The current paper relates an analysis of future cash flows of Apple Inc. Analysis of the cash flows is based on DCF model. There were two scenarios of future growth developed on the basement of analysis of the Annual Report 2011. The paper also represents an analysis of competitive environment.
- Scenario Analysis
Estimated free cash flow analysis was applied using the model of DFC (Jury, 2012).
The formula for calculating future cash flows is as follows:
DCF = CF1/(1+r)^1 + CF2/(1+r)^2+CF3/(1+r)^3,
where DCF – discounted cash flow, CF – cash flow for particular year (2013-2015), r – discount rate (Jury, 2012).
Cash flow for the year 2011 made up -$1,446 million resulting from operating activity cash flow of $37,529, investing activity -$40,419, and financing activity $1,444 (Apple Inc., 2011).
On the assumption that the weighted average cost of capital would remain the same, the statement of incremental cash flows looks as follows:
As it can be seen from the Table 1, free cash flows were estimated for the three years (2013-2015). WACC was taken on the level of 2011 year (9%). Also, there were calculations made for wickets of 8% and 10% attempting to evaluate changes if WACC changes +/-1% (Apple Inc., 2011).
In 2011, Apple disclosed 940.69 million of outstanding shares. The current price for 1 share outstanding was $548.15 (Bloomberg, 2012). Thus, market value of the Company can be calculated using the following formula:
MV = SP x NSO,
where MV – market value, SP – share price, NSO – number of shares outstanding (Jury, 2012). Thus, market value will make up:
MV = $548.15 x 940,690,000 = $515.64 billion.
In 2011 WACC of Apple Company made up 9%.
For the purposes of the current research a current price-to-cash flow ratio should be calculated. The formula for the calculation is as follows:
P/C = SP/CFPS,
where P/CF – price-to-cash-flow ratio, SP – share price, CFPR – cash flow per share.
P/CF = 548.15/(-1338.89/548.15) = 548.15/2.44 = -224.65.
Projected share price:
SP = P/C x CFPS,
where SP – share price, P/CF – price-to-cash-flow, CFPS – cash flow per share.
SP = -0.022 x (-1338.89/548.15) = 537.36.
On the assumption that the number of shares outstanding will remain the same in future (940.69 million), a future market value of equity can be calculated (Table 4).
According to Jackson (2012), Apple performed very well. For past two years Apple stock price had grown almost twofold: starting from $320 in 2010 to more than $600 in the beginning of 2012. Annual Report of Apple Inc. (2011) shown that the Company has negative cash flow from investing activity of -$40,419. However, it is not necessarily bad because it may mean that the Company purchased long-term investments aiming to provide future financial health of the Company. The evidence of this assumption could be found in the Annual Report of Apple Inc. (2011), where it was stated that the Company explores strategy of aggressive growth that includes investing in new business and acquisitions. At the same time, this strategy is very risky despite of bringing high profits. In future, the business of the Company could be negatively affected by this strategy. Future cash flows can be also negatively affected by aggressive acquisitions of new businesses. On the other hand, Apple is operating in a highly competitive environment that requires constant growth and innovation. Employing other strategy may not bring expected results (Apple Inc., 2011).
Scenario analysis based on future cash flows was chosen for estimation of the Company performance for the next 3 years (2013-2015). From the analysis of the Annual Report of the Company for 2011 a conclusion can be made that continuing high growth of Apple conditioned by taking high risk and investing in innovative companies products. One of the most important measures of the risk is beta. Current Apple Company’s beta is 0.88 meaning that it is exposed to a high level of risk. Recently, the things followed the best case scenario for Apple: the Company represented innovative products iPhone (53% of overall sales) and iPad series (20% of overall sales). These products allowed the Company to gain huge profits. However, the market is becoming saturated and no one knows what the demand for iPad and iPhone would be in 3 years. The most likely case is that the demand will decrease and more innovative products will enter the market. Therefore, future success of the Company will depend on further investment in innovative technologies and products. Another alternative is expanding the Company’s market share at the expense of its competitors (Jury, 2012).
Optimistic scenario of further developments suggests that iPhone series will be more popular in future and Apple will expand its market share at the expense of the market share occupied by Samsung. The growth would probably come from emerging markets. The users will purchase iPhones instead of their old phone models. On the assumption that Apple increases its market share for 1% by 2015, the Company would have to reduce the price for its products for 10% in 2015 (Jury, 2012).
Pessimistic scenario suggests replacing old iPhones with products offered by Apple’s competitors (Samsung, Microsoft) that would be cheaper than Apple products. The average sales price of iPhones would likely to decline by 15% in response to declining market share. It would cause a decline in profit margin while revenues may increase (Jury, 2012).
B. Impact of Inflation on Future Cash Flows
A forecasted level of inflation is shown in the Table 5.
As the current growth rate of the Apple Company’s sales is 4.6%, an assumption can be made that despite of high risk the Company is exposed, its growth rate outstrips inflation rate projected for the years 2013-2015. It is quite possible that the growth rate would decrease during successive years if the sales of the Company drop. However, if the sales will drop, then the Company’s margins could devalue. All the more, the margin between the Company’s current growth rate and maximum forecasted inflation rate is only 1.5% (Economy at a Glance, 2012).
- Forecasts for the Next 3 Years Using Financial Statements
Cash flows are heavily relied on the scenarios that were outlined. It depends on the strategic decisions of the Company that will be explored in future. For example, if the Company will succeed to expand to emerging markets with its products, then the cash flows will increase. If Apple will follow pessimistic scenario, then the growth rate will stabilize or even decline.
D. Brief Analysis of Competitors
As it can be seen from the Table 6, Apple competes with many well-known companies operating in communication market. Currently, the Company gives place to Samsung and Nokia. Microsoft is also a very serious competitor of Apple in the market of operating systems (Apple Inc., 2011).
However, Microsoft is maturing company while Apple demonstrates constant growth using its strong competitive advantages including huge innovative potential, creative team, and ability to take risks without fear. At the same time there are several comparatively new companies represented in the market, among them are Lenovo and Acer. A constant threat is represented by the companies switching from one product to another thus competing in new segments. Apple also is subjected to the threat of substitutes represented by Amazon, Spotify, and Napster offering Internet software solutions (Apple, Inc., 2011).
E. Post-Audit analysis of Past Project
Steve Jobs was known for his experiments leading to success. He always used non-conventional approach to improve Apple’s financial results. Thus, at the end of 90’s when he returned to manage the Company, he made a crucial decision to emphasize on software ignoring advices to develop hardware direction. As a result, Apple had become a world third-largest mobile phone manufacturer after Nokia and Samsung (Bloomberg, 2012).
The paper is devoted to the analysis of the current financial position of Apple Company and analysis of future cash flows. Apple Inc. occupies strong position in the communication market despite of high level of competition. The Company relies on innovation and human resource potential in its growth. The analysis of future cash flows showed that future growth depends on strategic decisions made by the Company management.
Apple Inc. (2011). Annual report 2011. Retrieved from http://investor.apple.com/secfiling.cfm?filingID=1193125-11-282113&CIK=320193
Bloomberg. (2012). Apple Inc. Retrieved from http://www.bloomberg.com/quote/AAPL:US
Economy at a Glance. (2012). Economic forecasts. Retrieved from http://myweb.rollins.edu/wseyfried/forecast.htm
Jackson, E. (2012 March 21). Why Apple will hit $1,650 by the end of 2015. Forbes. Retrieved from
Jury, T. (Eds.). (2012). Cash flow analysis and forecasting: the definitive guide to understanding and using published cash flow data. New York: John Wiley & Sons.