Apple ($AAPL) announced quarter one results today.  With the $AAPL share price over US$200 - 52-week range US$82.33-215.59 - we decided to have a quick look.

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) - Interactive Analyst Report For $RIM
2. Palm ($PALM) - Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) - Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$189.23 for $AAPL - 6.7% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $QCOM and $GOOG.  I am going to look at only one of the metrics we use at Valuecruncher - EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $AAPLT is trading at 18.6x ($AAPL is being valued at 18.6x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more a dollar of $IBM (more than double), $RIM, $QCOM or $GOOG EBITDA. This is despite $AAPL making less margin at the EBITDA line than any of these comparators ($AAPL made a 22.8% EBITDA margin last year comparded with 23.0% at $IBM and 41.6% at $GOOG). There are still some steep expectations being priced into the current share price.

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of US$187.57 - 7.5% below the current share price. This valuation is in line with our DCF analysis.

Summary

Based on our DCF valuation - $AAPL looks overvalued. Looking at some comparators - the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price - you are paying a full price and there are cheaper options available. We know that we will hear about that from the $AAPL fans out there however.

Disclosure: no positions.

It has been a crazy 15 months for the Apple ($AAPL) share price. On the 22 August 2008 $AAPL was trading at $176.79. By 16 January 2009 $AAPL had dropped to $82.33 - down over half (53% down) in under five months. Today $AAPL closed at $190.01 - up over 130% in under nine months. The graph below shows the closing prices over the period. So what do we think about $AAPL?

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) - Interactive Analyst Report For $RIM
2. Palm ($PALM) - Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) - Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$176.16 for $AAPL - 7.3% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $PALM and $QCOM.  I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AAPL is trading at 4.5x ($AAPL is being valued at 4.5x last year’s revenues). This compares to $IBM at 1.7x, $RIM at 3.5x, $PALM at 3.4x and $QCOM at 5.8x. $AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues.  A dollar of $AAPL revenues is being valued more than a dollar of $RIM revenues - despite that dollar of revenues producing less profit (on an EBITDA basis) than the $RIM revenues.  A dollar of $AAPL revenues is being valued less than a dollar of $QCOM revenues - but $QCOM produces nearly twice the profit (on an EBITDA basis) as $AAPL.  We would expect the difference between the multiples for $QCOM and $AAPL to be larger - in $QCOM’s favour. There are some big growth expectations for $AAPL - on an EV/Revenue basis there appears to be a premium being paid for $AAPL against the peer group.

If we lower the $AAPL EV/Revenue multiple to 3.75x (a slight premium to $RIM) then this gives a share price of $163.30 - 14% below the current share price.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AAPLT is trading at 21.51x ($AAPL is being valued at 21.5x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more than double a dollar of $IBM, $RIM or $QCOM EBITDA ($PALM is losing money at the EBITDA line).

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of $160.06 - 16% below the current share price.

Summary

Based on our DCF valuation - $AAPL looks overvalued. Looking at some comparators - the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price - you are paying a full price and there are cheaper options available. We do recognize that there are a lot of $AAPL fans out there however.

Disclosure: no positions.

We have been participants and observers of the on-line finance  space for a period of time now. As part of that we regularly examine our view of the competitive landscape. We have decided to share some of our views on where the very broad industry may be headed. This isn’t company specific – very much the high-level perspective.

Where We Are Today

We view the on-line finance space in three broad areas: Information, Analysis and Execution.

Pre-1995 this whole area was dominated by brokerage firms with full-service offerings. They had the information, did the analysis and the executed the trades. Since 1995 that has changed pretty significantly.

Information – background operational and financial information. The main players in this space are now the large finance portals (Yahoo, AOL, MSN, Google, etc). They built and extended these offerings in the Web 1.0 and 2.0 days. The business model is primarily advertising – free to consumers. It should also be noted that there is still a paid market for detailed and timely financial information (Reuters, Bloomberg, Capital IQ, etc).

Analysis – what does the information mean? Should I buy a particular stock? What is this stock worth? Full-service brokers still compile research notes and reports for clients – but this space has begun to be disrupted. This disruption is coming from a number of areas:

Qualitative – primarily finance blogs. These take two main forms: user-generated content aggregators (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Community Sites – where retail investors look to communities of investors for advice on where to invest. Examples: The Motley Fool, Wikinvest, Covestor, KaChing, etc.

