The

Henry Fund
Henry B. Tippie School of Management
Jon Kerr [jonathan-kerr@uiowa.edu]

Apple Inc. (AAPL) November 8, 2015
Consumer Goods Electronic Equipment Stock Rating Buy
Investment Thesis Target Price $145 - $155
Apple has always been known as an innovative company giving customers Henry Fund DCF $153.26
the best possible user experience. The company has built a product Henry Fund DDM $149.46
ecosystem integrating their products into all aspects of people lives. The Relative P/E Multiple $147.91
Apple brand image allows the company to charge premium prices for each of Price Data
their products. The premium prices create high margins and high profits for
Current Price $121.06
the company. Recent enhancements to existing products and new product
releases in new markets will generate continued growth. Increased
52wk Range $92.00 - $134.54
investment in research and development will drive innovation into the Consensus 1yr Target $148.88
future. Apples brand image and continued innovation has Apple positioned Key Statistics
well for future success. Market Cap (B) $674.9
Shares Outstanding (B) 5.58
Drivers of Thesis Institutional Ownership 60.20%
Apple has created a premium brand image and product ecosystem that is Five Year Beta 1.09
difficult for competitors to duplicate. The product ecosystem gives Apple Dividend Yield 1.84%
a competitive advantage in every market they compete in and will Est. 5yr Growth 15.34%
continue to drive company growth in the future.
Price/Earnings (TTM) 12.44
The iPhone is positioned as the premium brand of smartphone in a
Price/Sales (TTM) 2.87
mature but still growing industry. Continued growth is expected driven
by Asian countries such as China and India with relatively low smartphone Debt/Equity 54.0%
penetration. Profitability
Apple has released the Apple Watch, which enters them into the booming Operating Margin 30.48%
wearables market. This could be a huge revenue source in a market that Net Profit Margin 22.85%
is expected to grow 28.1% per year into 2019. Return on Assets (TTM) 20.84%
Return on Equity (TTM) 46.25%
Risks to Thesis AAPL Industry Sector
Apple is highly dependent on the iPhone product line, which consistently 50
accounts for more than 50% of profits.
40 46.3
Apple competes in competitive and fast-paced industries. If consumers
begin to treat the markets Apple competes is as commodity markets, 30
Apple will have a difficult time charging premium prices and maintaining 31.2
high margins. 20
22.9
10 17.1 16.3
Earnings Estimates 12.4 14.2 13.0
5.2
Year 2013 2014 2015 2016E 2017E 2018E 0
EPS $5.72 $6.49 $9.28 $9.70 $10.33 $11.02 P/E ROE Prot Margin

Growth -10.34% 13.54% 42.95% 4.51% 6.54% 6.68% Source: Yahoo Finance
12 Month Performance Company Description
Apple designs and manufacturers numerous
AAPL S&P 500 electronic devices including mobile phones,
25%

20%
personal computers, watches, portable
digital music players, and other media
15%
devices, as well as software and services.
10% The cornerstone of the company is the
5% iPhone product line, but other important
0% product lines include the iPad, Mac, and
-5%
iTunes. The company sells these products
Source: Yahoo Finance worldwide to individual consumers and in
-10%
N D J F M A M J J A S O
the enterprise and education markets.

Important disclosures appear on the last page of this report.



EXECUTIVE SUMMARY COMPANY DESCRIPTION
Apple Inc. is a leader in consumer electronics, designing Apple, headquarted in Cupertino, California, was founded
and manufacturing mobile phones, tablets, personal in 1976 as a computer company. With the release of the
computers, and other devices. They continue to be at the iPod in 2001, the company began to transform itself to a
forefront of innovation in each of the markets they mobile device company, integrating its products into
compete in by investing in strategic research and everyday life. The company now designs and
development. manufacturers numerous electronic devices including
mobile phones, personal computers, watches, portable
Apple has always been known for the superior user digital music players, and other media devices. Through
experience with each of their products. The company has the transformation, the company has created an
built the Apple brand as a top-of-the-line brand and ecosystem of innovative products, most notably the
therefore can demand premium prices for their products. iPhone and the iPad. These two products account for
Apple has been able to generate consistent profits in fast- nearly three-fourths of the companys revenue.
paced and evolving industries. This is due to the Apple
ecosystem the company has created. The core product of Revenue Types
Apple is the iPhone. However, consumers get more and
more benefits from other Apple devices and services
when used along side the iPhone. The true value Apple FY 2015 % Revenue per
gives consumers is the Apple ecosystem amongst all its Segment
products.

The mature but growing smartphone market will 4% iPhone

continue to be Apples main source of revenue. The
iPhone is expected to account for 66% of the companys 9% iPad
total revenue in 2015. Due to the increased adoption of
smartphones, industry wide units sales are expected to 11% Mac
increase at 8.2% 4-year CAGR. (2) This increased adoption
along with the companys new iPhone installment plan, 10%
iTunes, Sogware
we forecast iPhone unit sales to grow at a 3.5% CAGR into 66%
and Services
2020 slightly decreasing their current global market share
of approximately 16%. Accessories

Apples mature products will continue to grow into the

future but the new products and services such as the
Apple Watch and Apple Music will drive the incremental
Source: Apple 2015 10-K
(1)

revenue growth for the entire company going forward. Apples main revenue generator is the iPhone, which is
The Apple Watch enters the company into the the companys line of smartphones that combines a
Wearables market, which is expected to increase at a phone, music player, internet device, camera, and a voice
28.1% 4-year CAGR. Apple Music gives the company a activated intelligent assistant into one product. In 2015,
solution for consumers following the trend of switching iPhone sales were $155.0 billion, which accounted for
from downloaded music to streaming music. 66.3% of revenue. (1) The number of iPhones sold in 2015
was 231.2 million units, a 36.8% increase from 2014. We
The iPhone, iPad, and Mac are proven, premium
expect the number of units to increase at a 5-year CAGR
products. These products are the base of Apples revenue
of 3.5% to 274.3 million units in 2020. However, due
which we have modeled to increase at a 3.8% CAGR into
increasing pricing pressure from growing competition, we
2020. The new products and services, along with
believe Apple will begin to decrease the average price
consistent innovation, will drive Apples success in the
from $671 in 2015 to $630 in 2020. While unit sales are
future and therefore, we recommend a buy rating.
forecast to grow at a 3.5% CAGR, we forecast iPhone
revenues to only grow at 2.2% a CAGR into 2020.

