, expenditures, and balance sheets of the business to decide where the security should be exchanged. Others may be more top-down, looking at the larger economy, and looking at industries and/or individual businesses that fit into that context. Others may combine both methods and operate both top-to-bottom and bottom-to-top.
Apple may be exchanged via its underlying stock (i.e. cash equities) market options, shares, and CFDs for European traders.