Technology Apple Inc. (NASDAQ: AAPL) Recommendation: BUY · market needs time to adapt the...

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Krause Fund Research Fall 2016

Technology Recommendation: BUY Analysts

Guoying Chen [email protected]

Zuodong Ji [email protected]

Yoo Hee Won [email protected]

Apple is one of the largest technology companies exist in our time. The Company is known for its outstanding innovation ability, premium products and omnipotent ecosystem. The company is profitable with high margins and we expect its growing trend to continue going forward. Therefore, we recommend a BUY rating. Drivers of Thesis • The product ecosystem increases the compatibility among devices locking customers in the closed and protected IOS system. Customers are exceptionally loyal to the ecosystem, boosting the Company’s growth. • The increasingly heavy investments on R&D and acquisitions drive the innovation across the Company’s products. The relentless creativity maintains and attracts customers, business partners and shareholders. • Relatively low smartphone penetration rate in the emerging markets gives iPhone new growth opportunities. The Company sales growth in India reaches over 50% in FY2016. We expect the Company to scratch the surface in the emerging markets. • The Company’s current Enterprise Alliance Strategy deepens its influence in the enterprise market. The various partnerships help to maintain the rapid growth of Apple’s B2B segment. Risks of Thesis • Over 60% of revenue comes from sales of iPhone. The centralized product line may amplify the potential decline in profit as iPhone sales decreases. • The Company generates over 60% revenue outside the Americas; the increasingly strengthening dollar puts downward pressure on these oversea revenues and investments.

Apple Inc. (NASDAQ: AAPL)

November 14, 2016

Current Price $105.71 Target Price $155-$165

Stock Performance Highlights 52 week High $89.47 52 week Low $119.92 Beta Value 1.323 Average Daily Volume 36.356 m Share Highlights Market Capitalization $563.7 b Shares Outstanding 5.332 b Book Value per share $24.03 EPS $8.31 P/E Ratio 13.6 Dividend Yield 2.2% Dividend Payout Ratio 26% Company Performance Highlights ROA 14.93% ROE 36.90% Sales $215.6 b Financial Ratios Current Ratio 1.35 Debt to Equity 67.86%

Apple Designs and manufacturers numerous electronic devices including mobile phones, personal computers, watches, portable digital music players, and other media devices, as well as software and services. The cornerstone of the company is the iPhone product lines include the iPad, Mac, and iTunes. The company sells these products worldwide to individual consumers and in the enterprise and education markets.

Investment Thesis

Key Statistics

12 Month Performance

Company Description

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Apple Inc., one of the largest technology companies in the world, continues to stand on the frontline of innovation by increasing the spending and investment on R&D, acquisition, and alliance strategy. Apple’s friendly ecosystem improves consumer experiences with each of its products and also increases the brand value that allows the Company position a premium price for its products. The sales of iPhone significantly drive the Company's annual revenue. In 2016, 63.39% of revenue were generated through iPhones sales. As for the newest products, we are still optimistic about the sales of iPhone 7 and 7 Plus based on customer response. Regarding the growing demand for smartphones in emerging market, we forecast that the Company will have almost 6% YOY CAGR until 2021. In the past four years, the Company has doubled the size of its service revenue. App Store revenue continued to skyrocket, and Apple Music revenue increased by 22%. Meanwhile, the Company is benefiting from the strong growth in transaction volume through Apple Pay. Apple Pay transaction has been increased by 500% year-on-year by the end of September quarter.i Considering the incoming built-in Apple Pay in safari, we believe that the increasingly popular transaction service will have positive impact on services revenue. Apple has shown a particular zest for the corporate market. The Company have collaborated with enterprises to help corporations adapt to a IOS driving system. In our understanding, the Company may scratch the surface of the opportunity to expand its business to its corporate customers. We believe our DCF model reflects a more reasonable intrinsic value of the Company. Based on our DCF valuation, Apple’s stock price will be $160.91. The model prices in our revenue projection. The current price for the stock is $105.72. Thus, in the long run, we estimate an upward of 53% for the traded price. We recommend a strong BUY for this good performance stock. The following pie chart shows net sales by product during 2016:

Source: Apple 2016 10-Kii As of September 31, 2016, Apple’s total net sales were $215,639 million compared with $233,715 million in 2015. iPhone continues to be Apple’s signature product and accounts for 63.39% ($136,700 million) of total sales. Dollar sales and unit sales of iPhone decreased by 12% and 8%, respectively. Service revenue is the second largest revenue segment and represents 11.29% ($24,348 million) of total net sales. Following Service are Mac and iPad segments that contribute $22,831 million (10.59%) and $20,628 million (9.57%) to the total sales, respectfully. Other Products is the lowest with $11,132 million (5.16%). iPhone iPhone is the leading product of smartphones based on Apple designed iOS system and carries with Siri, the voice-activated intelligent system, and Touch ID for qualifying the access. When Apple announced its first iPhone in 2007, market response was overwhelming, and over 5000,000 units of iPhone were sold on the first weekend. In September 2016, the Company introduced iPhone 7 and iPhone 7 Plus featuring new advanced camera, water and dust resistance, immersive stereo speakers, and new color choices. The recent annual report disclosed that the Company’s annual profits declined for the first time in 15 years. At this moment, iPhone faces multiple challenges in the market.

Regarding Samsung’s battery explode and overheating incidents, Apple may be benefitting with an increased users switching from the premium Android device –Samsung Galaxy. In the long run, we think that the Company may enlarge its current market in the emerging market such as China by catering to untapped consumer groups among the lower middle class. We expect the iPhone sales reverse the decreasing trend in 2017 and have

Executive Summary

Company Analysis

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a considerable increase in revenue of 10%. Overall, we project iPhone revenues to increase at a constant rate of 5% from 2018 to 2021.

iPad iPad is a form of multi-purpose tablets include iPad Pro, iPad Air, and iPad mini operating in its ecosystem. The new 9.7-inch iPad Pro launched this year did not increase iPad sales revenue in the third quarter of 2016. During the last quarter, the Company sold 9.26 million iPads, which is far less than 14.08 million sold in September 2013 quarter.iiiNow to be fair, the decline in the sales of tablets happens everywhere, and it is not a unique falling in Apple. Despite the declines sales in the new iPad Pro, Tim Cook claims that the iPad Pro is expected to replace for notebook or a desktop for many people. The market needs time to adapt the innovation. From second quarter of 2012 to the third quarter of 2016, the Company’s iPad market shares have dropped from 60.3% to 21.5% since a large number of companies enter the market. In 2017, we expect that iPad sales will slightly decrease by 4.0%. Considering the competition in the long term, we project that iPad sales will reverse the slight decline in 2019 and experience an average growth at 1.0%. Further, we consider that the post-PC era will still hold for some time, and tablets can coexist with PCs but will not entirely replace them. Mac The Company’s portable computers include MacBook, MacBook Air, MacBook Pro, and MacBook Pro with Retina display. Recently, the Company released a new MacBook Pro with Touch Bar that replaces the keyboard function with context-sensitive navigation for multitasks. We expect that the pricey new MacBook with Touch Bar may raise the average unit price from $1,235 to $1,300. Since the 5.25% increase in the unit prices and a minor decline in the sales units, we estimate Mac revenue will have a 2.50% increase and reach to $23.4 million in 2017. With the decreasing market shares (7%) and growing mature PC market, Mac sales revenue is projected to have a continuing decline around 2% into 2021. Service The Company also generate revenue through services that tied up with physical, digital devices it sold. The Internet Service such as the iTunes Store, the App Store, the iBook Store, and Apple Music only available for iOS devices which create a balanced ecosystem for Apple’s products. Besides, the Company provides iCloud service, AppleCare, and Apple Pay service as well. In 2016, Services

accounted for 11.29% of total revenue and became the second largest revenue segment. Obviously, Apple has a robust performance on its service business as the hardware sales shrink. In the future, considering the higher device engagement (of Apple Services) compared with other Android devices, we expect that sales revenue from services will grow at a constant 15% into 2021. By 2021, we forecast that service revenue will account for 17.5% of total revenue. Other Products The Company’s Other segment embraces Accessories, Apple TV, Apple Watch, and iPod. This product category represents only 5.16% of total sales in 2016. In 2016, the Company introduced new Apple Watch named Watch Series 2 and Watch Nike+ coming with some improvements on “swim proof,” more accurate GPS for tracking, and a faster processor. Within expectation, Other Products sales increased by 10.58% in 2016. In the short term, we expect a 15% growth in this segment with the launch of new Apple Watch. However, when we consider that an Apple Watch is not a must-own product for the common people, we expect that Apple Watch will have a constant moderate growth at 5% from 2018 to 2021.

Revenue Decomposition and Growth

2015 Rev. (m)

2016 Rev. (m)

2015 % of Total Rev.

2016 % of Total Rev.

2017 Rev. g

iPhone 155,041 136,700 66.34% 63.39% 10%

iPad 23,227 20,628 9.94% 9.57% -4.01% Mac 25,471 22,831 10.90% 10.59% 2.49% Services 19,909 24,348 85.20% 11.29% 20% Others 10,067 11,132 4.31% 5.18% 15% Source: Apple 2016 10-Kiv

Geographic Decomposition The Company have 6 primarily operating segments based on geographic region and natural of customers.

Apple generates about $86,613 million (40%) revenue in Americas including North and South America. The European market embraces the most European countries as well as India, the Middle East, and Africa. In these region, the Company had $49,852 million (23.16%) sales. In Greater China, the Company created $48,492 million (22.49%) sales from Mainland of China, Hong Kong, and Taiwan. Japan is the second largest East Asian market for Apple, which generated $16,928 million sales (7.85%). The Rest of Asia-Pacific includes Australia and other Asian nations contribute $13,654 (6.33%) sales revenue for the Company in 2016.

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40.17%

23.16%

22.49%

7.85%

6.33%

Net Sales by Operating Segments

Americas

Europe

Greater China

Japan

Rest of AisaPacific

Source: Apple 2016 10-K v

In 2015, the greatest revenue growth came from the successful sales in the Great China Area, which increased by nearly 84% from 2014. However, the sales fell 17% in 2016, amid a slowing and competitive market in China. The App Store, and other services have been increasingly regulated by The Cyberspace Administration of China from July 2016. The released rules stated that the app stores must monitor the viability of application developers.vi The strict scrutiny Apple is facing can put more burden for the Company to distribute its app services in China, despite that other apps platforms operated by local smartphone makers are in confront of the same issue. Currently, even if the technology usage rates increase dramatically in the emerging economies, but developed economies still play a predominant role in the technology market. For the Company, there is tremendous potential to expand its market shares in the emerging market and to be localized. Moreover, the Company is a net receiver (over 60% of revenue in foreign sales) of foreign currencies. Thus, changes in the exchange rate can be sensitive for the Company’s net foreign sales and gross margin that are expressed in U.S. dollar. The Company CEO Tim Cook said in 2016 earnings calls, “the fiscal year 2016 performance was hurt by the devaluation of the currency which affected it about 3%, so the underlying business performance was 14% down.” vii Also, CFO Lucas Maestri claimed that “[the Company] had offset almost entirely [impact from foreign exchange] through some initiatives going from pricing actions to cost initiatives to [the] hedging program.” viii The Company has entered or may enter in the future, into

non-designated foreign currency contracts to offset the foreign currency exchange losses on its foreign-dominated debt issuances. Acquisitions Supported by fat cash on hand, Apple has made series of acquisitions to bolster the development and innovation of its product lines. Besides, the Company also intends to expand its user bases and attract more niche talent market leaders. We believe that the subsequent acquisition, investment, and corporation reflect the Company recent strategies that have been factored in our valuation model. Turi Inc.: In August 2016, Apple acquired artificial intelligence startup Turi Inc. and closed the transaction at $200 million. This transaction is on the line with Apple’s strategy to seek for and gain an edge in AI and be more competitive in the battle with Google, Amazon, and Facebook. Turi helps developers integrate AI into creating and managing software and services. Apple intends to use Turi’s technology to improve Siri and let users interact with the machine easier and faster. Tim Cook states in the conference calls that “machine learning continually help Siri get even smarter in areas such as understanding natural language.” ix Meanwhile, the Company has extended Siri to work in Mac OS Sierra. The investment on AI is paid off, machine learning not only improves Siri, but also improves facial recognition, better app suggestions, and navigation on Apple Watch.x We believe that the acquired AI technology will result in a higher customer satisfaction of machine interaction if Apple fully integrate with its other products. In the future, powerful AI can be a selling point which is hard-to-copy. Didi Chuxing Inc.: The Company firmly believes that R&D is a focused investment that is critical for future growth. In 2016, the Company has invested $10,045 million in R&D with a 25% YOY growth.xi Total R&D cost accounted for 5% of net sales. It suggests that Apple probably has more products in the research labs that likely to launch in the market. In May 2016, Apple invested $1 billion in Didi Chuxing, the Uber of China. After the investment, Didi announced that it purchased Uber Chinese operation and boosted the value towards $35 billion. Assuming that Apple’s $1 billion investment was straightforward, Didi’s action would bring 25% return on the investment.xii Even though

Recent Development

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this cash cow does not exactly need the money, it is still an appealing rate of return considering from the investment.