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Apple also has a line of multi-purpose tablets called the to increase at a 17.4% CAGR into 2020 and become 8.0%
iPad. The iPad generated $23.2 billion in 2015, 9.9% of of total revenue.
the companys revenue. The iPad was released in 2010
and had seen tremendous growth until 2014 when unit Segment Revenue Growth
shipments dropped from 71 million to 68 million with
iPad revenues decreasing 5.3%. Apple is still the global 2015 % 2016 % Rev.
2015 2016 Total Total Growth
leader in the tablet market, maintaining the highest Revenue Revenue Revenue Revenue Rate
market share of tablet shipments for all tablet
iPhone $155,041 $159,692 66.3% 65.1% 3.0%
manufacturers. However, due to the increasing number
iPad $23,227 $23,692 9.9% 9.7% 2.0%
of players in this market, Apples market share has
Mac $25,471 $26,235 10.9% 10.7% 3.0%
decreased from 61.5% in Q2 2011 to 24.5% in Q2 2015. (3)
iTunes, Software
No one company has been the main catalyst for Apples and Services $19,909 $21,502 8.5% 8.8% 8.0%
decreased market share; it has been numerous
Accessories $10,067 $14,094 4.3% 5.7% 40.0%
companies that have chipped away at their market
Total Revenue $233,715 $245,214 100.0% 100.0% 4.9%
dominance. We expect revenue from the tablet to Source: Apple 2015 10-K
(1)

reverse the decreasing trend in 2016 and have a slight
increase in revenue of 2%. Overall, we forecast the iPad Geographic Diversification
revenues to increase at a 5.9% CAGR from 2015 to 2020.
Apple generates revenue through six different operating
Mac is the companys line of laptop computer and segments. The segments are broken down into regions
desktop computers. Mac computers contributed $25.5 based on the nature and location of its customers.
billion to the companys revenue in 2015, 10.9% of total
sales. Mac sales have been fairly steady for the company
since 2008 with revenues and number of units shipped FY 2015 Regional Sales
increasing each year except in 2013. We expect sales to
increase 3% to $26.2 billion in 2016. We expect Mac
sales to grow at a constant 3% into 2020. 6%

The company also generates revenue through the sale of 7% Americas

digital media via online stores as well as through licensing 40% Greater China
and other services. The iTunes, Software and Services
22% Europe
segment accounted for 8.5% of revenue in 2015. In June
of 2015, Apple announced that since the launch of the Japan
iTunes store, 100 billion apps had been downloaded from
its App Store and 25 billion songs have been sold in Rest of APAC
25%
iTunes. The App Store and iTunes will continue to
maintain revenue for the segment. Growth in this
segment will come from new initiatives Apple has
released such Apple Music and Apple Pay. We expect 8% Source: Apple 2015 10-K
(1)

growth for this segment in 2016, with a 5-year CAGR of The Americas segment is the highest revenue segment
5.8% into 2020. and includes both North and South America. Europe
Apples Accessories segment includes the Apple TV, the includes the European countries, India, the Middle East,
Apple Watch, Beats Audio headphones, and Apple- and Africa. Greater China includes China, Hong Kong, and
branded third-party accessories for the iPhone, iPad, Taiwan. The Rest of Asia Pacific includes Asian
Mac, and iPod. This product category accounted for only countries and Australia.
4.3% in 2015. We expect large growth in the segment All of the companys operating segments had increased
with the release of the Apple Watch driving the majority revenues in 2015. The greatest growth came from the
of the growth in 2016. Apple also recently released the Greater China region. In 2015, the Greater China region
generation 4 Apple TV that will boost revenues in 2016 has revenue growth of 84%. In contrast, the Americas
and beyond. We forecast 40% growth in this segment in only had growth of 17%. In 2015, China is expected to
2016. We expect revenues for the Accessories segment have a smartphone penetration among all mobile phone

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users of 45% (excluding Hong Kong), compared to Gross margin increased to 39.9% in the quarter compared
penetration rates of 81% in the US and 80% in the UK. (4) to 38.0% a year ago. For the quarter, the earnings per
We believe the Greater China segment will continue to diluted share were $1.96, an increase of 38.0% from the
generate a larger percentage of revenue for the company corresponding quarter a year ago. The growth was
as the release of the iPhone 6, with a larger screen, will attributed to record sales of iPhone and Mac products, as
continue to drive demand in this region. well as expanded availability of the Apple Watch. (6)

Since Apple has 60% of revenue in foreign sales, currency Apple is expecting 2016 Q1 revenue to be between $75.5
exchange rates have a major impact on company profits. billion and $77.5 billion, a slight increase from 2015 Q1
Apple CFO Luca Maestri said in the 2014 earnings calls, revenues of $74.6 billion. They expect to maintain their
We prefer to adjust local pricing at the time of new current gross margin between 39% and 40% and have
product launches. So if currency fluctuates after a operating expenses of $6.35 billion. We have modeled
product has been launched, Apple would rather have 2016 revenue to be $245.2 billion with net income of
reduced revenue and margins than reduced unit sales $52.7 billion, growth of 4.9% and -1.3%, respectively. We
due to higher prices. Maestri did say the company has expect net income to decline slightly due to an increase in
currency hedges and as their current hedging contracts operating expenses.
expire, the company will entire into new hedging
contracts at current levels. Maestri also stated that Apple Watch Shipments
revenue growth in Q1 2015 would have been 4% higher
had currency not affected results. (5) During the 3rd quarter of 2015, Apple began shipping the
Apple Watch. The Apple Watch will provide large growth
RECENT DEVELOPMENTS in revenue in the accessories segment of the company.
As well, the watch will help drive revenues of other Apple
In late 2014, Apple released their largest iPhone yet, the products and help enhance the Apple ecosystem of
iPhone 6 and iPhone 6 plus. The phone added addition products. The Apple Watch allows the company to enter
functionality to previous models but biggest difference a previously untapped and growing wearables market
was the screen size, which increased to 4.7 and 5.5 and compete against the Samsung Gear, Pebble Steel,
responding to consumer demand for larger screens. On Sony SmartWatch, and others. The number of devices
September 9, 2015, Apple had its new product release sold in the smart wearable market is expected to grow at
event. The company released a new iPhone 6s and 6s a 28.1% CAGR into 2019 and reach 89.4 million units. (7)
Plus with some enhanced features but the iPhone
product line is already seeing tremendous growth. We do Analysts estimate that apple sold 3.6 million units in the
not expect the new phones to significantly increase that quarter. This equates to approximately $1.6 billion in
growth. Apple also released a 12.9 iPad Pro to target revenue. After selling the watch in a test market of 100
the enterprise market. An updated Apple TV was stores, Best Buy has announced they will begin selling the
unveiled as Apple attempts to become an integral part of device in all 1,050 of its stores because of the better than
consumers living rooms. expected demand.

Apple has expanded its product ecosystem in 2015. The An issue of the Apple Watch is that it has limited
biggest move from the company was the release of the functionality when not paired with a cell phone.
Apple Watch to take advantage of the booming Therefore the Apple Watch is a phone accessory and is
wearables industry. As well, using their 2014 Beats only compatible with the iPhone 5 and newer. This
Audio acquisition, the company has started competing in compatibility issue limits the customer base of the Apple
the streaming audio market with Apple Music. Watch. Since 2012, the iPhone has averaged
approximately 16% market share of new smartphone
Q4 and FY 2015 Earnings shipments. Therefore the watch is limited to only 16% of
the smartphone market size. (8)

On October 27, 2015, Apple announced their most

successful year ever with revenue growing 28% to nearly
$234 billion. The company had quarterly revenue of
$51.5 billion and quarterly net profit of $11.1 billion, an
increase of 21.4% and 30.6% from Q4 2014, respectively.