Niche Tool Providers – primarily quantitative-based tools. For example Valuecruncher.

Execution – the actual buying and selling of stocks. The discount brokers have come to dominate this space (i.e. Charles Schwab, ETrade, etc). They disrupted full-service brokers with simple flat-rate commission structures starting in the Web 1.0 days.

That is a high-level view of where we are today. What might happen next?

We completed a scenario planning exercise based on the frameworks developed by people like Peter Schwartz.

We started with an analysis of trends and uncertainties. A trend is something that we feel certain is occurring. An uncertainty is something that could still go either way.

Trends

1. Execution becomes a commodity – executing trades will continue as a low-cost business. There will be some geographic-based regulatory moats – but no ability to generate abnormal returns. Other parties could enter this market (i.e. portals).
2. Death of traditional equity research – the current model is too expensive and producing research reports that are complex and hard for retail investors to consume. Traditional equity research will head the way of newspapers. Equity research is important but the delivery methods must change. There will be a space at the top-end for high-quality  research (that clients will pay for) but only a niche.
3. Investor knowledge continues to improve – the level of general investor knowledge continues to improve but there still remains a significant gap between the average retail investor and the corporate finance professional.
4. Financial blogs continue to be influential – high-quality analysis continues from blogs. There are two broad models – aggregating content (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Uncertainties

1. Individual VS Collaborative – how will retail investors choose to research investment decisions? Individual analysis – retail investors (with improving education) complete their own analysis on where to invest – both qualitative and quantitative. Collaborative – retail investors look to communities of investors for advice on where to invest – track record is vital.
2. Free VS Paid – financial information has proven to be an isolated area on-line where paid models have worked (i.e. WSJ). Moving forward – will retail investors be prepared to pay for financial information or will free win out?

We then construct a basic scenario matrix. These scenarios are not meant to reflect concrete versions of possible future states but rather to illustrate the potential impact of the identified trends and uncertainties. There will be components of all of the scenarios in the future – this analysis is intended to emphasize trends and uncertainties. We look at the winners in each scenario and where the portals come out.

Scenarios

1. We Live In Public – Retail investors seek advice from communities of other investors. Track record is vital – this is open to abuse. Retail investors won’t pay for this advice. Community owners seek models to monetize the audience not the content – none is initially obvious beyond advertising. Winners – The Motley Fool, StockTwits. Portals – business as usual providing (mostly) raw data.
2. Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing. Portals – business as usual providing (mostly) raw data.
3. Super Commons – Retail investors value analysis and tools but are not willing to directly pay. There is a move from traditional on-line financial information providers (i.e. Capital IQ) to low-cost/no-cost providers (i.e. financial portals). Retail investors and corporate finance professionals use the same tools. New tools are added (i.e. Google Domestic Trends). Pay-walls come down – financial blogs are at their most influential. Winners – Portals and financial blogs
4. Walled Garden – Retail investors value analysis and tools. The financial blogs continue to exert influence. However the pay-wall remains at the WSJ and on-line information providers (Reuters, Capital IQ) have a valuable and growing business. Winners – Reuters, Bloomberg, Capital IQ. Portals – Opportunity to launch a low-cost disruption strategy aimed at on-line information providers (a good enough offering to tempt [for example] Capital IQ’s clients).
   

Implications

• Discount Brokers – Challenged across all scenarios. Must follow a low-cost strategy and only add services if that will increase trades (and commissions).
• Financial Blogs – Winners across all scenarios (a role to play in all scenarios). Two distinct approaches – aggregating content VS traditional journalism on the web. We would expect one to come to the forefront (our bet would be on aggregating content – but it is too early to say).
• Community Sites – Winners in the “We Live In Public” and “Rock Stars” scenarios. Significant opportunity if community is the way that people choose to make investment decisions. A business model has proven to be a challenge to date for players like the Motley Fool (“We Live In Public” scenario). It is more obvious if investors will pay to be part of the community (“Rock Stars” scenario) – this is currently unproven however.
• Paid Finance Services – Business as usual in the “Walled Garden” scenario and challenged across all other scenarios. Even in the “Walled Garden” scenario there is the potential for the paid financial services to be disrupted (low-cost disruption) by the portals offering extended services (i.e. Google Domestic Trends). Currently users of paid services also use the free portal services (Yahoo Finance and Google Finance). There are limited options to defend this. Paid services do provide the data used by the finance portals. Reuters are also moving into the free space.
• On-Line Finance Portals – Winners across all other scenarios. In the “We Live In Public” and “Rock Stars” scenarios – it is closest to business as usual. These players are the ones with the ability to acquire or build community sites. Investors that are part of communities still require basic financial information and tools. In the “Super Commons” and “Walled Garden” scenarios there are big opportunities. Both require adding analysis tools. Partnering with financial blogs is key. Adding analysis tools is an arms race between the different finance portals.