In fact, what the Company focuses on this investment is how Apple can learn more about the business and the Chinese market. For the Company, the investment on Didi is a road leading to China. Regarding the earlier regulations from the China’s government on Apple App Store, iTunes, and iBook services, we regard this $1 billion investment in the homegrown Chinese company as an olive branch to the Chinese government. It helps Apple reshape its figure in the Greater China market. Having a friendly relationship with Chinese government helps the Company to gain extensive Chinese operations when competes with other overseas tech companies. We believe that the investment is a clear strategy that gives Apple the chance to get closer to the China’s market and results in an increase in the sales of hardware devices and services. Strategic Partnership with Deloitte Bolstering the Company’s enterprise strategy, Apple has started to boost its growing business with corporate IT customers through teaming up with Deloitte. In August 2016, Apple and Deloitte announced the partnership. Deloitte, one of the largest financial service companies, is operating Apple Practice with over 5,000 advisors to implement iPhones and iPad on inventory management, retail, and back-office systems. Apple also collaborates with Deloitte Consulting to create a new offering for iOS called EnterpriseNext, composing a new tool to accelerate the process of ideation and prototyping custom services across over 20 industries.xiii Deloitte is a large Apple corporate customers with more than 100,000 iOS devices and over 75 custom-built apps being used in the organization. Working with corporations is a crucial opportunity for the Company to gain a new source of growth for the iPhone after this flagship product experienced a decline in sales on 2016. Utilizing the seamless ecosystem, the Company can stimulate the sales of its other products and services that only delivered through iOS. It is not the first time that Apple collaborates with important partners in business. Back to 2014, the Company had already dealt with IBM to develop a series of industry-specific apps. After that, Apple also cooperated with Cisco for creating an excellent app and voice experience used on the corporate network.

Similarly, Apple partnered with SAP to revolutionize work on iPhones and iPads. We reasonably believe that the cooperation with corporations helps Apple widens its customer base with iOS within the enterprise, and iPhone and service sales will keep increasing in the future. FY 2016 Q3 and Q4 Earnings The third quarter revenue in 2016 fell 14.7% comparing with a year-ago period. It is evident that quarterly sales slump because of the weak sales in iPhone, the market is waiting for refreshing in September with the issuance of iPhone 7 and 7 Plus. Even though Apple released iPhone SE in March, the high SE demand did not offset the cooling demand in large-screen iPhones. Most consumers are limited by the longer contract of handsets with carriers and wait for a new iPhone. The gross margin decreased from 39.90% in the third quarter of 2015 to 37.38%, and the operating income in the third quarter of 2016 was only 17.76% compared with 21.60% in a one-year period ago. Disclosed on the recent 10-K, the revenue generated for the fourth quarter was $46,852 million versus analysts’ consensus expectation of $47,031 million.xiv Actual EPS was $1.67 for the Forth quarter higher than analysts’ expectation of $1.66. Adjusted EPS for 2016 was $8.31, 0.5% greater than the expectation of $8.27.xv The sales on the iPhone 7 and 7 Plus mostly flow into the fiscal year 2017. In 2017, we project that the total sales revenue will be $235,590 million, up above 2016 sales revenue of 9.25%. Analysts’ mean expectation is $228,730, an increase of 5.70% of year-over-year.xvi

Place and Promotion Applesells its handset products worldwide through the direct channel including retail stores and online stores, as well as direct sales force through third-party cellular network carrier, wholesalers, and retailers. In 2015, Apple’s net sales through its direct and indirect distribution channels accounted for 26% and 74%, respectively, or total net sales.

According to data from eMarketer, Apple stores have the highest retail sales per square foot in the United States in 2016, reaching to $5,546/sq. foot.xvii Apple’s retail strategy proves that the sales of “fashion-trend” products are enhanced by knowledgeable salespersons who can introduce and convey the value of products and software services in a professional approach and directly impact on customer’s purchasing decision.

Market and Competition

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Apple further believes that the existing of retail stores is necessary for the company to build a relationship with customers directly through providing an effective way to demonstrate the advantage and value of products and providing high-quality sales on the niche market and after-sales support services. To ensure the high-quality customer experience, since the first Apple store launched in 2001, the number of Apple stores has boomed and reached to 463 worldwide in 2015. Especially, Apple’s retail business may experience a massive growth in China. From 2014 to 2015, net sales in Greater China increased by 84%, and Greater China has outgrown other oversea market becoming the second largest market for Apple despite the intense competition in the domestic smartphone market in China. Also, Apple established an educational platform that operates through mobile or iTunes U that helps effective online lecturing and learning for both lecturers and students. Providing educational platform enables closer and intellectual brand image. Production and Price Like many multinational companies in the United States, Apple outsourcing strategy makes it became the designer instead of the manufacturer in the United States. Around the world, Apple has more than 600 suppliers around the Pacific area, and most of the Products are fabricated in Asia. Specifically, Samsung is the Apple’s top chip supplier; Sharp is the provider for retina display; Toshiba supplies major flash memory; Taiwanese companies are key suppliers of semiconductors. Foxconn acts as the primary assembler for Apple in Southeast of China; the company employs 23,000 workers in the assembling line. In 2010, the average manufacturing cost was only $2.00 and almost 17 times in the United States. By locating the assembling factory back to the United States, Apple would have to wipe $14 billion in 2010’s annual profit. On the one hand, the outsourcing strategy makes American Manufacturing “design in California, assembled in China” realize, which helps the company have more capital to optimize its manufacturing process and invest more in R&D for better American design. Samsung Electronics (Samsung’s sister company) and Foxconn have experienced 11,461 percent and 6,002 percent increase in their revenue since the cooperation with Apple. xviiiSamsung has been the large competitor for Apple in the United States and the emerging market with the advantage of pricing and various Android models.

Overall, we expect that the Company may experience sales increase in the emerging market by introducing less pricey products competing with cheap Android devices. Smartphone market According to Business Insider, it is forecasted the CAGR rate for smartphone market growth is 6% from 2016 to 2021, indicating a slowing down of the global market.xix Part of the deceleration is due to the slowing replacement rate of new phones in relatively mature market like the U.S. and China. To cope with this change, major players like Apple are offering 12-month upgrade contract. Telecommunication carriers like AT&T, Verizon, Sprint and T-Mobile are even offering free trade-in deals to attract more users. New growth opportunity is believed to be in emerging markets like India and Indonesia. In 2015, Smartphone penetration rate in India and Indonesia are 17% and 21% comparing to 72% in the U.S. xx Demand from these markets especially rose from the falling average selling prices (ASPs) of low-end phones. Gartner estimates that 139 million smartphones will be sold in India in 2016, growing 29.5% Year over Year.xxi According to The chart below, the smartphone market shares in 3Q2015 and 3Q2016. Samsung, Apple, Huawei, OPPO and vivo are the top 5 players in the market in Quarter 3 of 2016. Together, they shared 54.6% global market with other brands shared the rest 45.4%.xxii

Source: IDCxxiii

Chinese brands are able to get an increasing share of the market by featuring and promoting specific traits of the phone with a relatively low price. For example, OPPO is known for its well-performed camera and vivo is known for its hi-fi sound system. xxiv Specifically, OPPO and vivo both increase more than doubled during last quarter. The continual expansion success of the two brands partly result from their aggressive marketing strategy both domestically and overseas.

Top Five Smartphone Vendors, Shipments, Market Share, and Year-Over-Year Growth, Q3 2016 Preliminary Data (Units in Millions)

Vendor 3Q16

Shipment Volumes

3Q16 Market

Share

3Q15 Shipment Volumes

3Q15 Market

Share

Year-Over-Year

Change Samsung 72.5 20.00% 83.8 23.30% -13.50%

Apple 45.5 12.50% 48 13.40% -5.30% Huawei 33.6 9.30% 27.3 7.60% 23.00%

OPPO 25.3 7.00% 11.4 3.20% 121.60% vivo 21.2 5.80% 10.5 2.90% 102.50%

Others 164.8 45.40% 178.2 49.60% -7.50% Total 362.9 100.00% 359.3 100.00% 1.00%

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The Chinese giant Huawei experienced a notable increase of 23%. Aiming at the mid-tier consumers around the world, the overseas shipments account for 47% of all shipments compared to 40% last year.

Samsung’s third quarter shipments decreased the largest of 13.5%. As Apple’s major competitor and the largest smartphone provider worldwide, Samsung is experiencing a difficult struggle to regain its consumer confidence after its Galaxy Note 7 Exploding battery debacle. The reports of the flagship phone catching fire led the company issue a global recall of the device. As a result, its operating profits of the mobile communications division experienced drastic drop from $2.1 billion a year ago to $87.9 million.xxv Apple’s share of profits in the smartphone industry, on the other hand, reached the highest record of 103.6%, in contrast with 90% a year ago.xxvi This trend indicates that other vendors are losing more profits. It seems that they compete in the market only to get noticed. Due to the new introduction of iPhone 7, the ASP for iPhone increased from $595 in 2Q2016 to $618 in 3Q2016.xxvii However, according to IDC, the ASP for the smartphone market will drop from $295 in 2015 to $237 in 2020.xxviii Apple is able to charge a relatively high premium rate comparing to other competitors because of its branding value as well as its active and high-end customers. If we reduce iPhone’s impact on the IDC forecasts, we can see an even lower ASP in the global smartphone market. As mentioned before, the decreasing trend of the ASP is partly due to the new growth opportunities in the low end market. Tablet Market The tablet market continues to land off since consumers are turning to larger screen smartphones as replacements plus the life expectancy of tablets are longer. According to Danial Research Group, Average life expectancy of tablets is expected to grow 28.5% in 2017 to 2.34 years comparing to 2012.