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Apple Music

Global Smartphone Operabng

In July of 2014, Apple acquired Beats Music for $3 billion.
System Market Share held by Along with the entering the company in new markets
Apple iOS with the Beats headphones, this acquisition helped Apple
create a subscription based streaming audio music
23.0%

service to compete with Pandora and Spotify. The music

20.9%
25.0%

19.7%
service, called Apple Music, was launched at the end of

18.2%
17.5%
17.1%
16.6%

June 2015.

15.2%
20.0%
14.4%

14.1%
13.0%
12.8%

11.7%
11.7%
15.0% Apple Music differentiates itself from Spotify and other
competitors by offering three additional features other
10.0% than just streaming music. Apple Music has a radio
service called Beats 1, which is an around-the-clock global
5.0%
live broadcast from DJs located in Los Angeles, New York,
0.0% and London. The second feature Apple Music uses to
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 differentiate itself is curated playlists created by real
'12 '12 '12 '12 '13 '13 '13 '13 '14 '14 '14 '14 '15 '15
people. The playlists are built for the listener based on
the users favorite genres and artists. The last unique
Source: IDC
(8)

feature is Connect. This is a social networking feature,
Even with the limited market, we expect total revenues which lets fans follow artists.
for the watch in 2015 to be $3 billion with that number
Apple Music has the potential to cannibalize revenue
growing to $6 billion in 2016. We expect Apple Watch
from Apples iTunes music store, as some customers will
revenues to reach $14 billion in 2020. With an average
no longer buy music through iTunes a la carte style.
price of $450 for an Apple Watch, this would equate to
Instead customers may only pay the $9.99 monthly
31.2 million units sold in 2020, approximately 11% of
subscription fee for Apple Music and stream their music
iPhone unit sales. We feel our estimation of Apple Watch
rather than owning it. This subscription fee is equal to
sales are reasonable as a Credit Suisse survey of iPhone
Spotifys Premium subscription of $9.99. Also equivalent
6/6Plus owners indicates that 18% of the respondents
to Spotify is Apple Music will allow users to download
would definitely buy the watch. (9)
albums for offline listening. We believe Apple Music will
over take the iTunes Music Store as the biggest revenue
iPhone 6/6+ Users Who Will Buy generator in the iTunes, Software, and Services segment
and we have forecasted revenue for the segment to grow
an Apple Watch
at a 5.8% CAGR into 2020.

Apple Pay
Yes,
Denitely Denitely On October 20, 2014, Apple released Apple Pay. This is a
Not 18% mobile payments service which is designed to allow users
18% to make payments for good and services in retail stores
Yes, using an iPhone 6, iPhone 6 Plus, or Apple Watch. For
Probably
security, Apple uses tokenization, which prevents actual
11%
Probably
credit card numbers from being sent over the air. Apple
Not Pay aims at replacing the wallet. Apple CEO Tim Cook has
27% said that Apple Pay will forever change the way all of us
Maybe buy things. (10) Apple Pay has seen some early success
27% with a growing list of partners. On July 7, Apple added 23
more U.S. banks and credit unions, which brings the total
to 461 Apple Pay partners in the United States and 9 in
the UK. (11)
Source: Credit Suisse
(9)

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Apple generates money from Apple Pay by charging fees growth and increased penetration. The mobile phone
when consumers use the service in place of credit and market is by far the most important in the industry
debit card for purchases. Apple Pay does offer a benefit because of the volume of shipments and revenue.
to both the transaction partner and the user. Apple pay
offers an extra layer of security with a Touch ID Smartphone Growth
fingerprint feature. This feature delivers proof that both
the mobile device and the authorized cardholder are Worldwide Mobile Phone Shipments
physically present in the store.

However, we do not believe Apple Pay will make a

significant addition to company revenue. Apple collects
$0.15 on a $100 transaction. It is estimated that this fee
will earn $118 million in revenue in 2015 and $310 million
in 2016, only about a tenth of a percent of revenue. (12)
We believe the purpose of Apple Pay is to help sell
hardware and not generate revenue from transaction
fees. Apple Pay is one more way the company can
integrate its product offerings into everyday life, making

consumers dependent on the iPhone thereby making it
difficult for consumers to exit the Apple ecosystem. Source: S&P NetAdvantage
(13)

The smartphone industry has experienced a large amount

iPhone Installment Plans
of growth in recent years. In 2014, smartphone
On September 9, 2015, Apple announced a payment plan shipments grew 27.6% from the previous year. However,
for iPhones in response to carriers no longer giving phone growth of shipments in the industry is expected to slow
subsides. Customers can buy an unlocked iPhone and pay to an 11.3% increase in 2015. Even with slowing growth,
for the device over a 24-month time frame. The global shipments are expected to reach 1.9 billion by
customer has the option to trade in their current iPhone 2019, an 8.2% 4-year CAGR. (2) The growth is being caused
for a new iPhone at the end of 12 months, as long as they by the increased adoption of smartphones among mobile
sign on for another 24-month agreement. Apple is phone users. Smartphones are expected to account for
catering to the consumers who prefer the newest model 80% of mobile phone shipments in 2018 with Asia and
available but at the same time refurbishing and reselling other emerging markets being the largest contributors to
the recently traded-in phone. the growth. (13)

For the consumer, a benefit of purchasing the phone Tablet Sales

using Apples installment plan is that the phone is
unlocked and can be used with any carrier without the
need to sign a contract. For Apple, one benefit of the Projected Global Tablet Shipments
new payment plan could be that it shortens the upgrade 350
286
cycle for the iPhone. As well, it helps Apple keep
276
263
229.6

300
248

customers in the Apple ecosystem. Customers who

Shipments in million units

219.9

purchase phones through carriers can upgrade to any 250

manufacturers phone, but Apple customers only have
200
145

the option of upgrading to another iPhone. We believe

the new iPhone installment plan will increase customer 150
upgrade cycles, thereby increasing iPhone sales.
76

100

INDUSTRY TRENDS
19

50

0
The electronics industries that Apple competes in are fast 2010 2011 2012 2013 2014 2015* 2016* 2017* 2018*
paced and extremely competitive. Mobile devices
including smartphones and smart wearables are seeing Source: Statista
(14)

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The tablet market had seen tremendous growth with
worldwide shipments increasing from 19 million units in Global Desktop and Laptop
2010 to almost 220 million units in 2013. However, the Shipments
year-over-year growth rate slowed to 4.4% in 2014,
compared to 100.7% and 53.3% growth in 2012 and 2013, 400 364 349
respectively. The preference of consumers towards 350 315 308
smartphones with larger screens is having a negative 300
282 279 282

Millions of units
impact on tablet sales. IDC expects Tablet sales to
250
continue to be slow in 2015 with shipments of 248 million
units, an increase of 8%. By 2018, worldwide shipments 200
are expected to reach 286 million units, a 4-year CAGR of 150
5.6%. (14) 100

