At Valuecruncher we have looked at Apple ($AAPL) twice over the last six-months. In June with the $AAPL share price at US$186.10 we produced a valuation of US$146.70. Then in September with the $AAPL share price at US$131.05 we had a valuation of US$163.98. We are now in early-December and $AAPL has continued to head south – with the market generally. $AAPL is now trading at US$94.00 – just over half the price we first looked at in June. We felt it was time to revisit the valuation of $AAPL from an intrinsic value perspective – and most importantly the assumptions that we are using. We have also completed some high-level comparator analysis looking at the current price of $AAPL against some broad peers using a range of metrics.

Valuecruncher valuation model of $AAPL with interactive assumptions

Valuecruncher produces a valuation of US$109.55 for $AAPL. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.5% above the current share price of US$94.00.

Assumptions

• Revenue: Reuters aggregates 29 analysts covering $AAPL and the mean estimate of 2009 revenues is US$40.6 billion. For our analysis we have used US$36.5 billion in 2009, US$43.5 billion in 2010 and US$49.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 19.0% to 2011. Reuters has $AAPL‘s EBITD margin at 20.8% last year and an average of 16.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$1.15 billion per annum moving forward.
• Discount Rate: 11.0%. In our June valuation we used a discount rate of 11.0% but dropped that to 10.0% in September. We believe 11.0% is a reasonable assumption in the current market conditions.
• Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 12.6% – we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.

Our analysis incorporates the cash on the $AAPL balance sheet – Valuecruncher calculates a net debt number.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. At Valuecruncher we have previously looked at comparator analysis.  For $AAPL we looked at a range of broad peers.  We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash).  Then we measured a range of metrics against the enterprise value for $AAPL and the peer set.

We have used the last financial year (LFY) as the base set of metrics.  Of the peer group $EBAY and $YHOO had rough LFY performance.  The other numbers are interesting.  The one that stands out a mile to us however is that $AAPL is currently trading at 7.0x last years free cash flow (FCF).  Remove the cash and you can have the business for 7.0x last years FCF – no growth assumed.  Wow – that looks cheap.

Using our valuation of US$109.55 that gives a EV/FCF multiple of 8.7x.  That is still pretty resonable compared to the peer set.

Play with our assumptions – what does your analysis say?

Disclosure: None

There are plenty of commentators noting that $EBAY is facing numerous challenges in the current environment:

• Concerns about the impact of a slowing economy on the business.
• Problems with their community of sellers over fee structures.
• Competition from large players such as Amazon ($AMZN) and small niche operators.
• With 50%+ of revenues from outside the US there is an exposure to a rising US dollar as well.

$EBAY also hit a 52-week low of US$19.95 on the 29^th September.  On the positive side $EBAY has also grown revenues at a compound annual growth rate of over 30% since 2004 (2004 revenues of US$3.3 billion to US$7.7 billion in 2007) while generating profits (at the EBITDA level) in the mid-30% range.  We decided to look at the underlying numbers for $EBAY using the Valuecruncher on-line valuation model to see what we think about the current share price.

Valuecruncher valuation model of $EBAY with interactive assumptions

Valuecruncher produces a valuation of US$23.88 for $EBAY.  This is a current valuation not a target price.  This valuation is 14.5% above the current share price of US$20.85.

Assumptions

Our assumptions are revenues of US$9.0 billion in 2008 growing to US$11.0 billion in 2010. We have used an EBITDA margin of 36.5% in 2008 decreasing to 35.0% in 2010. Our terminal growth rate is 3.75%. We used a terminal capital expenditure number of US$800 million. Our WACC (discount rate) is 11.0%.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Our analysis incorporates the cash on the $EBAY balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis the current share price looks cheap.  We also think our assumptions are pretty conservative.  Looking at some sensitivities:

• 2010 revenues drop to US$10.5 billion – Valuecruncher valuation drops to US$22.77 (9% above current price).
• 2010 EDITDA drops to 32.5% – Valuecruncher valuation drops to US$22.13 (6% above current price).
• Terminal growth rate drops to 3% – Valuecruncher valuation drops to US$22.10 (6% above current price).
• All of these downside sensitivities occur – Valuecruncher share price drops to US$19.57 (6% below current price).  That is a pretty negative outlook however.