Source: Danial Research Group, Statistaxxix The below chart shows the current tablet market

shares. Apple maintains its dominate place in the market followed by Samsung, Amazon.com, Lenovo and Huawei. Source: IDC xxx Even though the market is landing off, apple manages to grow its market share by 1.90% compared to 3Q2015. The unit sales of iPads decrease 0.6 million (6%) but the net quarter sales for iPad is able to stay nearly the same. This results from Apple’s launch in its 12.9-inch (Nov 2015) and 9.7-inch iPad Pro (Mar 2016). The ASPs for its tablets grows significantly from $433 to $459 compared to a year ago, offsetting its shipments decreasing effect. xxxi According to Pocketnow, the average ASPs for tablets in 1Q16 is $241.xxxii Clearly, the premium brand image and the maturing ecosystem provide Apple an incomparable advantage. Samsung is the only vendor in the top five companies who lost its market shares. We believe Samsung is still a major competitor for Apple since it hasn’t stepped into the detachable tablets market. Amazon experienced a rapid growth in its tablets this year. 3Q2016 unit sales is up to 3.1 million compared to only 0.8 million in 3Q2015, reflecting a year over year growth rate of 319.9%. Amazon is trying to build its ecosystem for

Top Five Tablet Vendors, Shipments, Market Share, and Growth, Third Quarter 2016 (Preliminary Results, Shipments in millions)

Vendor 3Q16 Unit Shipments

3Q16 Market Share

3Q15 Unit Shipments

3Q15 Market Share

Year-Over-Year

Growth Apple 9.3 21.50% 9.9 19.60% -6.20%

Samsung 6.5 15.10% 8.1 16.00% -19.30% Amazon.com 3.1 7.30% 0.8 1.50% 319.90%

Lenovo 2.7 6.30% 3.1 6.00% -10.80% Huawei 2.4 5.60% 1.9 3.70% 28.40% Others 19 44.20% 26.9 53.20% -29.20% Total 43 100.00% 50.5 100.00% -14.70%

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its Fire Tablet and Prime membership customers, providing them with free movie services, unlimited cloud storage services and free app downloading services. Fire tablets are sold as low as $49.9. On its prime day sale in early July, Amazon offered a 30% discount to its already low-priced device, creating a huge surge of shipments. xxxiii

Wearables Market Wearables referring to technology devices that can be worn by a consumer and often include tracking information related to health and fitness. Representative products are Apple Watch and Fitbit band. According to Statista and Transparency Market Research, the forecasted value of the global wearable device market will grow steadily and reach 5.8 billion in 2018.xxxiv While Both smartphone and tablets growth rate are slowing down in the forthcoming years, wearables market is still at the development stage and is expected to grow rapidly.

Source: Transparency Market Research, Statistaxxxv According to IDC, Fitbit leads the wearables market and has one fourth of the market share in 2Q16. Xiaomi, Apple, Garmin and Lifesense follow Fitbit and have 14%, 7%, 6.9% and 4.6% market shares, respectively.

Source: IDCxxxvi

Xiaomi sold 3.1 million units in 2Q2016 as China becomes the fastest growing market for wearables. The Chinese wearable giant is able to develop heartbeat tracking features into its band with its selling price remains under $20. Unlike Xiaomi, another Chinese brand, Lifesense, focuses on healthcare features like blood pressure monitoring, quickly gained Chinese consumers attention in the past year, shipping 1 million units in 2Q2016. PC Market According to IDC, the declining trend of the PC market did not change currently. However, the declining pace slowed down. In 2Q2016, the worldwide PC shipments totaled 62.4 million units, reflecting the newest year-on-year declining rate of 4.5% comparing to previously forecasted 7.4%.xxxvii

Same pattern, longer average life expectancy of PC, is spotted in this mature market as well.

Source: IDCxxxviii Lenovo continues to lead the market with 13,202 shipments in 2Q2016. In the recent IFA event in Berlin, Lenovo released a new version of YogaBook. This new book integrates a touch-based Halo Keyboard, a new Moto Z Play and a camera made by legendary camera maker Hassleblad in order to attract spoiled customers. Together with HP Inc and Dell, the top 3 vendors have more than 50% of the market share. Apple’s share in the market continues to decrease, from a 7.4% in 2Q2015 to 7.1% in 2Q2016. We believe apple need to develop features like touch-screen in its Mac to catch up with the market. Peer Comparison After discussed the industry specific metrics in each market, we will compare Apple to some top players in each of the market to evaluate its performance. Comparing the two smartphone giants, Apple made $231.3 Billion in sales last year while Samsung made $178.6 Billion. However, the net profit margin of them differentiated a lot. Apple is able to reach 23.09% net profit margin while Samsung only has 9.32%.

Top Five Wearable Device Vendors, Unit Shipments, Market Share, and Year-Over-Year Growth, Q2 2016 (Units in Millions)

Vendor 2Q16 Unit Shipments

2Q16 Market Share

2Q15 Unit Shipments

2Q15 Market Share

2Q16/2Q15 Growth

Fitbit 5.7 25.40% 4.4 24.90% 28.70%

Xiaomi 3.1 14.00% 3.1 17.20% 2.50%

Apple 1.6 7.00% 3.6 20.30% -56.70%

Garmin 1.6 6.90% 0.8 4.20% 106.70%

Lifesense 1 4.60% 0 0.00% N/A

Others 9.5 42.10% 5.9 33.30% 59.30%

Total 22.5 100.00% 17.8 100.00% 26.10%

Top 5 Vendors, Worldwide PC Shipments, Q2 2016 (Units in Thousands)

Vendor 2Q16

Shipments

2Q16 Market Share

2Q15 Shipments

2Q15 Market Share

YoY Growth

Rate Lenovo 13,202 21.20% 13,511 20.70% -2.30% HP Inc. 12,964 20.80% 12,330 18.90% 5.10%

Dell 9,963 16.00% 9,560 14.60% 4.20% ASUS 4,518 7.20% 4,285 6.60% 5.40% Apple 4,420 7.10% 4,820 7.40% -0.083

Others 17,297 27.70% 20,791 31.80% -

16.80% Total 62,363 100.00% 65,296 100.00% -4.50%

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Microsoft has a comparable net profit margin of 19.83% while Lenovo and Blackberry generate negative profit margins last year. As discussed in the smartphone section, Apple can charge a relatively high premium because of its brand value and active users.

Source: Factsetxxxix Apple has the highest ROA ratio of 20.45% and ROE ratio of 46%. Microsoft has a ROA ratio of 9.08% and ROE ratio of 22.09% following Apple. Both Lenovo and Blackberry have negative ROA and ROE ratios last year. GDP

Source: Bureau of Economic Analysisxl In the third quarter of 2016, the real GPD increased at a rate of 2.90%. In the second quarter, the GDP growth was 1.40%. xliThe increasing growth of GDP in the third quarter reflected a positive contribution from personal consumption expenses. Our short-term forecast (consecutive two-quarters) for U.S. real GDP growth is 2.35%. In the long term, we expect the real GDP growth will keep stable around 1.50% by 2021. A slower U.S. GDP growth makes U.S. companies have fewer opportunities to grow. A slowly increasing budget for personal consumptions leads the Company not easy to expand the sales revenue profoundly. Regarding the slower growth rate of GDP, we will not be overoptimistic about the company future performance. From the global economic perspective, the World Bank forecasts that the global real GDP growth is

2.4%, 2.8%, and 3.0% for 2016,2017, and 2018, respectively. We expect that the global GDP will grow at an average of 2.50% by 2021. Considering the world market, we assume CV NOPLAT for the Company will be around 2.00% in our model. Since the change of GDP growth will have a significant impact on our valuation model. The choice of CV NOPLAT will be adjusted by the change in the global market. If the world economy slows down faster than the expectation after 2021, then it is likely that less spending and consumption on technology products worldwide, which has an adverse impact on Apple’s valuation in the long term.

Unemployment Rate

Source: Bureau of Labor Statisticsxlii The unemployment rate is a direct factor that affects consumer spending, confidence, and purchasing power. Most recently, the level of unemployment was changed to 4.9%, the U.S. Bureau of Labor Statistic reported in November. A higher unemployment rate tends to make the market shrink with the increasing uncertainty and worries about the economy. In reverse, the current dropping unemployment rate and slightly rising wages reflect a growing recovery economy. At this point, with the increase in disposable personal income, people are willing and able to consume more technology products. In the short run, we expect that the unemployment rate will maintain at 4.9% in the next six months. As mentioned above, the slower GDP growth makes companies put fewer efforts to hire people. In the long term, regarding the slow growth in real GDP, we expect that the unemployment rate will not have significant change and maintain at the level of 4.5-5.0%. Therefore, we expect that Apple may still have an increase trends on sales in the short term in the domestic market, and the growing global market will offset the increasingly slowly-growing domestic sales in the long run.

Company Sales($ Billions)

Net Profit Margin

ROA ROE

Apple 231

23.09% 20.45% 46.00%

Samsung 179

9.32% 7.91% 11.16%

Microsoft 85

19.83% 9.08% 22.09%

Lenovo 45

-0.29% -0.49% -3.62%

Blackberry 2

-9.63% -3.47% -6.30%

Economic Outlook

10

Personal Consumption Expenditure

Source: FREDxliii

A higher consumer confidence is a strong indicator of increasing personal consumption expenditures. By the end of October 2016, the index of trust was 98.6, consumers have cooled down since the second quarter, Bloomberg we suppose that consumer confidence falls to 2-year low because of the temporary concerns about the president election.xliv

For Apple, most of its products are discretionary products, and the demand is somewhat sensitive to the change in price and consumer’s purchasing power. Combined with the continuing low unemployment rate, we expect consumer confidence index will be back to 100, and personal spending growth rate will keep at average 3.5% to 4% per year.

Exchange Rates The exchange rate is an important driver that impacts on company’s capability of competition in the global market, especially for the company like Apple. In 2016, over 60% of sales revenue came from the market outside of Americas. Thus, the fluctuation of exchange rate affects Apple’s worldwide net income to a high intent. As the China’s government increase the regulation on Yuan and slow down its economic growth, dollars become more attractive currency in the world market for investors. Also, the Brexit and migrant crisis aggravate the weakness in European markets, results in strengthening the dollar. However, a strong U.S. dollar may not be good news for Apple. In confronting of the intense competition from Samsung and China’s local smartphone makers (such as Huawei, Oppo, and Xiaomi), Apple gradually loses the edges on price and become harder to beat the emerging market.

Besides, the Company may also suffer from currency losses on foreign revenue and net investment in the foreign operation. Currently, the Company hedge the foreign exchange gains or losses via on-designated exchange contract. The following graph indicates that U.S. dollar is getting stronger in recent months, and we expect that the exchange rate will maintain the current level, and the dollar will have an index value of 120 for the next several years.xlv

source: FREDxlvi

Interest Rate The Company also may consider the interest rate risk primarily related to its investment portfolio and outstanding debts. Any change in U.S. interest rate may affect the interest earned on cash and cash equivalent, market securities, and Company’s long-term debt. The current effective federal funds rate is 0.40%, and we expect the rate to maintain at 0.40% over the next six months, while we forecast it will reach to 1.0% or a little higher in next three years. Disclosed in the recent annual report, a hypothetical 1% increase in market interest rate would result in interest expenses on Company’s debt as of September 24, 2016 to increase by $271 million. Also, the 1% increase will also cause $4.9 billion incremental declines in the fair market value of the portfolio. In the long run, we have factored the increase borrowing costs into our model.

Significant increase in smartphone penetration and greater internet penetration in emerging market can result in a huge increase in consumer base for Apple’s products.

Friendly partnership with corporates to expand its

market among enterprises which may offset the

Catalyst for Growth

11

slowdown in consumer market. The strategic alliance with Deloitte, IBM, SAP, and Cisco helps the Company strengthen the integration of its hardware and software platforms and guarantee the increase in sales in business market.