Mobile Phone Installment Purchase Plans 50

0
As of August 13, 2015, new Verizon customers will have 2011 2012 2013 2014 2015* 2016* 2019*
to provide their own phone or buy one under an
Source: Statista
(17)

installment plan. T-Mobile started this trend in 2013 and
all four major cell phone providers are following suit. In
Music Downloads vs Streaming
the past, a consumer who signed up for a two-year
contract could also purchase a new smartphone for a In 1999, when the online music sharing service Napster
subsidized price typically around $199. Apple iPhone, was launched, consumers of the music industry shifted
Samsung Galaxy or other devices retail for up to $700. how they acquired their music from purchasing a physical
The pricing model for the service providers monthly fee product with recorded music to downloading songs and
had the cost of the phone built into it and the consumer albums through the internet. A new transition is
would eventually pay for the remaining cost of the happening in the music industry with consumers
phone. However, the full price of the phone was usually changing how they access music. Rather than owning
unknown to the consumer. Without the subsidies, the music by purchasing and downloading songs, customers
full cost of the phone is more visible to consumer and are renting their music through ad-supported and
price-sensitive consumers could change their buying subscription based streaming music services.
habits. In Q4 2014 the average Apple iPhone cost was
$687 while Android devices had an average price of In 2007, 3% of the music industry revenues were
$254.(15) This now visible price disparity could shift attributed to streaming music services. In 2014, that
consumers away from the more expensive iPhone. number had risen to 21% of total revenues. (18) According
to PricewaterhouseCoopers, revenue from digital music
PC Sales streaming is expected to grow to $2.76 billion in 2018, a
13.4% CAGR. While digital music downloading revenue
The introduction of the tablet and large screen will grow at a rate of only 3.3%. (19)
smartphones has had an adverse affect on PC and laptop
sales, which have been declining since 2011. According The number of users streaming music is expected to
to IDC, Q2 2015 PC shipments for the top 5 vendors increase from 129.4 million in 2015 to 168.3 million in
decreased 11.8% over the past year. Apple is the only 2020, a CAGR of 5.4%. While the number of users
company in the group to have a year-over-year increase downloading music is expected to decrease from 65.6
in PC shipments with growth of 16.1% in Q2 2015. IDC is million in 2015 to 63.8 million in 2020. (20)
forecasting overall PC shipments to remain steady in the
near future with growth of zero to -3%. (16)

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MARKETS AND COMPETITION
The markets that Apple competes in are characterized by
constant innovation and short product life cycles. Due to
these characteristics, products eventually face maturity
and obsolescence.

Smartphone Market
The smartphone market is a massive and fast paced
market with products constantly being updated and
enhanced due to quickly evolving technologies. Product
lifecycles are short in the industry with the major
manufactures releasing new generations of products
every year or two. Also, consumers usually have the
opportunity to upgrade their existing phone to the next
generation every couple of years when their contract
with a service provider expires.

Smartphone Market Share Source:

WJS
(22)

Samsung Apple Huawi Xiaomi Lenevo Others Most companies within the market compete based on
2015Q2 21.4% 13.9% 8.7% 5.6% 4.7% 45.7% price and features, except for Apple who is able to charge
2014Q2 24.8% 11.6% 6.7% 4.6% 8.0% 44.3% a premium for the iPhone. While other companies are
2013Q2 31.9% 12.9% 4.3% 1.7% 5.7% 43.6% decreasing smartphone sales prices, Apple is increasing.
In FY2014 the average cost of the iPhone was $603. In
2012Q2 32.2% 16.6% 4.1% 1.0% 5.9% 40.2%
Source: IDC
(21) FY2015, that number increased to $671. The price of the
iPhone is expected to fall but only to $635 by 2018.
The top five companies in the industry by market share Android, which has a much lower average price due to
are Samsung, Apple, Huawei, Xiaomi, and Lenovo. the wide range of high and low-end phones, is expected
Samsung is the market leader retaining 21.4% market to have a similar trend dropping from $254 in 2014 to
share in Q2 of 2015. However, the smartphone market is $214 in 2018. (23) These declining prices could indicate
a competitive market with 45.7% of the market being that the market has become commoditized and cost will
served by companies outside the top five in the become the main driver for market share as handsets
industry.(21) While all the companies compete on market begin to contain identical features.
share, Apple dominates the market in terms industry
profits. In the first quarter of 2015, Apple recorded 92% Even with falling average prices, growth is still available
of the total operating income from the industries top especially outside the US and Europe in countries with
eight smartphone manufacturers, up from 65% in Q1 low smartphone penetration. We expect iPhone unit
2014. Together, Apple and Samsung account for more sales to be 247.6 million in 2016 with that number
than 100% of industry profits as other manufacturers lost increasing to 274.4 million in 2020, a 3.5% CAGR.
money in the quarter. (22)
Tablet Market
The tablet market is very similar to the smartphone
market. Companies compete in the market with features
and price. The life expectancy of tablets is slightly longer
than smartphones due to less usage, which leads to less
damage. In 2015, the lifespan of a tablet is expected to
be 26 months, compared to an 18-month life for
smartphones in the US. Even with longer life cycles,

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products are constantly being updated and enhanced due Surface Pro 3 tablet. The new iPad was designed
to quickly evolving technologies. specifically with businesses in mind. Apple added a
standalone keyboard to make this Apples first 2-in-1.
Top Five Tablet Vendors Market Share While only a small percentage of the overall tablet
market, 2-in-1s are expected to have a 5-year CAGR of
2Q15 2Q14 57% while traditional tablets will have a 5-year CAGR of
2Q15 Unit Market 2Q14 Unit Market Y-o-Y
Shipments Share Shipments Share Growth
2%. We believe Apple will continue to lose market share
but sales will begin to increase in 2016 due to the new
Apple 10.9 24.5% 13.3 27.7% -17.9%
iPad Pro. Overall we believe iPad revenues will have a
Samsung 7.6 17.0% 8.6 18.0% -12.0%
5.94% CAGR from 2015 to 2020, maintaining
Lenovo 2.5 5.7% 2.4 5.7% 6.8% approximately 11% of total company value.
Huawei 1.6 3.7% 0.8 3.7% 103.6%
LG Wearable Market
Electronics 1.6 3.6% 0.5 3.6% 246.4%
Others 20.4 45.6% 22.4 46.7% -9.3% Smart wearable technology refers to any electronic
Source: IDC
(24)
device, which can be worn by a person to integrate
The top five companies in the industry are Apple, computing into daily activities. This can include devices
Samsung, Lenovo, LG and Huawei. Four of the top five such as eyewear, wrist wear, and foot wear. Companies
companies in the industry are the same leaders in the compete in this industry with features and smartphone
smartphone industry, with the exception of LG replacing compatibility. Many wearable devices must be paired
Xiaomi. Apple is the market leader with 24.5% market with a smartphone to take advantage of all the features
share in Q2 of 2015. However, Apples market share has of the device. The Samsung watch can only be paired
decreased from 61.5% in Q2 of 2011. Much like the with phones running the Android operating system. The
smartphone market, the tablet market is a competitive Apple Watch can only be paired with an iPhone 5 or
market with 45.6% of the market being served by newer.
companies outside the top five in the industry. (24)
The market is in its early stage of development but is
During 2011 to 2013 there was steady growth in the expected to hit an inflection point in 2015 driven by the
tablet market. However, there was a market slow down Apple Watch. In 2014, approximately 4.2 million smart
in 2014 as smartphones screens have become larger. watches were sold. During 2015, Apple alone shipped
almost 7 million Apple watches. (34) The total smart
wearables market is expected to increase from 4.2
Global Tablet Shipment Forecast million units shipped in 2014 to 33.1 million units in 2015,
an increase of 688%. Shipments are expected to reach
350 89.4 million units in 2019, a 28.1% 4-year CAGR. (7)
300 276 286 269.4
263
248
250 220 229.6 Unit Shipment forecast basic/
Millions of units