Play with our assumptions – what does your analysis say?

Disclosure: None.

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Over at Clusterstock Henry Blodget thinks that eBay looks cheap. We thought that we would take the opportunity to have a look at eBay using the Valuecruncher interactive tool to analyse the company.

EBAY Valuation

Our assumptions are revenues of US$9.0 billion in 2008 growing to US$11.5 billion in 2010. We have used a flat EBITDA margin of 37.5% from 2008. We have used a terminal growth rate of 4.8%. We calculated this terminal growth rate based on year three growth of 12.2% dropping to a 4% stable growth rate by year 10. We used a terminal capital expenditure number of US$800 million. We have used a WACC (discount rate) of 11.5%.

Valuecruncher Valuation EBAY

Our analysis incorporates the cash on the eBay balance sheet – Valuecruncher calculates a net debt number. Our analysis also incorporates Skype within the current eBay structure. It is possible that eBay will decide to sell the Skype business (Yahoo, Google and Microsoft have been suggested as possible acquirers). There may be a higher value owner of Skype than eBay – but until that situation is clarified we have kept Skype where it is.

Our analysis gives a valuation of US$28.13 which is less than 1% below the current share price of US28.38. We don’t agree with Henry Blodget that EBAY looks cheap. Based on our analysis the current valuation looks about right. Play with our assumptions – what does your analysis say?

Valuecruncher has placed a value of $28 per eBay share with a range between $22.52 and $34.05. The current share price of $33.71 is at the upper end of the Valuecruncher range.  Valuecruncher may be undervaluing eBay, as the methodology does not explicitly model the growth options available.
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The current market price implies an enterprise value (EV) to EBIT multiple of 26.9 compared to Valuecruncher’s mid point EV-EBIT multiple of 22. It is difficult to compare eBay’s EV-EBIT multiple with other comparable companies as each has there own unique set of options.  To provide a point of reference eBay’s current market multiple is considerably lower than online companies Amazon.com (42.4), InterActiveCorp (IAC) (38.4) and Google (38.2), none of these companies are directly comparable to eBay but they all have online growth opportunities. The size of these multiples suggests the market is prepared to include a significant portion of the potential growth opportunities value into today’s price. To add a New Zealand perspective online auction site Trade Me sold for approximately 15 times forecast EBIT in early 2006.�
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The short-term revenue growth rate of 25% and terminal growth rate of 5.8% used by Valuecruncher acknowledge the growth available to eBay. These growth rates are very aggressive but may not fully capture the potential of opportunities such as eBay’s VoIP provider Skype.
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eBay’s ViOP provider Skype represents a significant growth opportunity but it is very difficult to model this opportunity explicitly. Skype had 171 millions users at 31 December 2006 using over 28 billion free Skype to Skype minutes. Skype out minutes totalled 4.2 billion in 2006 contributing to revenues of $195 million.
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eBay hold a passive 25% stake in online classifieds site Craigslist which has an estimated revenue of $20 million per annum but has the traffic and untapped potential to significantly increase this. It is difficult to estimate a value of eBay’s 25% stake in Craigslist and it is definitely contributing to the difference between the Valuecruncher mid point valuation and the current market price.
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Is eBay overpriced? The difference between the Valuecruncher mid point valuation and the current market valuation is approximately $7.5 billion. Whether eBay is overpriced (or under priced) depends on your opinion on the potential of VoIP, Skype and Craigslist.
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Valuecruncher Assumptions
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Valuecruncher has forecast revenues to grow at 25% over the next three years and an EBIT margin of 30%.

Terminal Growth Rate: 5.8% �
Cost of Capital (WACC): 12.5%

Valuecruncher Valuation Report – eBay