Faster development of AI technology and machine

learning can be a highlighted growing point in the Company’s products. The increasingly intelligent and interest interaction between the device and users helps Apple’s products gain more edges on customer experience. Meanwhile, it will be utilized to deal with the batter problem to enhance the performance.

The Company’s successful ecosystem play an

important role in attracting new customers and transform them into loyal ones. It is sophisticated at combining its customer’s experience on different modules and devices together, which aims to make users purchase safety, comfort, convenience, simplicity, and productivity. xlvii

Samsung’s latest manufacturing failure has hurt

the company dramatically. We believe it will take the smartphone leader at least 2 years to fully recover from the incident in terms of brand image. It’s a great timing and opportunity for Apple beat Samsung in the premium smartphone market.

Persistent Innovation in Apple’s products help

Apple to grow in a strategic way. We believe Wireless is the trend. Apple has proved to the world again that it has the courage and innovation to be the first company embracing future. Apple is capable of changing and shaping user habits.

Wearable market is growing rapidly, we believe

latest Apple watch series 2 and forthcoming generations are going to help Apple gain its market.

In short term or long term, the pressure from the

currency fluctuation will still impact over 60% of revenue that come from outside U.S. and the net investment in foreign operations. The Company may not choose to hedge a portion of its foreign currency exposures when considers accounting considerations and the prohibitive economic cost of hedging.

Emerging market like India and Indonesia are in

need of low price smartphones. $400 IPhone SE

did not meet Emerging markets expectations. Apple made an effort to import and sell refurbished IPhones to India. The proposals were turned down by Indian government for two times in 2015 and 2016.xlviii Apple is facing a challenging situation in the emerging market.

Revenue Decomposition According to Apple’s latest conference call, its newest iPhone 7 was sold out at the end of 4Q16 as well as 1Q17. With the strong coming back of the iPhone 7, we expect iPhone’s revenue to grow at about 10% to $150 billion in 2017, which is 5 billion less than 2015. Starting from 2018, we forecast iPhone to grow at a CAGR of 5%. Similarly, we believe the ASP for iPhone will increase in 2017 due to the high price setting of iPhone 7. However, we do expect Apple to introduce another low-price iPhone in the coming 5 years. To account for the effect, we expect ASP for iPhone to decrease at $10 per year starting from 2018.

Apple’s services revenue exceeds both Mac and iPad for the first time and becomes the second largest revenue segment for Apple in 2016. Apple’s service in the App Store is one of the major components of Apple’s ecosystem. Combining with the increasing AppleCare service carried by the upgrade contracts, we forecast the service segment to grow at a CAGR of 15% for the next 5 years.

Apple introduced its new MacBook Pro in October, with the lowest price at 1,499. We believe the ASP of the Mac will increase to 1,300 in 2017 but gradually decrease to 1,215 in 2021. Although the global PC markets continue to shrink, we expect average selling units of Mac fluctuate around 18,300 units for the next five years because of Apple’s highly loyal customers in the segment.

The iPad segment of the Apple accounts for 9.57% of Apple’s total revenue in 2016. Since the tablets market is landing off, we think the unit sales of the iPad will decrease by 3.5% in year 2017 but will gradually grow to 46,000 units in 2021. This 0.2% CAGR growing rate is due to Apple’s newly formed strategic partnership with Deloitte, aiming at breaking into the enterprise market. We believe the effect of this partnership will slowly reveal in the coming years. Same with iPhone, the pressure from low ASP tablets from competitors will cause the ASP for iPad to decrease. We set the decreasing rate of ASP to 0.65% for iPad for the next 5 years. Together, we expect iPad to account for only 6.94% of Apple’s revenue in 2021.

Valuation

Investment Positive

Investment Negative

12

Other products segment will help the company grow as well. The newly released Apple Watch 2 will drive the revenue growth of the segment. Together with the companies’ marketing effort in the product, we believe the other products segment will grow at a peak year-over-year rate of 15% in 2017. Overall, we have modeled the growth rate for the segment to be 8% CAGR for the next 5 years.

In 2016, the gross margin of Apple was 39.08%. As stated in previous sections, the competitive environment in tablets, smartphones and PCs market will drive the ASP of Apple products down. Thus we forecast Apple’s Gross Margin gradually decrease to 33.68% in 2021.

Capital Expenditure According to Apples 2016 10-k, the company reported a $12.8 billion total capital expenditures in 2016 and is planning to utilize $16 billion capital expenditures in 2017. Combining with the past five year averages, we forecasted Apple’s future capital expenditure to be 5.89% of its total revenue from 2018 to 2021. Discounted Cash Flow and Economic Profit Models Our Discounted Cash Flow(DCF) and Economic Profit(EP) models implied a price of $160.91, which is 52.2% higher than its current price of $105.71(as of November 14, 2016). We believe our DCF and EP models have well priced in our various revenue and balance sheet projections and thus Apple is currently undervalued as a result. Dividend Discount Model Our Dividend Discount(DDM) model computed an intrinsic Value of $126.24, also implying that Apple is currently undervalued. However, we choose not to put a lot of weight in the DDM model since it’s difficult to project the payout ratio of the company. In fact, Apple just started to pay dividends in year 2012 and its payout ratio are fluctuating since then. Moreover, the DDM model is focusing on revenue, income statement projection and is omitting the effect of Apple’s 237 billion cash, cash equivalents and marketable securities on its balance sheet. Relative Valuation We came up with two sets of peers comparable to Apple and computed Apple’s relative price based on the average P/E ratio of each sets. One set of comparable companies are from the Technology industry and has an average forward P/E ratio of 15.2. Multiplying this ratio by our 2016 Apple EPS estimate, we have an implied stock price of $126.61. Another set of comparable companies is the brand leaders, consisting of brands like Coca Cola and Harley-Davidson. Given the premium brand status of Apple, we think it’s reasonable to do such relative

valuation analysis. With the forward P/E ratio of 18.8 in the set, we computed an implied stock price of $156.97 for Apple. Since it’s hard to find companies that have comparable product lines and revenue streams in the technology sector, we think the implied price computed using premium brands average P/E is more appropriate. Mac Growth to iPhone Growth We are aware that both of our DCF and DDM model will be pretty sensitive to iPhone’s growth rate. However, we would also like to know on what scale will our model be sensitive to it compared to other revenue segments. Thus we chose Mac as a testing benchmark. According to our results, holding we can see that for average 1% increase of the Mac growth rate, Apple’s stock price will increase on average by $0.72. For average 1% increase of the iPhone growth rate, the stock price will increase on average by $4.43. The scale of increase in the stock price will be larger as the growth rate move up. CV NOPLAT to Beta CV growth of NOPLAT is one of the key assumptions in DCF and EP models. We run a test to see how sensitive Apple is to the NOPLAT growth rate relative to Beta. Holding Beta constant at 1.323(which is our assumption), increases in CV Growth rate from 1.5% to 3% will result in $30 increase in the stock price. In contrast, if we hold CV growth constant at 1.5 %, decreases in Beta from 1.323 to 1.1, stock price will increase by $21. It’s fair to conclude that both Beta and CV growth play important roles in determining the stock price and Apple will be able to reach its best scenario by increase its CV growth rate and decrease its Beta. CV NOPLAT to WACC Computed by Beta, we are curious to see how WACC is doing compared to CV NOPLAT. Since Apple have so much cash on hand, it’s a possible though unrealistic scenario for Apple to get rid of all its existing debt and thus decrease WACC. Holding CV growth at 1.5%, stock price rises by nearly $80 as WACC decreases from 11% to 6.5%. Relatively speaking, Apple’s stock is more sensitive to CV growth than WACC. Service Growth to iPhone Growth in DDM As mentioned in previous sections, we see Apple’s Service segment to be the largest growing opportunity for Apple. To test how service revenue could play out in our model, we analyzed the sensitivity of service segment and iPhone segment growth in the DDM model. Holding iPhone’s growth rate constant at 6 percent, increases of service revenue growth from -5% to 15% will account for $18 increase in DDM price model. Given the recent trend of

Sensitive Analysis

13

Apple’s strategy in its service segment, we are pretty confident that 15% CAGR service growth rate will likely be achieved. Payout Ratio to iPhone Growth in DDM We put less weight in our DDM model partly because we think it’s hard to project Apple’s dividend payout policy given that Apple has only started paying dividends for 4 years. We want to analyze the impact of payout ratio to our DDM model. Holding our iPhone growth constant at 6%, as payout ratio increases from 0% to 35%. Even though payout ratio increases significantly, the price DDM calculated is still far from our target price range of $155 to $165. Our initial assumption towards DDM model is confirmed. iPhone Sales iPhone accounts for more than half of the Company’s revenue and it is the center for the Company to establish a better ecosystem. Recently, the Company just introduce the iPhone 7 and 7 Plus. Compared with iPhone 6, the new iPhone has optimized camera systems, better performance in battery life, water resistance, and a faster A10 Fusion chip. Currently, demand still outstrips supply. In the future, the iPhone sale should be closely monitored. The increase or drop in iPhone sales will impact the Company’s foreseeable strategy and business model.

Investments and Acquisitions The Company surely increases its investment and acquisitions for creating better user experience. Machine learning and AI will be important part of the future development in the Company. Any new breakthrough on machine learning will bring positive impact on future sales

Keys to Monitor

14

i Seeking Alpha <http://seekingalpha.com/article/4014922-apple-aapl-q4-2016-results-earnings-call-transcript> ii Apple 2016 3rd 10-Q< http://investor.apple.com/secfiling.cfm?filingID=1628280-16-17809&CIK=320193> iii Apple 4Q16 Data< http://images.apple.com/newsroom/pdfs/Q4FY16DataSummary.pdf> iv Apple 2016 3rd 10-Q< http://investor.apple.com/secfiling.cfm?filingID=1628280-16-17809&CIK=320193> v Apple 2016 3rd 10-Q< http://investor.apple.com/secfiling.cfm?filingID=1628280-16-17809&CIK=320193> vi Bloomberg <http://www.bloomberg.com/news/articles/2016-06-28/china-orders-mobile-app-stores-providers-to-monitor-users> vii Seeking Alpha <http://seekingalpha.com/article/4014922-apple-aapl-q4-2016-results-earnings-call-transcript> viii Seeking Alpha <http://seekingalpha.com/article/4014922-apple-aapl-q4-2016-results-earnings-call-transcript> ix Seeking Alpha <http://seekingalpha.com/article/4014922-apple-aapl-q4-2016-results-earnings-call-transcript> x WSJ <http://www.wsj.com/articles/apple-buys-machine-learning-startup-turi-1470448718> xi Apple 2016 10-K <http://investor.apple.com/common/download/download.cfm?companyid=AAPL&fileid=913905&filekey=66363059-7FB6-4710-B4A5-7ABFA14CF5E6&filename=10-K_2016_9.24.2016_-_as_filed.pdf> xii Businessinsider <http://www.businessinsider.com/what-the-didi-uber-merger-means-for-apple-2016-8 > xiii Apple <http://www.apple.com/newsroom/2016/09/apple-and-deloitte-team-up-to-accelerate-business-transformation-on-iphone-and-ipad.html> xiv Factset Data xv Factset Data xvi Factset Data xvii Emarketer < https://www.emarketer.com/Article/Apple-Still-Sells-Most-per-Square-Foot/1012523 > xviii CIO < http://www.cio.com/article/2926435/innovation/how-apples-outsourcing-strategy-created-two-giant-competitors.html > xix Business Insider<http://www.businessinsider.com/global-smartphone-market-forecast-2016-3> xx Statista < https://www.statista.com/statistics/539395/smartphone-penetration-worldwide-by-country/> xxi Gartner<http://www.gartner.com/newsroom/id/3339019> xxii IDC <http://www.idc.com/getdoc.jsp?containerId=prUS41636516>