This is one view of the potential future. Tell us what you think.

Valuecruncher Future Of On-Line Finance Summary (Four-page PDF summary).

After our recent post on Microsoft ($MSFT) - people asked for a quick take on Apple ($AAPL). Here it is.

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) - Interactive Analyst Report For $RIM
2. Palm ($PALM) - Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) - Interactive Analyst Report For $QCOM

$AAPL’s share price is currently trading at US$160.00. This is well up from the 52-week low of US$78.20. The graph below shows the last 12 months of closing prices.

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$161.63 for $AAPL - 1.0% above the current share price. We see $AAPL correctly valued at the moment. But how about compared to a peer group?

Comparison Analysis

I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AAPL is trading at 3.66x ($AAPL is being valued at 3.66x last year’s revenues). This compares to $MSFT at 3.08x, $IBM at 1.70x, $GOOG at 5.73x and $HPQ at 0.91x. $AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues.  A dollar of $AAPL revenues is being valued more than a dollar of $MSFT revenues - despite that dollar of revenues producing just more than half the profit of the $MSFT revenues.  A dollar of $AAPL revenues is being valued twice as much as a dollar of $IBM revenues - despite that dollar of revenues producing a similar level of profit as the $AAPL revenues.  As we have previously noted - that is some big growth expectations for $AAPL.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AAPLT is trading at 17.51x ($AAPL is being valued at 17.51x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more than double a dollar of $MSFT, $IBM or $HPQ EBITDA. And more than a dollar of $GOOG EBITDA as well. $AAPL is trading at a higher EV/EBITDA multiple than $RIM and $QCOM as well - but it is in the same general ballpark. $RIM is trading at 15.08x and $QCOM at 16.93x.

Summary

Based on our DCF valuation - $AAPL looks correctly valued. Looking at some comparators - the market is valuing $AAPL pretty highly compared to some peers. On an EV/Revenue basis - a dollar of $AAPL revenues is worth more than a dollar of $MSFT revenues even when the dollar of $MSFT revenues produces nearly twice the profits of the $AAPL revenues. We believe if you are investing in $AAPL at the current price - you are paying a full price and there are cheaper options available.

Disclosure: no positions.

One of the things that we frequently observe in discussions about stocks is a focus on the qualitative story - “I like my iPhone, buy Apple  ($AAPL)”.

Now the story behind a stock is important. That Apple (or any other company) makes great products that people want to buy is very relevant to the value of the company.

BUT - to make good investment decisions you need to understand how the financial markets value this story. Markets can have an overly optimistic or pessimistic view of a company. To understand value - you need to look at the numbers.

Let’s look at an example - Microsoft ($MSFT)

We have previously looked at $MSFT and the comments on those posts have reflected the challenges that $MSFT faces as a company moving forward. These comments have mostly reflected the story of these challenges - the view that $MSFT will not be as successful in the future as it has been in the past. Because of these challenges - $MSFT must be a bad investment.

Let’s have a look at that assumption - from a valuation perspective.

Remember - the market should value companies on future expected prospects (measured in future expected cash flows). Where opportunities exist, either buying or selling, is where companies expected future cash flows are viewed either excessively optimistically or pessimistically. Over the long-run it should correct.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” — Benjamin Graham, The Intelligent Investor

Now looking at $MSFT.  It has been an amazing business - it has the second largest market capitalization in the world after Exxon Mobil ($XOM) [$XOM US$336.41 Bn, $MSFT US$218.31 Bn, PetroChina US$208.37 Bn]. Since 2005 (to 2008) the company has grown revenues at a compound annual growth rate (CAGR) of 15% with EBITDA margins of 40%.