200
145
smart wearables worldwide
200
150
Unit Shipments in Millions

100 76
150
50 19

0 89.4
100
2010

2011

2012

2013

2014

2015*

2016*

2017*

2018*

2019*

50 33.1
Source: IDC
(25)
4.2 66.3
39.0
There are still growth opportunities in the tablet industry. 22.1
0
Manufacturers are beginning to target the enterprise 2014 2015 2019
market to attempt to replace PCs. Apple just released Basic Wearables Smart Wearables
their new 12.9 iPad Pro to compete with Microsofts
Source: IDC
(7)


Page 9



PC Market from the entire Apple ecosystem. Apple has an
extremely large customer following with more than 800
The PC market is a very mature market and is on the million iPhones sold since it was first released in 2007. (1)
decline mainly due to businesses extending their upgrade The iPhone has given the Apple experience to millions of
cycles. Life spans of PCs are increasing because the pace customers. We believe these customers are continuing
of change has slowed. The technology of computer with the Apple experience by switching to a Mac when it
hardware has outpaced the technology of computer is time to upgrade their PC. We expect Mac unit sales to
software, which has extended the life of PCs. According be 21.5 million units in 2016. We then expect Mac unit
to Daniel Research Group, the average lifespan of a sales to increase at a 4.5% CAGR into 2020.
desktop PC in 2012 was 3.97 years. The lifespan has
increased to 4.6 years in 2015. Another reason for the Peer Comparison
decline in PC sales is consumers have been replacing PCs
with tablets. In Q2 2015, shipments fell to 66.1 million Apple competes in multiple markets of the technology
units, an 11.8% year-over-year decline. The decline of PC hardware industry. Apple competes in mature markets
shipments should slow with the total volume shipped with its top revenue generating products. Therefore our
forecast to be 293.1 million in 2015, declining slightly to peer analysis is focused on profitability metrics.
291.4 million in 2019. (26)
Samsung is Apples largest competitor in both the
PCs are becoming commodities as the feature set smartphone and tablet market. In Samsungs last fiscal
becomes more and more common among competing year, they had sales of $195.9 Billion USD while apple had
companies. Companies in the industry are now sales of $233.7 Billion. HP and Lenovo have the largest
competing strictly on price. In 2009, the average selling market share in the PC market and these companies had
price of a desktop PC was $605. In 2015, the price is revenues of $111.5 Billion and $46.3 Billion in 2014.
expected to be $379. (28)
A metric that stands out among the rest is the Net Profit
The top 5 companies in the PC market are Lenovo, HP, Margin. The only market that Apple is the market leader
Dell, Apple and Acer Group. Lenovo is the market leader in is the tablet market. Yet, they have a net profit margin
with 20.3% market share in Q2 2015. Other companies that dwarfs all of their competing companies. Apples net
outside the top five hold 32.3% of the market. (27) profit margin percentage is 22.9%, compared to 13.1% for
Microsoft, second among the peer group. Samsung,
Worldwide PC Shipments 2Q 2015 Apples most formidable competitor, has a profit margin
of 11.2%. The difference in net profit margin percentage
2Q15 2Q14 is due to the brand image Apple has built which has
2Q15 Market 2Q14 Market Y-o-Y allowed them to charge a premium for all of their
Shipments Share Shipments Share Growth products. This brand image is what sets Apple apart from
Lenovo 13,444 20.3% 14,535 19.4% -7.5% their competitors.
HP 12,253 18.5% 13,675 18.2% -10.4%
Dell 9,560 14.5% 10,466 14.0% -8.7% Sales Net Profit ROA ROE P/E Debt/
Apple 5,136 7.8% 4,423 5.9% 16.1% (B) Margin % % % (ntm) Equity

Acer 4,334 6.6% 5,932 7.9% -26.9% Samsung 195.9 11.2 10.4 15.1 7.9 6.95

ASUS 4,330 6.5% 4,693 6.3% -7.7% HP 111.5 4.5 4.8 18.6 7.3 73.0

Others 17,082 25.8% 21,274 28.4% -19.7% Microsoft 93.6 13.1 7.0 14.4 15.6 44.1
Source: BGR
(27)
LG 48.9 0.98 1.6 4.9 11.8 77.0
Lenovo 46.3 1.8 3.7 23.4 17.2 74.8
Apple was the only manufacturer to see year-over-year
growth in the PC market. Apple saw a 16.1% increase in Blackberry 3.9 -9.1 -4.1 -8.3 - 49.8
shipments in Q2 2015 and increased its market share Apple 233.7 22.9 20.8 46.3 13.0 56.4
from 5.9% to 7.8%. Apple also does not compete on price Source: FactSet

within the industry. In 2014, the average price for a Mac

Not surprisingly, Apples ROA and ROE are nearly double
was $1,274, much higher than the average desktop PC of
the next closest competitor in the group. Apple has an
$379. We believe the growth of the Mac computer is
ROA of 20.8% and an ROE of 46.3% while Samsung has an

Page 10



ROA and ROE of 10.4% and 15.1%, respectively. Lenovo
has an ROA and ROE of 3.7% and 23.4%, respectively. Unite States Consumer Opinion
Survey: Condence Indicators
Due to short product life cycles and constant threat of
product obsolescence, companies competing in the 102

Normalised (Normal = 100)

technology sector must have high research and
101
development costs. Samsung had R&D expenses of $13.8
Billion compared to Apples $8.1 Billion in 2015. 100
99

98
2015 R&D Expenses 97
$13.8

96
20.7%

$16.0 25.0%

1-Jan-10
1-Jun-10
1-Nov-10
1-Apr-11
1-Sep-11

1-May-13
1-Dec-12

1-Aug-14
1-Jan-15
1-Oct-13
1-Jul-12
1-Feb-12

1-Mar-14
$12.1

$11.5

$14.0
14.9%

20.0%
$9.8

$12.0
12.9%

$8.1
Billions USD

$10.0 15.0% Source: FRED

(29)

$5.6

$8.0
7.3%

10.0%
Many of the products that Apple produces are
$6.0
4.4%

discretionary goods, such as smartphones, tablets, PC,

3.5%

$4.0 and digital music downloads. When consumer spending

5.0%
$2.0 is down, sales for these products will also be down.
$0.0 0.0% Personal Consumption Expenditures have followed the
consumer confidence indicator as expenditures have
been on the rise since 2009 and have maintained
approximately 3% growth per year.
R&D Expenses R&D % of Sales
Source: FactSet
Personal Consumpbon
These companies often compete against Apple, but they Expenditure - Percent Change
also sell a much wider range of products and services. from Year Ago
Apple is only focused on innovating a small core group of
products, which share much of the same hardware and 6.0
Percent Change from Year Ago

many of the same features. Apple is therefore able to 5.0

keep R&D expenditures low while these other companies
must spread R&D expenses over a large set of products. 4.0

3.0
ECONOMIC OUTLOOK
2.0
While the iPad and MAC are becoming more and more
1.0
popular in the business world, the majority of Apples
revenues are from sales to consumers. Therefore, a good 0.0
Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15
Sep-12

Sep-13

Sep-14

Sep-15
Mar-13

Mar-14

Mar-15

indication of sales for Apple in the United States is

consumer confidence. Consumer confidence is a strong
indicator of consumer spending. Source: FRED
(30)

Since the recession in 2008, consumer confidence has GDP is another driver that can give a good indication of
been steadily increasing. We believe consumer future Apple sales. We expect Real GDP growth to be at
confidence will remain neutral for the next six months 2.7% for the next 6 months before increasing to
and begin to increase over the next few years. approximately 3% in the next two years.