xxiii IDC <http://www.idc.com/getdoc.jsp?containerId=prUS41636516>

xxiv PhoneRadar<http://phoneradar.com/bbk-electronics-company-information/> xxv Nytimes <http://www.nytimes.com/2016/10/28/business/samsung-galaxy-note-7-profit.html >

xxvi Fortune < http://fortune.com/2016/11/04/apple-smartphone-profits/>

xxvii Apple 10-Q <http://images.apple.com/newsroom/pdfs/Q4FY16DataSummary.pdf>

xxviii IDC < http://www.idc.com/getdoc.jsp?containerId=prUS41061616>

xxix Statista<https://www.statista.com/statistics/267473/average-tablet-life/> xxx IDC < https://www.idc.com/getdoc.jsp?containerId=prUS41885416>

xxxi Apple 10-Q <http://images.apple.com/newsroom/pdfs/Q4FY16DataSummary.pdf>

xxxii Pocketnow < http://pocketnow.com/2016/06/10/tablet-shipments-average-selling-prices-q1-report> xxxiii IDC <https://www.idc.com/getdoc.jsp?containerId=prUS41885416>

xxxiv Statista < http://www.statista.com/statistics/302482/wearable-device-market-value/> xxxv Statista<https://www.statista.com/statistics/302482/wearable-device-market-value/> xxxvi IDC<https://www.idc.com/getdoc.jsp?containerId=prUS41718216> xxxvii IDC<https://www.idc.com/getdoc.jsp?containerId=prUS41584116> xxxviii IDC<https://www.idc.com/getdoc.jsp?containerId=prUS41584116> xxxix Factset Data xl Bureau of Economic Analysis <http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm> xli Bureau of Economic Analysis <http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm> xlii Bureau of Labor Statistics, “Average Yearly Unemployment Rate” http://data.bls.gov/timeseries/LNS14000000 xliii FRED, “Consumer Opinion Surveys: Confidence Indicators: Composite Indicators: OECD Indicator for the United States” https://fred.stlouisfed.org/series/CSCICP03USM665S xliv Bloomberg <https://www.bloomberg.com/markets/economic-calendar> xlv Federal Researve Bank of St. Louis <https://fred.stlouisfed.org/series/TWEXB > xlvi FRED, “Trade Weighted U.S. Dollar Index: Broad” https://fred.stlouisfed.org/series/TWEXB xlviiIntrinsic Investing, Sept.20. 2016, “How Apple Creates Value… By Creating Customers” http://intrinsicinvesting.com/2016/09/20/how-apple-creates-value-by-creating-customers/ xlviii BloombergTechnologyhttp://www.bloomberg.com/news/articles/2016-05-03/india-thwarts-apple-s-plan-to-sell-cheaper-refurbished-iphones

References

15

Important Disclaimer

This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Apple Inc.Revenue Decomposition

Fiscal Years Ending Sept. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021CViPhone 101,991 155,041 136,700 150,370 157,889 165,783 174,072 182,776

growth rate 11.74% 52.01% -11.83% 10.00% 5.00% 5.00% 5.00% 5.00%iPad 30,283 23,227 20,628 19,800 19,563 19,891 20,020 20,148

growth rate -5.31% -23.30% -11.19% -4.01% -1.20% 1.68% 0.65% 0.64%Mac 24,079 25,471 22,831 23,400 23,569 22,575 22,446 22,180

growth rate 12.08% 5.78% -10.36% 2.49% 0.72% -4.22% -0.57% -1.19%Services 18,063 19,909 24,348 28,000 32,200 37,030 42,585 48,973

growth rate 12.54% 10.22% 22.30% 15.00% 15.00% 15.00% 15.00% 15.00%Other Products 8,379 10,067 11,132 12,802 14,082 14,786 15,525 16,302

growth rate -17.18% 20.15% 10.58% 15.00% 10.00% 5.00% 5.00% 5.00%Total Revenue 182,795 233,715 215,639 234,372 247,303 260,066 274,649 290,378

Total growth rate 6.95% 27.86% -7.73% 8.69% 5.52% 5.16% 5.61% 5.73%

iPhone 55.80% 66.34% 63.39% 64.16% 63.84% 63.75% 63.38% 62.94%iPad 16.57% 9.94% 9.57% 8.45% 7.91% 7.65% 7.29% 6.94%Mac 13.17% 10.90% 10.59% 9.98% 9.53% 8.68% 8.17% 7.64%Services 9.88% 8.52% 11.29% 11.95% 13.02% 14.24% 15.51% 16.87%Other Products 4.58% 4.31% 5.16% 5.46% 5.69% 5.69% 5.65% 5.61%% Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Unit sales by product:iPhone 169,219 231,218 211,884 231,338 246,701 263,148 280,761 299,632

growth rate 12.62% 36.64% -8.36% 9.18% 6.64% 6.67% 6.69% 6.72%iPad 67,977 54,856 45,590 44,000 43,667 44,800 45,500 46,000

growth rate -4.30% -19.30% -16.89% -3.49% -0.76% 2.59% 1.56% 1.10%Mac 18,906 20,587 18,484 18,000 18,500 18,250 18,175 18,255

growth rate 15.70% 8.89% -10.22% -2.62% 2.78% -1.35% -0.41% 0.44%

Unit price by products:iPhone 603 671 645 650 640 630 620 610

growth rate -0.79% 11.25% -3.78% 0.75% -1.54% -1.56% -1.59% -1.61%iPad 445 423 452 450 448 444 440 438

growth rate -1.05% -4.95% 6.86% -0.55% -0.44% -0.89% -0.90% -0.45%Mac 1,274 1,237 1,235 1,300 1,274 1,237 1,235 1,215

growth rate -3.12% -2.86% -0.17% 5.25% -2.00% -2.90% -0.16% -1.62%

Domestic Revenue % 36% 40% 40% 38% 40% 38% 38% 35%

International Revenue % 64% 60% 60% 62% 60% 62% 62% 75%

Apple Inc.Income Statement

Fiscal Years Ending Sept. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVNet sales $ 182,795 $ 233,715 $ 215,639 $ 234,372 $ 247,303 $ 260,066 $ 274,649 $ 290,378

Cost of sales 104,312 128,832 120,871 131,437 138,688 145,846 154,024 162,845

Gross margin 78,483 104,883 94,768 102,935 108,614 114,220 120,625 127,533

Operating expenses:Research and development 6,041 8,067 10,045 8,918 9,410 9,895 10,450 11,049

Depreciatipon and Amortization 7,946 11,257 10,505 13,685 18,615 22,127 25,820 29,721

Selling, general and administrative 11,993 14,329 14,194 15,058 15,889 16,709 17,645 18,656

Total operating expenses 25,980 33,653 34,744 37,660 43,913 48,731 53,916 59,425

Operating income 52,503 71,230 60,024 65,275 64,701 65,489 66,709 68,108

interst and dividend income 1,795 2,921 3,999 6,011 6,601 6,872 6,978 7,044

Interest expense (384) (733) (1,456) (3,351) (3,541) (3,849) (4,045) (4,173)

Other expense, net (431) (903) (1,195) (1,195) (1,195) (1,195) (1,195) (1,195)

Other income/(expense), net 980 1,285 1,348 1,465 1,865 1,827 1,738 1,676

Income before provision for income taxes 53,483 72,515 61,372 66,740 66,566 67,317 68,447 69,784

Provision for income taxes 13,973 19,121 15,685 16,765 16,721 16,910 17,194 17,530

Net income $ 39,510 $ 53,394 $ 45,687 $ 49,975 $ 49,845 $ 50,407 $ 51,253 $ 52,254

Earnings per share:Basic (in dollars per share) $ 6.49 $ 9.28 $ 8.35 $ 9.17 $ 9.46 $ 10.13 $ 10.89 $ 11.72growth 11.86% 42.99% ‐10.02% 9.87% 3.07% 7.08% 7.51% 7.64%

Basic (in shares) 6,086 5,753 5,471 5,424 5,118 4,837 4,578 4,340

Dividend payout ratio 28.04% 21.34% 26.11% 25.16% 25.16% 25.16% 25.16% 25.16%Cash dividends declared per share (in dollars per share)

$ 1.82 $ 1.98 $ 2.18 $ 2.31 $ 2.38 $ 2.55 $ 2.74 $ 2.95

Total dividend paid $ 11,788 $ 12,049 $ 12,542 $ 12,630 $ 12,905 $ 13,042 $ 13,251 $ 13,500

Apple Inc.Balance Sheet

Fiscal Years Ending Sept. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVCurrent assets:Cash and cash equivalents 13,844 21,120 20,484 36,073 38,740 34,639 28,626 29,056 Short-term marketable securities 11,233 20,481 46,671 47,852 49,062 50,304 51,576 52,881

Accounts receivable,net 17,460 16,849 15,754 18,802 19,839 20,863 22,033 23,295

Inventories 2,111 2,349 2,132 2,460 2,596 2,729 2,883 3,048

Vendor non-trade receivables 9,759 13,494 13,545 13,589 14,338 15,078 15,924 16,836

Deferred tax assets 4,318 5,546 - 3,169 3,960 4,251 4,535 4,808

Other current assets 9,806 9,539 8,283 10,380 10,953 11,518 12,164 12,861

Total current assets 68,531 89,378 106,869 132,325 139,489 139,382 137,741 142,785

Long-term marketable securities 130,162 164,065 170,430 176,992 183,806 190,882 198,231 205,863

Property, plant and equipment, net 20,624 22,471 27,010 36,741 43,673 50,962 58,661 66,800

Goodwill 4,616 5,116 5,414 5,414 5,414 5,414 5,414 5,414

Acquired intangible assets, net 4,142 3,893 3,206 2,009 1,107 658 483 355

Other non-current assets 3,764 5,422 8,757 6,594 6,957 7,317 7,727 8,169

Total assets 231,839 290,345 321,686 360,073 380,445 394,615 408,256 429,386

Current liabilities:Accounts payable 30,196 35,490 37,294 38,280 40,392 42,476 44,858 47,427

Accrued expenses 18,453 25,181 22,027 24,284 25,624 26,946 28,457 30,087

Deferred revenue 8,491 8,940 8,080 9,545 10,071 10,591 11,185 11,825

Commercial paper 6,308 8,499 8,105 8,473 8,941 9,402 9,929 10,498

Current portion of long-term debt - 2,500 3,500 2,336 5,317 5,024 2,643 6,455

Total current liabilities 63,448 80,610 79,006 82,918 90,344 94,440 97,073 106,293 Deferred revenue, non-current 3,031 3,624 2,930 3,568 3,765 3,960 4,182 4,421

Long-term debt 28,987 53,329 75,427 81,169 85,725 90,648 95,816 101,154

Deferred tax liabilities 20,259 24,062 26,019 23,098 28,869 30,987 33,060 35,053

Other non-current liabilities 4,567 9,365 10,055 8,725 9,207 9,682 10,225 10,810

Total liabilities 120,292 170,990 193,437 199,479 217,911 229,716 240,355 257,731

Apple Inc.Cash Flow Statement

Fiscal Years Ending Sept. 26 2014 2015 2016

Cash and cash equivalents, beginning of the year

$ 14,259 $ 13,844 $ 21,120

Operating activities:Net income 39,510 53,394 45,687

Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization 7,946 11,257 10,505

Share-based compensation expense

2,863 3,586 4,210

Deferred income tax expense 2,347 1,382 4,938

Changes in operating assets and liabilities:Accounts receivable, net (4,232) 611 1,095

Inventories (76) (238) 217

Vendor non-trade receivables (2,220) (3,735) (51)