Now $MSFT has a raft of potential challenges to their business - only one recent example: Google Chrome OS.

But how is the $MSFT story being valued? We will look at this from two angles - $MSFT vs a set of peer companies and $MSFT as a standalone entity using a discounted cash flow valuation model.

Comparator Analysis

At Valuecruncher we provide a range of different valuation metrics for each company and a starting set of peer companies (that can be changed).  Here is the $MSFT comparator tool - and some explanation on how to use the tools. Our tools are interactive - you can adjust the valuation outputs to see the impact on the share price.

I am going to look at two of the metrics - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

For $MSFT we will look at four comparators - IBM ($IBM), Apple ($AAPL), Google ($GOOG) and Hewlett-Packard ($HPQ).

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $MSFT is trading at 3.2x. This compares to $IBM at 1.7x, $AAPL at 3.5x, $GOOG at 5.5x and $HPQ at 0.9x. $MSFT’s profit margins (at the EBITDA line) are 43.3% of revenues compared to 20.6% and 12.0% for $IBM and $HPQ respectively - so those feel right.  $GOOG has similar margins to $MSFT and significant growth options - but a dollar of $GOOG revenues being worth 70% more than a dollar of $MSFT revenues feels rich. But the standout - to us - is that $AAPL with profit margins half that of $MSFT is valued similarly on an EV/Revenue basis. A dollar of $AAPL revenues is being valued slightly more than a dollar of $MSFT revenues - despite that dollar of revenues producing less than half the profit of the $MSFT revenues.  That is some big growth expectations for $AAPL.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $MSFT is trading at 7.4x. This compares to $IBM at 8.2x, $AAPL at 16.5x, $GOOG at 14.8x and $HPQ at 7.4x. Talk about no respect - a dollar of $MSFT EBITDA is worth only slightly more than a dollar of $HPQ EBITDA and less than the other comparators.

Discounted Cash Flow (DCF) Analysis

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$29.43 for $MSFT - 18.5% above the current share price. A key input to that calculation is an estimate of long-term growth of 4.0% - which we don’t feel is too aggressive. Remember revenues have grown at a CAGR of 15% since 2005. The US economy grew at a 3.6% CAGR between 2003 and 2007.

Summary

Our DCF analysis produces a valuation of US$29.43 for $MSFT - 18.5% above the current share price. This equates to an EV/EBITDA multiple of 9.1x. This appears reasonable in comparison to the peer group of companies that we have examined.

Based on our analysis it appears that $MSFT is undervalued. There are certainly challenges facing the business - but the market currently has an overly pessimistic view on the company. $MSFT currently represents a good buy. All our tools are interactive - you can complete your own analysis.

Disclosure: No Positions.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” — Benjamin Graham, The Intelligent Investor

That is the best analysis we can find about the current market. We believe there is an intrinsic value for shares and our analysis attempts to calculate this. But in the short-term market sentiment is a key factor and at the moment the votes are primarily negative. But there are some positives appearing. This week it was IBM ($IBM). $IBM announced better than expected fourth quarter results. At Valuecruncher we have previously looked at $IBM. Our 2008 projections in our previous analysis were not far out - we projected 2008 revenues of US$105.0 billion against actuals of US$103.6. We decided to update our valuation of $IBM.

Valuecruncher valuation model of $IBM with interactive assumptions

Valuecruncher produces a valuation of US$128.62 for $IBM. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 42.8% above the current share price of US$90.07.

Assumptions

• Revenue: Reuters aggregates 15 analysts covering $IBM and these analysts have a mean estimate of 2009 revenues of US$103.2 billion. For our analysis we have used US$105.0 billion in 2009, US$107.0 billion in 2010 and US$110.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 20% flat to 2010. Reuters had $IBM‘s EBITD margin at 20.26% in 2007 but is waiting for detailed profitability results for 2008 (including at the EBITDA line) which have not yet been released by the company.
• Capital Expenditure: We have assumed capital expenditures of US$4.5 billion in 2009 and 2010 rising to US$5.0 billion in 2011 and beyond.
• Discount Rate: 10.5%.
• Terminal Growth Rate: 3.0%.