Page 11



One factor that affects consumer spending is the CATALYSTS FOR GROWTH
unemployment rate. Unemployed people are trying to
stretch their financial assets for a longer duration due to iPhone
the uncertainty of the end of their unemployment. This
leads to a reduction in consumer spending due to Apple recently released the iPhone 6s and 6s Plus. The
financial limitations. We expect the unemployment rate most significant difference between the 6s and the 6 is
to maintain a level around 5.1% in the next 6 months, the 3D touch technology that allows the 6s iPhones to
which should keep consumer spending from decreasing. sense different pressures. The new phone have received
great reviews from the public. The new iPhone release
Unemployment Rate: All Persons and the recently announced installment plan could drive
Aged 15-64: U.S. further growth in the iPhone product line.
9.0
The iPhone product line accounted for more than two-
8.5 thirds of the companys revenue in 2015. The iPhone will
8.0 continue to be Apples largest source of revenue.
7.5 Because of the dependency on the iPhone, the company
Percent

7.0 must continue to make improvements to the phone while

creating growth by innovating in other markets.
6.5
6.0 Apple Watch
5.5
5.0 The Apple Watch is a product that could provide the
company with growth into the future. The Apple Watch
competes in the wearables market, which is a new
market for the company. The wearables market space is
Source: FRED
(31)
expected to see tremendous growth in the next few
years.
Exchange rates are a driver for companies competing in
the technology industry. In 2014, Apple generated 62% Apple Music
of its revenue from international sales. As such, currency
movements could have a large effect on sales and profits Apple Music is not necessarily operating in a new market
for Apple. In the graph below, the US dollar has been for Apple, but it is a new product offering that allows the
getting stronger in recent months. We expect exchange company to compete in a different way in the digital
rates to maintain their current levels for the next couple media market space. Apple Music positions the company
years. to serve the growing number of consumers who are
switching from downloading their music to streaming it.
This service gives the company another revenue source in
Trade Weighted US Dollar Broad a market they already have a significant presence in.
Index
120
Apple TV
115 Apple recently released the upgraded Apple TV. Apple TV
(Index Jan 1997=100)

allows a user to watch Netflix and similar services as well

110 as stream live TV channels, such as ESPN, if the user has a
105
TV service provider login. In 2014, Apple sold almost 6
million units and that number is expected to reach 10
100 million in 2015. With the release of new Apple TV,
shipments are expected to increase to 24 million. (33) The
95
new version of Apple TV allows users to play games and is
90 Apples first attempt to enter into the online gaming
2010 2011 2012 2013 2014 2015 market. The most significant upgrade to the device has
Source: FRED
(32)
yet to be released. Apple plans to release a streaming TV

Page 12



service that would bundle multiple television channels for products will need to generate a large amount of revenue
a price around $40 per month, which would compete to counteract any decrease in iPhone sales.
with cable television providers as well as DishNetwork
and DirecTV. This service is expected to be released in VALUATION
2016 and could be a significant revenue source as
consumers are continuing to leave cable and satellite TV We used a Discounted Cash Flow (DCF), Dividend
services for internet streaming services. Discount Model (DDM), and Relative Price to Earnings
(P/E) analysis to value Apple Inc. The DCF and DDM
INVESTMENT POSITIVES models computed stock prices of $153.26 and $149.46.
For the relative P/E analysis we calculated a price based
Apple has a competitive advantage in every on peers and another price based on industry leaders.
market they compete in because of the product These two approaches computed stock prices of $147.91
ecosystem they have created. The iPhone is the core of and $180.68, respectively. We believe the true value of
the company. The integration of the iPhone and Apples Apple stock is in between at $145 and $155.
other products and accessories is what creates value for
users and is difficult for competitors to duplicate. Apple has only been paying dividends since 2012 when
they had a payout ratio of 5.9%. In 2013, the company
Apple holds only 16% of market share in the increased that ratio to 28.5%, however, the dividend
smartphone industry but 92% of the industry profits. payment growth has been inconsistent. The company
Apple has positioned the iPhone as the premium brand of stated in their 2015 10-K that they expect dividends to
smartphone in a mature but still growing industry. continue at current levels or grow. We have modeled a
constant payout ratio of 22.0% based on the quarterly
Apple has a strong balance sheet which would all dividends throughout 2015, but we do not have a lot of
them to survive a downturn in the market. While the historical data to confidently make an assumption for the
company did have a current ratio of only 1.17 in 2015, dividend growth. While the DDM model, does give us a
they do have $185 billion is cash offshore. Apple could relatively close price to our range, we do not put much
easily become liquid and survive short-term issues even weight on it.
with having to pay a 35% tax on repatriated funds.
The Peer Comparison relative P/E analysis model
The iTunes, Software and Services segment has computed a low price of $147.91. Apple currently has a
an estimated 90% gross margin. Apple music targets a forward P/E ratio of 13.0 and the peer average forward
growing segment of consumers streaming music rather P/E ratio is 15.9. Because of Apples premium brand
than downloading it. The high margins along with status, we believe the company should not trade at a
continued growth of iTunes and Apple Music adoption discount to its peers. The Brand Leaders relative P/E
will drive profits in this segment. analysis model computed a relatively high price of
$180.68. The average P/E of the brand leaders was 19.5.
With the addition of the Apple Watch and Apple
This peer relative P/E price is within our price range. A
TV to the Accessories segment, Apple now has entry into
P/E of around 15.9 is justifiable for Apple because of the
growing markets with potential to generate significant
companys large cash balance and premium brands.
revenue.
The DCF model computed a price of $153.26. This price is
INVESTMENT NEGATIVES the basis for our price range. Our model was built
assuming many different revenue growth rates for each
Smartphones are becoming a commodity.
area of business. The iPhone product segment is the
Competitors quickly adopt features that distinguish any
largest revenue generator for the company and we
phone from another. Because of this commoditization,
forecasted unit sales to grow at a 3.5% CAGR into 2020.
iPhone margins could begin to decrease, as Apple would
However, we forecasted decreasing margins for the
need to reduce the selling price to gain new customers.
iPhone due to pricing pressures from lower cost
Apple is becoming extremely dependent on the smartphones and therefore modeled revenue to grow
iPhone product line for revenue. Two-thirds of the total slower than units sales a 2.2% CAGR for the next five
companies revenue came from the iPhone in 2015. New years.