Other current and non-current assets

167 (179) 1,090

Accounts payable 5,938 5,400 1,791

Deferred revenue 1,460 1,042 (1,554)

Other current and non-current liabilities

6,010 8,746 (2,104)

Cash generated by operating activities

59,713 81,266 65,824

Investing activities:Purchases of marketable securities

(217,128) (166,402) (142,428)

Proceeds from maturities of marketable securities

18,810 14,538 21,258

Proceeds from sales of marketable securities

189,301 107,447 90,536

Payments made in connection with business acquisitions, net

(3,765) (343) (297)

Payments for acquisition of property, plant and equipment

(9,571) (11,247) (12,734)

Payments for acquisition of intangible assets

(242) (241) (814)

Payments for strategic investments

(10) 0 (1,388)

Other 26 (26) (110)

Cash used in investing activities (22,579) (56,274) (45,977)

Financing activities:Proceeds from issuance of common stock

730 543 495

Excess tax benefits from equity awards

739 749 407

Payments for taxes related to net share settlement of equity awards

(1,158) (1,499) (1,570)

Payments for dividends and dividend equivalents

(11,126) (11,561) (12,150)

Repurchases of common stock (45,000) (35,253) (29,722)

Proceeds from issuance of term debt, net

11,960 27,114 24,954

Repayments of term debt 0 0 (2,500)

Change in commercial paper, net 6,306 2,191 (397)

Cash used in financing activities

(37,549) (17,716) (20,483)

Cash flows from all activities:

Increase/(Decrease) in cash and cash equivalents

(415) 7,276 (636)

Cash and cash equivalents, beginning of the year

14,259 13,844 21,120

Cash and cash equivalents, end of the year

13,844 21,120 20,484

Apple Inc.Forecasted Cash Flow Statement

2017E 2018E 2019E 2020E 2021CVNet Income 49,975 49,845 50,407 51,253 52,254 Adjustments to reconcile net income to net cash procided by operating activitiesAdd: Depreciation and amortization 14,882 19,517 22,576 25,995 29,849

Changes (increases or decreases) in working capital accounts:

Accounts Receivable (3,048) (1,037) (1,024) (1,170) (1,262)Vendor non-trade receivables (44) (750) (740) (845) (912)Inventories (328) (136) (134) (153) (165)Other current assets (2,097) (573) (565) (646) (697)Accouts payable 986 2,112 2,085 2,382 2,569Accrued expenses 2,257 1,340 1,322 1,511 1,630Deferred taxes (6,090) 4,980 1,827 1,788 1,720Deferred revenue 1,465 527 520 594 641

Net cash flows from operating activities 57,958 75,825 76,273 80,709 85,627

Investing activities:Increase in non-current asset 2,163 (364) (359) (410) (443)Marketable securities (7,742) (8,025) (8,318) (8,622) (8,937)Property& Equipment, gross (23,416) (25,547) (29,417) (33,519) (37,860)Net cash used for investing activities (28,995) (33,935) (38,093) (42,551) (47,239)

Financing activitiesProceeds from issuance of notes payable & long-term debt 4,947 8,004 5,091 3,315 9,718Non-current deferred revenue 638 197 194 222 239Other non-current liabilities (1,330) 481 475 543 586Payment of dividends (12,630) (12,905) (13,042) (13,251) (13,500)Procedds from issuance of common stock 0 0 0 0 0Repurchases of common stock (5,000) (35,000) (35,000) (35,000) (35,000)Net cash provided by financing activities (13,374) (39,223) (42,281) (44,171) (37,957)

NET INCREASE(DECREASE) IN CASH 15,589 2,667 (4,101) (6,013) 431

CASH BEGINNING OF THE YEAR 20,484 36,073 38,740 34,639 28,626

CASH END OF THE YEAR 36,073 38,740 34,638 28,625 29,056

Apple Inc.Common Size Income Statement

Fiscal Years Ending Sept. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVNet sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales 57.07% 55.12% 56.05% 56.08% 56.08% 56.08% 56.08% 56.08%

Depreciation expense 4.35% 4.82% 4.87% 5.84% 7.53% 8.51% 9.40% 10.24%

Gross margin 38.59% 40.06% 39.08% 38.08% 36.39% 35.41% 34.52% 33.68%

Operating expenses:Research and development 3.30% 3.45% 4.66% 3.80% 3.80% 3.80% 3.80% 3.80%

Selling, general and administrative 6.56% 6.13% 6.58% 6.42% 6.42% 6.42% 6.42% 6.42%

Total operating expenses 14.21% 14.40% 16.11% 16.07% 17.76% 18.74% 19.63% 20.46%

Operating income 28.72% 30.48% 27.84% 27.85% 26.16% 25.18% 24.29% 23.45%

Other income/(expense), net 0.54% 0.55% 0.63% 0.63% 0.75% 0.70% 0.63% 0.58%

Income before provision for

income taxes

29.26% 31.03% 28.46% 28.48% 26.92% 25.88% 24.92% 24.03%

Provision for income taxes 7.64% 8.18% 7.27% 7.15% 6.76% 6.50% 6.26% 6.04%

Net income 21.61% 22.85% 21.19% 21.32% 20.16% 19.38% 18.66% 18.00%

Apple Inc.Common Size Balance Sheet

Fiscal Years Ending Sept. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021CVCurrent assets:Cash and cash equivalents 7.57% 9.04% 9.50% 15.39% 15.66% 13.32% 10.42% 10.01%Short-term marketable securities 6.15% 8.76% 21.64% 20.42% 19.84% 19.34% 18.78% 18.21%Accounts receivable, net 9.55% 7.21% 7.31% 8.02% 8.02% 8.02% 8.02% 8.02%Inventories 1.15% 1.01% 0.99% 1.05% 1.05% 1.05% 1.05% 1.05%Vendor non-trade receivables 5.34% 5.77% 6.28% 5.80% 5.80% 5.80% 5.80% 5.80%Other current assets 5.36% 4.08% 3.84% 4.43% 4.43% 4.43% 4.43% 4.43%Total current assets 37.49% 38.24% 49.56% 56.46% 56.40% 53.60% 50.15% 49.17%Long-term marketable securities 71.21% 70.20% 79.03% 75.52% 74.32% 73.40% 72.18% 70.89%Property, plant and equipment, net 11.28% 9.61% 12.53% 15.68% 17.66% 19.60% 21.36% 23.00%Goodwill 2.53% 2.19% 2.51% 2.31% 2.19% 2.08% 1.97% 1.86%Acquired intangible assets, net 2.27% 1.67% 1.49% 0.86% 0.45% 0.25% 0.18% 0.12%Other non-current assets 2.06% 2.32% 4.06% 2.81% 2.81% 2.81% 2.81% 2.81%Total assets 126.83% 124.23% 149.18% 153.63% 153.84% 151.74% 148.65% 147.87%Current liabilities:Accounts payable 16.52% 15.19% 17.29% 16.33% 16.33% 16.33% 16.33% 16.33%Accrued expenses 10.09% 10.77% 10.21% 10.36% 10.36% 10.36% 10.36% 10.36%Deferred revenue 4.65% 3.83% 3.75% 4.07% 4.07% 4.07% 4.07% 4.07%Commercial paper 3.45% 3.64% 3.76% 3.62% 3.62% 3.62% 3.62% 3.62%Current portion of long-term debt 0.00% 1.07% 1.62% 1.00% 2.15% 1.93% 0.96% 2.22%Total current liabilities 34.71% 34.49% 36.64% 35.38% 36.53% 36.31% 35.34% 36.60%Deferred revenue, non-current 1.66% 1.55% 1.36% 1.52% 1.52% 1.52% 1.52% 1.52%Long-term debt 15.86% 22.82% 34.98% 34.63% 34.66% 34.86% 34.89% 34.84%Other non-current liabilities 2.50% 4.01% 4.66% 3.72% 3.72% 3.72% 3.72% 3.72%Total liabilities 65.81% 73.16% 89.70% 85.11% 88.12% 88.33% 87.51% 88.76%Shareholders’ equity:Common stock and additional paid-in capital 12.75% 11.73% 14.49% 13.33% 12.64% 12.02% 11.38% 10.76%Retained earnings 47.68% 39.49% 44.69% 54.92% 52.83% 51.15% 49.52% 48.13%Accumulated other comprehensive income/(loss)

0.59% ‐0.15% 0.29% 0.27% 0.26% 0.24% 0.23% 0.22%Total shareholders’ equity 61.02% 51.07% 59.47% 68.52% 65.72% 63.41% 61.13% 59.11%Total liabilities and shareholders’ equity 126.83% 124.23% 149.18% 153.63% 153.84% 151.74% 148.65% 147.87%

Apple Inc.Value Driver Estimation

Fiscal Years Ending Sept. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Marginal Tax Rate

Federal statutory tax rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%

State income taxes, net of federal benef 0.88% 0.94% 0.90% 1.09% 1.09% 1.09% 1.09% 1.09%

Indefinitely invested earnings of foreign

subsidiaries ‐8.87% ‐8.92% ‐9.10% ‐10.97% ‐10.97% ‐10.97% ‐10.97% ‐10.97%

Marginal Tax Rate 27.01% 27.02% 26.81% 25.12% 25.12% 25.12% 25.12% 25.12%

EBITA:Net Sales 182,795 233,715 215,639 234,372 247,303 260,066 274,649 290,378

Cost of sales (include Dep. and Amort.) 104,312 128,832 120,871 145,122 157,303 167,973 179,844 192,566

Research& & Development expense 6,041 8,067 10,045 8,918 9,410 9,895 10,450 11,049

Selling, General & Administrative Expense 11,993 14,329 14,194 15,058 15,889 16,709 17,645 18,656

Implied interest on operating lease 153 162 202 246 318 379 442 508

EBITA 60,602 82,649 70,731 65,522 65,020 65,868 67,151 68,616

Less: Adjusted Taxes Income tax provision 13,973 19,121 15,685 16,765 16,721 16,910 17,194 17,530

Tax shield on interest expense 134 257 510 842 890 967 1,016 1,048

Tax on interest income (628) (1,022) (1,400) (1,510) (1,658) (1,726) (1,753) (1,770)

Tax shield on other income (expense) ,net 151 316 418 300 300 300 300 300

Tax shield on implied lease interest 54 57 71 62 80 95 111 128

Adjusted Taxes 13,684 18,728 15,284 16,459 16,333 16,546 16,868 17,236

Plus: Change in DTL:deferred tax liabilities 20,259 24,062 26,019 23,098 28,869 30,987 33,060 35,053

deferred tax assets 4,318 5,546 ‐ 3,169 3,960 4,251 4,535 4,808

DTL‐DTA 15,941 18,516 26,019 19,929 24,909 26,736 28,525 30,244

Deferred tax 2,905 2,575 7,503 (6,090) 4,980 1,827 1,788 1,720

NOPLAT 49,824 66,496 62,950 42,973 53,667 51,149 52,071 53,100

IC:

Operating Current Assets:Average cash on B/S since 2009 10% 10% 10% 10% 10% 10% 10% 10%

Revenue 182,795 233,715 215,639 234,372 247,303 260,066 274,649 290,378

"Normal" Cash 18,280 23,372 21,564 23,437 24,730 26,007 27,465 29,038

Cash and cash equivalents 13,844 21,120 20,484 36,073 38,740 34,639 28,626 29,056

Lower of "Normal" Cash or Actual Cash 13,844 21,120 20,484 23,437 24,730 26,007 27,465 29,038

