Apple Part 2

Apple Inc. (AAPL) Part 2

In this part of my analysis of Apple I want to show you how I projected Apple’s likely future earnings. I will also put the projected future earnings in relation to 1. the price Apple is trading at today and 2. the price I bought Apple stock at in december 2018. So we will be able to estimate the future returns and see, if Apple is worth buying.

Projection of Future Earnings + Price of the Stock

First of all we calculate the compound annual growth rate of per share equity for the period of 2009 to 2018, which is 16.19%. Using this growth rate we project the future per share equity ten years from now, by compounding the 2018 value for ten years by 16.19%. Per share equity in 2018 was 22.53$ therefore the projected future per share equity is: 22.53$ * (1+0.1619) ^ 10 = 101$. In order to get the projected future earnings per share we multiply the projected future per share equity by the average return on equity of the last ten years, which gives us: 101$ * 0.3555 = 35.90$. The last step is estimating the future price of the stock. The estimated future price is the projected future EPS * average P/E over the last ten years. That gives us a future price of 15.81 * 35.90$ = 567$.

Calculating the Return  

Based on the estimated future price of the stock (future value) and the price at which Apple trades today (present value) we can calculate the return we will likely get if we buy the stock today. At the time of writing (early dec ’19) Apple trades at 264$, which will be the input for present value. The compound annual growth rate is defined as: {(future value / present value) ^ (1/n)} – 1 which in our case will be: {(567 / 264) ^ (1/10)} – 1 = 0.079 = 7.9%. That means if we buy Apple stock today at 264$ our return for the next ten years is likely to be 7.9% p.a.. I bought Apple for my portfolio in december 2018 for 149$ a share. Using the same formula for CAGR with 149$ as input for the present value we will get a result of 14.2% p.a..


Using these simple steps to estimate the likely return of an investment can help a lot with determining the right time to buy and with managing expectations. We have seen that buying Apple at todays prices would only give us a return of 7.9% which is not very attractive. Therefore we can conclude that even if we think Apple is a great business that we would like to own, it is necessary to wait for lower prices. In my personal case these calculations help me with managing my expectations. Apple stock went up tremendously in 2019, but I only expect 14.2% p.a. over ten years. So I know that if a large part of that movement happened early on that I might have to sit trough some sideways action. These calculations help me forming realistic expectations, thereby not getting discouraged over the lifespan of the investment. As I am happy with my expected 14.2% return I will stick with my investment in Apple, however I would not recommend buying Apple at these high prices. 

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