Page 13



The next largest segment is the Mac computer, percent of revenue is low when compared to peers.
accounting for 11% of revenue in 2015. The PC market Samsung, Apples biggest rival in the smartphone market,
has been in decline since 2011. We expect the industry has an R&D expense as a percent of revenue of 7.3%. We
to have roughly zero growth into 2019. However, we expect Apple to continue increase their level of R&D. We
believe the Mac will continue to steal market share from have modeled the R&D expense to be 3.9% in 2016 and
competitors and have modeled revenues to grow at a 4.2% into 2020.
3.0% CAGR for the next five years.
We have also modeled SG&A expenses to begin to
The iPad line of tablets is the third largest segment for increase to 2011 levels, accounting for 7.5% of revenue in
Apple, accounting for 9.9% of revenue in 2015. We 2020. With the increase in operating expenses and
expect revenues to begin to pick back up in 2016 as Apple decrease in gross margins, we have modeled Apples
targets the enterprise sector with the new iPad Pro. We operating income to decrease from 30.5% in 2015 to
expect revenues for the iPad to grow at a 5.9% CAGR for 28.9% in 2016 before declining to 25.8% in 2020.
the next 5 years and accounting for 11.0% of revenue in
2020.
Operabng Prots
Since 2009, the iTunes, Software and Service segment has
90000 38%
grown at 21% CAGR. With the addition of Apple Music,

Operabng Prot ($ Billion)

80000 36%
we expect this segment to continue to grow however we

Operabng Margin %
70000 34%
do not believe the segment will keep the same pace of 60000 32%
growth it has had the last 6 years. We modeled revenues 50000 30%
to grow at a 5.8% five-year CAGR. 40000 28%
30000 26%
20000 24%
Most of the new growth for the company will come from
10000 22%
the Accessories segment. The new Apple Watch and 0 20%
Apple TV will drive the growth for this segment. We have
modeled revenues for this segment to increase at a
17.4% CAGR for the next 5 years. In 2015, the
Op Prot Op Margin %
Accessories segment accounted for only 4.3% of total
revenue, we expect this segment to increase to 8.0% of
total revenue by 2020. Overall, we have modeled total Source: Apple 10-K
company revenue to grow at a 3.84% CAGR for the next 5
years. In the third quarter of 2015, Apples Board of Directors
increased the share repurchase program to $140 billion,
For the last five years, Apples gross margins have ranged which has $36 billion remaining for repurchases. We
from 37.6% to 43.9%. In 2015, the gross margin was expect the board to announce another share repurchase
40.1%. The total gross margin is most affected by the program and average around $30 billion in repurchases
iPhone gross margin, which accounts for 66% of revenue. each year through 2020. With these share repurchases
The iPhone gross margin was approximately 47% in 2015. and the dividend payments, we have modeled the total
We expect company gross margins to decline slightly to payout ratio to increase slightly in 2016 from 87.4% to
39% in 2016 as the iPhone will face increased pricing 88.4%, with the payout ratio totaling 74.6% in 2020. With
pressure and the average sale price for an iPhone will these payout ratios, the company will have average cash
decrease from $671 in 2015 to $645 in 2016. We expect flows of $3.4 billion per year from 2016 to 2020, which is
company gross margin to decrease to 37.5% in 2020 as more than the average cash flow per year of $1.97 billion
the average cost of an iPhone drops to $630 and iPhone from 2011 to 2015.
gross margins drop to 43.5%.
With the release of the Apple Watch and the new Apple
In Apples 2015 annual report, they state that R&D is TV, as well as the new iPhone and iPad releases, we
critical to the survival of the company. From 2008 to expect inventories to rise slightly in 2016 and into 2020.
2014, the R&D expenses averaged 2.7% of revenue. We expect inventories will increase to 2008 levels when
However in 2015, Apple had a record R&D investment of the iPod was at its peak. Therefore we have modeled
$8.0 billion, or 3.45% of revenue. This R&D expense as a inventories to increase to 1.35% of revenue in 2016 into
2020.

Page 14



Capital expenditures are expected to be around $13 dash software into their vehicles. Chevrolet, Hyundai,
billion in 2016. Capital expenditures have been Honda, and Volkswagen are releasing 2016 vehicles with
increasing as a percent of revenue since 2009. We have Apple CarPlay. CarPlay allows Apple to extend the Apple
modeled this trend to continue with capital expenditures ecosystem into the car. The consumer demand for Apple
increasing from 4.4% of revenue in 2015 to 6.0% of CarPlay should be monitored, as it could be a significant
revenue in 2020. revenue source if all car manufacturers are forced to
jump on board to meet that demand.
There are currently 52 analysts covering Apple and they
have a consensus average estimate of 146.74. The REFERENCES
analysts target prices range from $115 to $200. Our price
range of $145 to $155 is within analysts estimates and is 1. Apple 2015 10-K
slightly higher than the consensus average estimate. Our 2. Statista, Global smartphone shipments forecast from
price range is a 20% to 28% premium over the current 2010 to 2019
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$132.07, and our price range is a 9.8% and 17.4% smartphone-shipments-forecast/
premium over that price. We based our price range on a 3. Global market share held by tablet vendors from 2nd
sensitivity analyses around the DCF price by varying quarter 2011 to 2nd quarter 2015
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line. The company has also had great marketing, which adoption-platform-and-vendor-trends-in-major-
has positioned each of its products as the premium brand mobile-markets-around-world-2015-3
in each respective market. The company has increased eMarketer.com, 12/22/2014, Majority of Chinas
their R&D expenditures in 2015 and we expect that trend Mobile Phone Users Will Use Smartphones Next
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Watch will drive growth for the company in the booming Chinas-Mobile-Phone-Users-Will-Use-Smartphones-
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to increase as smartphones penetrate more and more of 5. BusinessInsider.com, 01/28/2015, Apple Just
the mobile phone users. The iPhone will continue to be Reported A Record Quarter, But Analysts Wanted To
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impacts-2015-1
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Reports-Record-Fourth-Quarter-Results.html
Not only is does the iPhone account for more than 50% of
7. IDC, 06/18/2015, Worldwide Wearable Market
revenues; it is also the center of the Apple ecosystem.
Forecast to Grow 173.3% in 2015
The company just released the iPhone 6s and 6s Plus but
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the differences from the previous version are subtle.
696715
Sales growth of the new models of the iPhone should be
8. Statista, Global Smartphone Operating System
monitored. If sales begin to drop for the iPhone, it could
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cs/236031/market-share-of-ios-in-global-
smartphone-os-shipments/
Apple CarPlay
9. Survey of Apple Watch purchase intention suggests
Apple announced CarPlay nearly two years ago but car first year sales of 35M
manufacturers are just now finally integrating Apples in-

Page 15



http://9to5mac.com/2015/01/14/apple-watch-sales- http://www.wsj.com/articles/apples-share-of-
2/ smartphone-industrys-profits-soars-to-92-
10. MacRumors, Apple Pay Overview 1436727458
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11. Apple.com, Apple Pay Participating Banks are dropping, and will continue to dip through 18
https://support.apple.com/en-us/HT204916 http://www.computerworld.com/article/2489944/sm
12. CNN, Apple Pay wont add to Apples profit artphones/smartphone-prices-are-dropping--and-
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e-pay/ 24. IDC, 08/29/2015, Worldwide Tablet Market
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to $687 and Android Decreases to $254, Says Report 11-8-percent-in-q2-but-apple-keeps-picking-up-
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Smartphone Industrys Profits Soars to 92%

Page 16



http://www.canalys.com/newsroom/almost-7-
million-apple-watches-were-shipped-two-quarters-
availability

IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowas Tippie School of Management.
These reports are intended to provide potential
employers and other interested parties an example of the
analytical skills, investment knowledge, and
communication abilities of Henry Fund students. Henry
Fund analysts are not registered investment advisors,
brokers or officially licensed financial professionals. The
investment opinion contained in this report does not
represent an offer or solicitation to buy or sell any of the
aforementioned securities. 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 Henry Fund may hold a financial
interest in the companies mentioned in this report.