Accounts receivable, net 17,460 16,849 15,754 18,802 19,839 20,863 22,033 23,295

Inventories 2,111 2,349 2,132 2,460 2,596 2,729 2,883 3,048

Vendor non‐trade receivables 9,759 13,494 13,545 13,589 14,338 15,078 15,924 16,836

Other current assets 9,806 9,539 8,283 10,380 10,953 11,518 12,164 12,861

Operating current assets 52,980 63,351 60,198 68,668 72,456 76,196 80,468 85,077

Operating Current Liabilities:Account Payable 30,196 35,490 37,294 38,280 40,392 42,476 44,858 47,427

Accrued expense 18,453 25,181 22,027 24,284 25,624 26,946 28,457 30,087

Deferred revenue 8,491 8,940 8,080 9,545 10,071 10,591 11,185 11,825

Operating current liabilities: 57,140 69,611 67,401 72,109 76,087 80,014 84,500 89,340

Operating working capital (4,160) (6,260) (7,203) (3,441) (3,630) (3,818) (4,032) (4,263)

Net PPE:Property & Equipment, net 20,624 22,471 27,010 36,741 43,673 50,962 58,661 66,800

Other Operating AssetsPV of Operating Lease 4,220 5,258 6,397 8,702 10,344 12,071 13,894 15,822

Acquired intaginble assets, net 4,142 3,893 3,206 2,009 1,107 658 483 355

Other non‐current assets 3,764 5,422 8,757 10,380 10,953 11,518 12,164 12,861

Total Other Long‐Term Operating Assets 12,126 14,573 18,360 21,092 22,404 24,247 26,541 29,038

Other Operating LiabilitiesDeferred revenue, non‐current 3,031 3,624 2,930 3,568 3,765 3,960 4,182 4,421

Total Other Operating Liabilities 3,031 3,624 2,930 3,568 3,765 3,960 4,182 4,421

Invested Capital Invested Capital 25,559 27,160 35,237 50,823 58,681 67,432 76,989 87,154

Value Drivers:NOPLAT 49,824 66,496 62,950 42,973 53,667 51,149 52,071 53,100

/ Beg. IC 34,599 25,559 27,160 35,237 50,823 58,681 67,432 76,989

ROIC 144.00% 260.17% 231.78% 121.95% 105.59% 87.16% 77.22% 68.97%

Beg. IC 34,599 25,559 27,160 35,237 50,823 58,681 67,432 76,989

* (ROIC‐WACC) 136.25% 252.41% 224.02% 114.20% 97.84% 79.41% 69.47% 61.22%

EP 47,141 64,514 60,844 40,241 49,726 46,599 46,842 47,130

NOPLAT 49,824 66,496 62,950 42,973 53,667 51,149 52,071 53,100

(Cap Ex) (9,040) 1,601 8,078 15,586 7,858 8,751 9,557 10,165

FCF 58,863 64,895 54,873 27,387 45,809 42,398 42,514 42,934

Apple Inc.Weighted Average Cost of Capital (WACC) Estimation

Cost of Equit Re=Rf+ Beta*(Rm‐Rf)

Rf (U.S. 30‐Yr Bond Yield 10/13/16) 2.53%

Rm‐Rf (geometric average) 4.54%

Beta(bloomberg) 1.323

Re=Rf+ Beta*(Rm‐Rf) 8.536%

Cost of Debt Apple Bond Mature on 08/04/2046yeild to maturity 3.85%

R(debt) 3.85%

Cost of Preferred Stock Rpfd 0.00%

Market Value od Equity shares outstanding 5,471

shares prices $107.79

VE 589,700

Market Value of Debt Commercial paper 8,105

Long‐term debt 75,427

Current portion of long‐term debt 3,500

PV of operating lease 6,397

VD 93,429

Market Value of Preferred Stock Vpfd 0

Market Value of the Firm V=VE+VD+Vpfd 683,129

weight of equity 86.32%

weight of debt 13.68%

weight of pfd 0.00%

marginal tax rate 26.81%

WACC 7.75%

Apple Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 1.50%

CV ROIC 68.97%

WACC 7.75%

Cost of Equity 8.54%

Fiscal Years Ending Sept. 26 2017E 2018E 2019E 2020E 2021CV

DCF ModelPeriod 1 2 3 4 5

FCF 27,387 45,809 42,398 42,514 42,934

Continuing Value 830,540

PV 25,416 39,453 33,888 647,594

Operating Value 746,351

Non‐operating:Excess cash ‐ Short‐term marketable securities 46,671

Long‐term marketable securities 170,430

Employee Stock Options ‐

PV of Operating Lease (5,258)

Non‐operating Value 211,843

Debt: Commercial paper 8,105



Value of Debt 87,032

Enterprise Value 871,162 Outstanding Shares 5,471

Intrinsic Value of Stock (Today) 160.91$

EP Model Period 1 2 3 4 5

Economic Profit 40,241 49,726 46,599 46,842 47,130

Continuing Value 753,552

PV 37,345 42,826 37,245 593,697

NPV 711,113

Beginning Invested Capital (end 201 35,237

Operating Value 746,351

Non‐operating Assets:

Excess Cash ‐

Short‐term marketable securities 46,671

Long‐term marketable securities 170,430

Employee Stock Options ‐

PV of Operating Lease (5,258)

Non‐operating Value 211,843

Debt:

Commercial paper 8,105



Value of Debt 87,032

Enterprise Value 871,162 Outstanding Shares 5,471

Intrinsic Value of Stock (Today) 160.91$

Apple Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sept. 26 2017E 2018E 2019E 2020E 2021CV

EPS 9.17$ 9.46$ 10.13$ 10.89$ 11.72$

Key Assumptions

CV growth 2.00%

CV ROE 30.78%

Cost of Equity 8.54%

Future Cash Flows

P/E Multiple (CV Year) 14.30

EPS (CV Year) 11.72

Future Stock Price 167.63

Dividends Per Share 2.31 2.38 2.55 2.74 2.95

Future Cash Flows

Discounted Cash Flows 2.13 2.02 1.99 1.97 120.79

Intrinsic Value 126.78$

Intrinsic Value (Today) 128.11$

Apple Inc.Relative Valuation Models

EPS EPSTicker Company Price 2016E 2017E P/E 16 P/E 17

GOOGL Google $777.87 $34.42 $41.02 22.60 18.96

MSFT Microsoft Corporation $58.16 $2.96 $3.24 19.65 17.95

INTC Intel Corporation $34.32 $2.66 $2.81 12.90 12.21

IBM IBM $158.21 $13.50 $13.97 11.72 11.32

KRX:005930 Samsung Electronics Corporation $1,418.14 $124.05 $148.43 11.43 9.55 CSCO Cisco Systems $30.93 $2.44 $2.55 12.68 12.13

Average 15.2 13.7

AAPL Apple Inc. $105.71 $8.35 $9.17 12.7 11.5

Implied Value: Relative P/E (EPS16) $ 126.61 Relative P/E (EPS17) 125.59$

EPS EPSTicker Company Price 2016E 2017E P/E 16 P/E 17

KO Coca Cola $41.17 $1.91 $2.00 21.55 20.59

HOG Harley‐Davidson, Inc. $59.02 $3.69 $3.88 15.99 15.21

NKE Nike $50.21 $2.37 $2.69 21.19 18.67

JNJ Johnson & Johnson $116.60 $6.72 $7.15 17.35 16.31

WMT Wal‐Mart $70.49 $4.34 $4.36 16.24 16.17 FBHS Fortune Brands Home & Security $56.08 $2.74 $3.12 20.47 17.97

Average 18.8 17.5

AAPL Apple Inc. $105.71 $8.35 $9.17 12.7 11.5

Implied Value: Relative P/E (EPS16) $ 156.97 Relative P/E (EPS17) 160.42$

Apple Inc.Key Management Ratios

Fiscal Years Ending Sept. 26 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CVLiquidity Ratios

Current Assets 68,531 89,378 106,869 132,325 139,489 139,382 137,741 142,785

/Current Liabilities 63,448 80,610 79,006 82,918 90,344 94,440 97,073 106,293

Current Ratio 1.08 1.11 1.35 1.60 1.54 1.48 1.42 1.34

(Current Assets 68,531 89,378 106,869 132,325 139,489 139,382 137,741 142,785

‐Inventory) 2,111 2,349 2,132 2,460 2,596 2,729 2,883 3,048


Quick Ratio 1.05 1.08 1.33 1.57 1.52 1.45 1.39 1.31

(Cash 13,844 21,120 20,484 36,073 38,740 34,639 28,626 29,056

+ Marketable Securities) 11,233 20,481 46,671 47,852 49,062 50,304 51,576 52,881


Cash Ratio 0.40 0.52 0.85 1.01 0.97 0.90 0.83 0.77

Activity or Asset‐Management Ratios

Annual Sales 182,795 233,715 215,639 234,372 247,303 260,066 274,649 290,378

/Average Accounts Receivable 17,460 16,849 15,754 18,802 19,839 20,863 22,033 23,295

Receivable Turnover 10.47 13.87 13.69 12.47 12.47 12.47 12.47 12.47

365 365 365 365 365 365 365 365 365

/Receivable Turnover 10.47 13.87 13.69 12.47 12.47 12.47 12.47 12.47

Average Collection Period 34.86 26.31 26.67 29.28 29.28 29.28 29.28 29.28

COGS 104,312 128,832 120,871 131,437 138,688 145,846 154,024 162,845

/Average Inventory 2,111 2,349 2,132 2,460 2,596 2,729 2,883 3,048

Inventory Turnover 49.41 54.85 56.69 53.43 53.43 53.43 53.43 53.43

365 365 365 365 365 365 365 365 365

/Inventory Turnover 49.41 54.85 56.69 53.43 53.43 53.43 53.43 53.43

Inventory Period 7.39 6.66 6.44 6.83 6.83 6.83 6.83 6.83

Financial Leverage Ratios

Total Debt(includes operating leases) 39,515 69,586 93,429 100,251 109,816 116,548 121,596 133,147

/Total Assets 231,839 290,345 321,686 360,073 380,445 394,615 408,256 429,386

Debt Ratio 17.04% 23.97% 29.04% 27.84% 28.87% 29.53% 29.78% 31.01%

Total Debt 39,515 69,586 93,429 100,251 109,816 116,548 121,596 133,147

/Total Equity 111,547 119,355 128,249 160,595 162,535 164,900 167,902 171,656

Debt‐to‐Equity Ratio 35.42% 58.30% 72.85% 62.42% 67.56% 70.68% 72.42% 77.57%

Profitability Ratios

(Sales‐COGS) 78,483 104,883 94,768 102,935 108,614 114,220 120,625 127,533

/Sales 182,795 233,715 215,639 234,372 247,303 260,066 274,649 290,378

Gross Profit Margin 42.93% 44.88% 43.95% 43.92% 43.92% 43.92% 43.92% 43.92%

Net Income 39,510 53,394 45,687 49,975 49,845 50,407 51,253 52,254

/Sales 182,795 233,715 215,639 234,372 247,303 260,066 274,649 290,378

Net Profit Margin 21.61% 22.85% 21.19% 21.32% 20.16% 19.38% 18.66% 18.00%

Net Income 39,510 53,394 45,687 49,975 49,845 50,407 51,253 52,254

/Average Total Assets 219,420 261,092 306,016 340,880 370,259 387,530 401,436 418,821

Return on Assets 18.01% 20.45% 14.93% 14.66% 13.46% 13.01% 12.77% 12.48%

Net Income 39,510 53,394 45,687 49,975 49,845 50,407 51,253 52,254

/Average Shareholder Equity 117,548 115,451 123,802 144,422 161,565 163,717 166,401 169,779