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

Our analysis has considerable range for downside:

• Increasing the discount rate to 11.5% drops our valuation to US$116.20.
• Lowering the terminal growth rate to 2% drops our valuation to US$117.41.
• Lowering our 2009-11 revenues to US$100.0 billion drops our valuation to US$116.43.
• Lowering our EBITDA margin to 17.5% from 2009 drops our valuation US$111.00.
• Combining all of these sensitivities results in a valuation of US$84.74 - 5.9% below the current share price.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $IBM we looked at four peer companies - Accenture ($ACN), HP ($HPQ), Microsoft ($MSFT) and Oracle ($ORCL). 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 $IBM and the peer set.

We have used the last financial year (LFY) as the base set of metrics. $IBM has not yet released the 2008 LFY profitability (EBIT and EBITDA) and free cash flow results. For this analysis we have used the 2008 revenue numbers with the 2007 profitability and free cash flow margins. The highlighted column links our DCF valuation to the current market valuation.

$IBM is currently trading in the middle to the upper-end of the valuation metrics of the peer group. Our DCF valuation places a value on $IBM well above where the market is currently valuing the company and the peer group. Reviewing our assumptions we remain comfortable with our valuation. Using the DCF valuation approach we believe that $IBM is trading at a discount to intrinsic value. The market is definitely voting negative - but in the long-run we believe $IBM represents value at current prices.

Play with our assumptions – what does your analysis say?

Disclosure: None

Microsoft ($MSFT) continues to trade under US$20 a share.  We have previously looked at $MSFT and felt it was undervalued in the US$20-25 range.  We decided it was time to revisit our valuation.

Valuecruncher valuation model of $MSFT with interactive assumptions

Valuecruncher produces a valuation of US$25.34 for $MSFT. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 33.6% above the current share price of US$18.96.

Assumptions

• Revenue: Reuters aggregates 30 analysts covering $MSFT and the mean estimate of 2009 revenues is US$67.3 billion. For our analysis we have used US$64.0 billion in 2009, US$68.5 billion in 2010 and US$72.5 billion in 2011.  Between 2004 and 2008 $MSFT grew revenues at a compound annual growth rate of 13.2% - revenues of US$36.8 billion in 2004 to US$60.4 billion in 2008.
• Profitability: We have used an EBITDA margin of 40.0% to 2011. Reuters has $MSFT‘s EBITD margin at 39.25% last year and an average of 37.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$3.75 billion per annum moving forward.
• Discount Rate: 11.0%.
• Terminal Growth Rate: 3.0%. In our assumptions we have 2010/11 revenue growth at 5.8% - we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.  We have used 3.0% as our terminal growth rate.

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

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $MSFT we looked at four peer companies - IBM ($IBM), Apple ($AAPL), HP ($HPQ) and Google ($GOOG). 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 $MSFT and the peer set.

We have used the last financial year (LFY) as the base set of metrics. $MSFT is currently priced at the bottom of the peer group for the EV/EBITDA and EV/EBIT metrics and in the middle for the EV/FCF metric.  The market is currently valuing the profits (EBIT and EBITDA) and free cash flow produced by $MSFT at less than half that of the comparable numbers for $GOOG. This reflects the perceived different future growth prospects of the two businesses.  The comparator numbers show $MSFT is comparably priced against the peer group - even with the strengths of their business model (39.8% EBITDA margins vs 18.9% for $IBM and 11.7% for $HPQ).  $MSFT’s growth is slowing - but it is still a very good business.  Should $MSFT’s profits (at the EBITDA and EBIT levels) really be valued less than $IBM and $HPQ?

Play with our assumptions – what does your analysis say? We think that $MSFT looks undervalued.  Our model is interactive - you can change any of our assumptions.

Disclosure: None

Last week a Global Equities Research analyst Trip Chowdhry put out a research note laying out his argument for Google ($GOOG) posting negative revenue growth in the current 2008 year. Chowdhry’s analysis (and we have not seen the original full research note) has $GOOG posting revenues of US$15.71 billion in 2008 (5% below actual 2007 revenues of US$16.94 billion), US$15.23 billion in 2009 (3% below his 2008 projection) and US$14.57 billion in 2010 (4% below his 2009 projection). This analysis was picked up by a range of commentators that we really respect. These included analyst’s like Barron’s Eric Savitz, Silicon Alley Insider and Ashkan Karbasfrooshan. The only problem is that the analysis is deeply flawed.