Return on Equity 33.61% 46.25% 36.90% 34.60% 30.85% 30.79% 30.80% 30.78%

Payout Policy Ratios

Dividends per Share 1.82$ 1.98$ 2.18$ 2.31$ 2.38$ 2.55$ 2.74$ 2.95$

/Earnings per Share 6.49$ 9.28$ 8.35$ 9.17$ 9.46$ 10.13$ 10.89$ 11.72$

Payout Ratio 28.04% 21.34% 26.11% 25.16% 25.16% 25.16% 25.16% 25.16%

Dividends per Share 1.82$ 1.98$ 2.18$ 2.31$ 2.38$ 2.55$ 2.74$ 2.95$

* Shares Outstanding 6,086 5,753 5,471 5,424 5,118 4,837 4,578 4,340

(Total Dividend 11,075.74$ 11,391.77$ 11,926.39$ 12,520.37$ 12,179.25$ 12,325.46$ 12,541.80$ 12,796.67$

+ Stock Repurchases) 45,000 35,253 29,722 5,000 35,000 35,000 35,000 35,000

/Net Income 39,510 53,394 45,687 49,975 49,845 50,407 51,253 52,254

Total Payout Ratio 141.93% 87.36% 91.16% 35.06% 94.65% 93.89% 92.76% 91.47%

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Operating Operating

Fiscal Years Ending Sept. 26 Leases Fiscal Years Ending Sept. 26 Leases Fiscal Years Ending Sept. 26 Leases Fiscal Years Ending Leases

2017 929 2016 772 2015 662 2014 610

2018 919 2017 774 2016 676 2015 613

2019 915 2018 744 2017 645 2016 587

2020 889 2019 715 2018 593 2017 551

2021 836 2020 674 2019 534 2018 505

Thereafter 3,139 Thereafter 2,592 Thereafter 1,877 Thereafter 1,855

Total Minimum Payments 7,627 Total Minimum Payments 6,271 Total Minimum Payments 4,987 Total Minimum Payments 4,721

Less: Interest 1,230 Less: Interest 1,013 Less: Interest 767 Less: Interest 742

PV of Minimum Payments 6,397 PV of Minimum Payments 5,258 PV of Minimum Payments 4,220 PV of Minimum Payments 3,979

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.85% Pre‐Tax Cost of Debt 3.85% Pre‐Tax Cost of Debt 3.85% Pre‐Tax Cost of Debt 3.85%

Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 3.7

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 929 895 1 772 743 1 662 637 1 610 587

2 919 852 2 774 718 2 676 627 2 613 568

3 915 817 3 744 664 3 645 576 3 587 524

4 889 764 4 715 615 4 593 510 4 551 474

5 836 692 5 674 558 5 534 442 5 505 418

6 & beyond 836 2,377 6 & beyond 674 1,960 6 & beyond 534 1,428 6 & beyond 505 1,407

PV of Minimum Payments 6,397 PV of Minimum Payments 5,258 PV of Minimum Payments 4,220 PV of Minimum Payments 3,979

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outsta

Number of Options Outstanding (shares):

Average Time to Maturity (years): 0.00

Expected Annual Number of Options Exercised: 0.00

Note: Apple has granted all of its ESOP in 2016

Current Average Strike Price:

Cost of Equity: 8.54%

Current Stock Price: $105.71

2017E 2018E 2019E 2020E 2021E

Increase in Shares Outstanding: 0 0 0 0 0

Average Strike Price: ‐$ ‐$ ‐$ ‐$ ‐$

Increase in Common Stock Account: ‐ ‐ ‐ ‐ ‐

Change in Treasury Stock 5,000,000 35,000,000 35,000,000 35,000,000 35,000,000

Expected Price of Repurchased Shares: 105.71$ 114.73$ 124.53$ 135.16$ 146.70$

Number of Shares Repurchased: 47,299 305,054 281,061 258,956 238,589

Shares Outstanding (beginning of the year) 5,470,820 5,423,521 5,118,467 4,837,406 4,578,450

Plus: Shares Issued Through ESOP 0 0 0 0 0

Less: Shares Repurchased in Treasury 47,299 305,054 281,061 258,956 238,589

Shares Outstanding (end of the year) 5,423,521 5,118,467 4,837,406 4,578,450 4,339,861

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AAPL

Current Stock Price $107.79

Risk Free Rate 2.53%

Current Dividend Yield 2.07%

Annualized St. Dev. of Stock Returns 38.80%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 0.000 0.000 0 ‐$ ‐$

Total 0.000 0.000 0 ‐$ ‐$

Note: Apple has granted all of its ESOP in 2016

Sensitivity AnalysisDCF Price

$ 160.91 ‐1.00% ‐0.55% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

‐1.00% 124.27$ 124.56$ 124.92$ 125.59$ 126.28$ 127.00$ 127.76$ 128.53$ 129.34$

0.00% 128.13$ 128.42$ 128.77$ 129.44$ 130.14$ 130.86$ 131.61$ 132.39$ 133.20$

1.00% 132.14$ 132.43$ 132.79$ 133.46$ 134.15$ 134.88$ 135.63$ 136.41$ 137.22$

2.00% 136.31$ 136.60$ 136.95$ 137.63$ 138.32$ 139.05$ 139.80$ 140.58$ 141.39$

3.00% 140.64$ 140.93$ 141.29$ 141.96$ 142.65$ 143.38$ 144.13$ 144.91$ 145.72$

4.00% 145.14$ 145.43$ 145.79$ 146.46$ 147.15$ 147.88$ 148.63$ 149.41$ 150.22$

5.00% 149.81$ 150.10$ 150.46$ 151.13$ 151.82$ 152.55$ 153.30$ 154.08$ 154.89$

6.00% 154.66$ 154.95$ 155.30$ 155.98$ 156.67$ 157.40$ 158.15$ 158.93$ 159.74$

7.00% 159.69$ 159.98$ 160.34$ 161.01$ 161.70$ 162.43$ 163.18$ 163.96$ 164.77$

DCF Price

$ 160.91 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%

1.100 162.68$ 172.52$ 184.37$ 198.94$ 217.25$ 240.99$ 272.96$ 318.37$ 387.93$

1.150 158.04$ 167.14$ 178.02$ 191.28$ 207.80$ 228.94$ 256.94$ 295.82$ 353.42$

1.200 153.70$ 162.12$ 172.14$ 184.26$ 199.22$ 218.14$ 242.85$ 276.46$ 324.87$

1.250 149.62$ 157.44$ 166.68$ 177.79$ 191.39$ 208.41$ 230.34$ 259.66$ 300.86$

1.323 144.09$ 151.13$ 159.39$ 169.22$ 181.12$ 195.82$ 214.43$ 238.77$ 271.93$

1.350 142.16$ 148.94$ 156.87$ 166.28$ 177.63$ 191.58$ 209.15$ 231.94$ 262.70$

1.400 138.75$ 145.07$ 152.44$ 161.14$ 171.55$ 184.25$ 200.09$ 220.37$ 247.30$

1.450 135.52$ 141.43$ 148.29$ 156.34$ 165.93$ 177.53$ 191.87$ 210.02$ 233.75$

1.500 132.46$ 138.00$ 144.40$ 151.87$ 160.71$ 171.35$ 184.37$ 200.69$ 221.74$

DCF Price

$ 160.91 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%

6.500% 173.02$ 184.60$ 198.75$ 216.43$ 239.18$ 269.50$ 311.95$ 375.62$ 481.75$

7.000% 160.03$ 169.42$ 180.68$ 194.45$ 211.66$ 233.79$ 263.30$ 304.60$ 366.56$

7.500% 149.05$ 156.78$ 165.91$ 176.88$ 190.27$ 207.02$ 228.55$ 257.26$ 297.46$

8.000% 139.64$ 146.09$ 153.61$ 162.50$ 173.17$ 186.20$ 202.50$ 223.45$ 251.39$

8.536% 130.95$ 136.33$ 142.52$ 149.74$ 158.27$ 168.49$ 180.96$ 196.52$ 216.48$

9.000% 124.38$ 129.01$ 134.30$ 140.40$ 147.52$ 155.94$ 166.04$ 178.39$ 193.82$

9.500% 118.10$ 122.08$ 126.58$ 131.73$ 137.67$ 144.60$ 152.79$ 162.62$ 174.63$

10.000% 112.53$ 115.97$ 119.83$ 124.22$ 129.23$ 135.01$ 141.75$ 149.72$ 159.28$

11.000% 103.07$ 105.69$ 108.60$ 111.86$ 115.52$ 119.67$ 124.41$ 129.89$ 136.27$

DDM Price

$ 128.11 ‐5.00% ‐2.50% 0.00% 2.50% 5.00% 7.50% 10.00% 12.50% 15.00%

‐1.00% 77.90$ 79.45$ 81.17$ 83.07$ 85.18$ 87.49$ 90.04$ 92.83$ 95.89$

0.00% 81.88$ 83.43$ 85.15$ 87.06$ 89.16$ 91.48$ 94.02$ 96.81$ 99.87$

1.00% 86.03$ 87.58$ 89.30$ 91.20$ 93.31$ 95.62$ 98.17$ 100.96$ 104.02$

2.00% 90.35$ 91.90$ 93.62$ 95.52$ 97.63$ 99.94$ 102.49$ 105.28$ 108.34$

3.00% 94.84$ 96.39$ 98.11$ 100.02$ 102.12$ 104.44$ 106.99$ 109.78$ 112.84$

4.00% 99.52$ 101.07$ 102.79$ 104.70$ 106.80$ 109.12$ 111.67$ 114.46$ 117.52$

5.00% 104.38$ 105.93$ 107.66$ 109.56$ 111.67$ 113.98$ 116.53$ 119.33$ 122.39$

6.00% 109.44$ 110.99$ 112.71$ 114.62$ 116.72$ 119.04$ 121.59$ 124.39$ 127.45$

7.00% 114.70$ 116.25$ 117.97$ 119.88$ 121.98$ 124.30$ 126.85$ 129.65$ 132.70$

DDM Price

$ 128.11 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 25.16% 30.00% 35.00%

‐1.00% $ 85.82 $ 86.88 $ 87.94 $ 88.99 $ 90.04 $ 91.08 $ 91.12 $ 92.12 $ 93.16

0.00% $ 89.69 $ 90.78 $ 91.87 $ 92.95 $ 94.02 $ 95.09 $ 95.13 $ 96.16 $ 97.22

1.00% 93.73$ 94.85$ 95.96$ 97.07$ 98.17$ 99.27$ 99.30$ 100.36$ 101.45$

2.00% 97.94$ 99.09$ 100.22$ 101.36$ 102.49$ 103.62$ 103.65$ 104.74$ 105.85$

3.00% 102.32$ 103.50$ 104.66$ 105.83$ 106.99$ 108.14$ 108.18$ 109.29$ 110.44$

4.00% 106.89$ 108.09$ 109.29$ 110.48$ 111.67$ 112.85$ 112.89$ 114.03$ 115.20$

5.00% 111.63$ 112.86$ 114.09$ 115.31$ 116.53$ 117.75$ 117.78$ 118.95$ 120.16$

6.00% 116.57$ 117.83$ 119.09$ 120.34$ 121.59$ 122.84$ 122.87$ 124.07$ 125.31$

7.00% 121.70$ 123.00$ 124.29$ 125.57$ 126.85$ 128.12$ 128.16$ 129.39$ 130.66$

Mac Growth 5‐yr CAGR

CV growth of NOPLAT

CV growth of NOPLAT

Service growth

Payout Ratio

iPphone Growth 5‐year CAGR

iPhone Growth 5‐year CAGR

WACC

iPhone Growth 5‐year CAGR

Beta

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