At Valuecruncher we believe that top-down analysis can lead to flawed conclusions. Current trends can be mistakenly extrapolated out. We believe that you need to work from the bottom up. This appears to be a case of top-down analysis gone wrong.

Why?

Chowdhry’s 2008 revenue number appears based on currently deteriorating marcro conditions - remember 2008 revenues of US$15.71 billion. However, through three quarters of 2008 $GOOG has reported US$16.09 billion of revenues (through three quarters). $GOOG already has reported 2008 revenues above Chowdhry’s projection (through three quarters). Unless $GOOG announces negative Q4 revenues it is not going to be posting revenues for the 2008 financial year of US$15.71 billion.

So what do we think about $GOOG’s future revenues and the implications for valuation?

Valuecruncher valuation model of $GOOG with interactive assumptions

Valuecruncher produces a valuation of US$350.60 for $GOOG. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 11.0% above the current share price of US$315.76.

Assumptions

• Revenue: Reuters aggregates 26 analysts covering $GOOG and the mean estimates of 2008 and 2009 revenues are US$22.4 billion and US$27.9 billion respectively. For our analysis we have used US$21.5 billion in 2008, US$24.75 billion in 2009 and US$29.0 billion in 2010. Citi analyst Mark Mahaney has some assumptions around revenues that we are broadly in agreement with. Assuming Q4 revenues are in line with Q3 then 2008 revenues come in at US$21.635 billion.
• Profitability: We have used an EBITDA margin of 40.0% to 2010. Reuters has $GOOG‘s EBITD margin at 36.4% last year and an average of 36.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$2.75 billion in 2008 then US$3.0 billion per annum moving forward.
• Discount Rate: 11.0%.
• Terminal Growth Rate: 5.5%. In our assumptions we have 2009/10 revenue growth at 17.2% - we have assumed that growth eventually slows to a 4.0% long-term stable growth rate.

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

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $GOOG we looked at a two peer companies - Microsoft ($MSFT) and Yahoo ($YHOO). 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 $GOOG and the peer set.

We have used the last financial year (LFY) as the base set of metrics. Of the peer group $YHOO is the closest direct competitor. But $YHOO has had a number of recent struggles and their LFY performance against $GOOG is not pretty. $MSFT’s numbers are an interesting comparison. $MSFT shows how far $GOOG still has to go from a financial perspective. $MSFT has over 3.6x the revenues of $GOOG (on a LFY basis). $MSFT’s financial performance is comparable to $GOOG. The market is currently valuing the revenues, profits (EBIT and EBITDA) and free cash flow produced by $MSFT at less than half that of the comparable numbers for $GOOG. This reflects the perceived different future growth prospects of the two businesses. That is an interesting observation - but to properly understand the implications you need to do the bottom-up analysis for each (probably using a discounted cash flow model).

Play with our assumptions – what does your analysis say? Our model is interactive - you can change any of our assumptions.

Disclosure: None

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

$YHOO has had a horror run since rebuffing Microsoft’s ($MSFT) takeover offer at US$31 a share.  Today $YHOO closed at US$12.86 – just above 40% of the $MSFT offer (from 31 January 2008).

Valuecruncher valuation model of $YHOO with interactive assumptions

Valuecruncher produces a valuation of US$17.62 for $YHOO.  This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price.  This valuation is 37% above the current share price of US$12.86.  This valuation of $YHOO focuses on the core business – we have ignored the investments $YHOO holds in Alibaba, Yahoo Japan and G-Market.

Assumptions

Revenue: Reuters aggregates 25 analysts covering $YHOO and these analysts have mean estimates of 2008 and 2009 revenues of US$5.69 and US$6.42 billion respectively.  For our analysis we have used US$5.50 billion in 2008, US$6.15 billion in 2009 and US$6.75 billion in 2010.

Profitability: We have used an EBITDA margin of 33% flat to 2010.

Capital Expenditure: We have assumed capital expenditures of US$700 million in 2008, US$800 million in 2009 and 2010 and then US$750 million beyond that.

Discount Rate: 11.0%.

Terminal Growth Rate: 4.5%.

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

Disclosure: None