Page 17

Apple
Revenue Decomposition

Fiscal Years Ending 09/30/2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
iPhone 91,279 101,991 155041 159692 162886 166144 169467 172856
iPad 31,980 30,283 23227 23692 26535 28657 30090 30993
Mac 21,483 24,079 25471 26235 27022 27833 28668 29528
iTunes, Software and Services 16,051 18,063 19909 21502 22792 24159 25367 26382
Accessories 10,117 8,379 10,067 14094 16913 19449 21394 22464
Total Revenue 170,910 182,795 233,715 245,214 256,147 266,243 274,986 282,223

iPhone 53.41% 55.80% 66.34% 65.12% 63.59% 62.40% 61.63% 61.25%

iPad 18.71% 16.57% 9.94% 9.66% 10.36% 10.76% 10.94% 10.98%
Mac 12.57% 13.17% 10.90% 10.70% 10.55% 10.45% 10.43% 10.46%
iTunes, Software and Services 9.39% 9.88% 8.52% 8.77% 8.90% 9.07% 9.22% 9.35%
Accessories 5.92% 4.58% 4.31% 5.75% 6.60% 7.31% 7.78% 7.96%
% Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

iPhone Growth Rate 16.00% 11.74% 52.01% 3.00% 2.00% 2.00% 2.00% 2.00%
iPad Growth Rate 3.34% -5.31% -23.30% 2.00% 12.00% 8.00% 5.00% 3.00%
Mac Growth Rate -7.48% 12.08% 5.78% 3.00% 3.00% 3.00% 3.00% 3.00%
iTunes, Software and Services Growth Rate 24.52% 12.54% 10.22% 8.00% 6.00% 6.00% 5.00% 4.00%
Accessories Growth Rate -5.98% -17.18% 20.15% 40.00% 20.00% 15.00% 10.00% 5.00%
Total Revenue Growth Rate 9.20% 6.95% 27.86% 4.92% 4.46% 3.94% 3.28% 2.63%

Unit Sales by Product

iPhone 150,257 169,219 231,218 247,585 254,509 261,644 268,995 274,375
iPad 71,033 67,977 54,856 56,408 64,718 69,896 73,391 75,592
Mac - Total 16,341 18,906 20,587 21,504 22,518 23,587 24,714 25,676

$ per iPhone 607 603 671 645 640 635 630 630
$ per iPad 450 445 423 420 410 410 410 410
$ per Mac 1315 1274 1237 1220 1200 1180 1160 1150

Domestic Revenue % 45.0% 44.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%
International Revenue % 55.0% 56.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%
Apple
Income Statement

Fiscal Years Ending 09/30/2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Net sales 170,910 182,795 233,715 245,214 256,147 266,243 274,986 282,223
Cost of sales 99,849 104,312 128,832 138,212 145,709 152,138 158,214 161,411
Depreciation & Amortization 6,757 7,946 11,257 11,369 11,822 12,933 13,652 14,978
Gross margin 64,304 70,537 93,626 95,634 98,617 101,172 103,120 105,834

Research & development expense 4,475 6,041 8,067 9,563 10,758 11,182 11,549 11,853
Selling, general & administrative expense 10,830 11,993 14,329 15,203 15,881 16,507 17,049 17,498
Total operating expenses 15,305 18,034 22,396 24,767 26,639 27,689 28,599 29,351

Operating income (loss) 48,999 52,503 71,230 70,867 71,977 73,483 74,521 76,482

Total Other Income (expense) 1,156 980 1,285 1,348 1,309 1,422 1,558 1,696
Income (loss) before provision for income taxes 50,155 53,483 72,515 72,215 73,286 74,905 76,080 78,178

Provision for (benefit from) income taxes 13,118 13,973 19,121 19,509 19,799 20,236 20,553 21,120

Net income (loss) 37,037 39,510 53,394 52,706 53,488 54,669 55,526 57,058

Year end shares outstanding 6,294 5,866 5,578 5,289 5,063 4,855 4,665 4,491
Weighted average shares outstanding - basic 6,477 6,086 5,753 5,434 5,176 4,959 4,760 4,578
Net earnings (loss) per common share - basic 5.72 6.49 9.28 9.70 10.33 11.02 11.67 12.46

Cash dividends declared per common share 1.63 1.82 1.98 2.13 2.27 2.43 2.57 2.74
Apple
Balance Sheet

Fiscal Years Ending 09/30/2015 2,013 2,014 2015 2016E 2017E 2018E 2019E 2020E
ASSETS
Cash & cash equivalents 14,259 13,844 21,120 23,010 27,908 30,513 33,345 38,272
Short-term marketable securities 26,287 11,233 20,481 21,059 26,652 34,404 42,374 50,569

Accounts receivable, gross 13,201 17,546 16,931 18,391 19,211 19,968 20,624 21,167
Less: allowance for doubtful accounts 99 86 82 92 96 100 103 106
Vendor non-trade receivables 7,539 9,759 13,494 13,409 14,007 14,559 15,037 15,432
Accounts receivable, net 20,641 27,219 30,343 31,708 33,122 34,427 35,558 36,493

Inventories 1,764 2,111 2,349 3,310 3,458 3,594 3,712 3,810

Other current assets 6,882 9,806 9,539 12,996 13,576 14,111 14,574 14,958

Total current assets 69,833 64,213 83,832 92,083 104,716 117,049 129,564 144,103

Long-term marketable securities 106,215 130,162 164,065 178,418 184,435 189,664 194,606 199,595

Gross property, plant & equipment 28,519 39,015 49,257 62,008 75,840 90,750 106,699 123,632
Accumulated depreciation 11,922 18,391 26,786 38,115 49,897 62,789 76,402 91,340
Property, plant & equipment, net 16,597 20,624 22,471 23,893 25,943 27,960 30,297 32,292

Goodwill 1,577 4,616 5,116 5,116 5,116 5,116 5,116 5,116

Acquired intangible assets, net 4,179 4,142 3,893 3,853 3,813 3,773 3,733 3,693
Other assets 5,146 3,764 5,556 5,640 5,891 6,124 6,325 6,491
Other non-current assets 10,902 12,522 14,565 14,609 14,820 15,013 15,174 15,300

Total assets 203,547 227,521 284,933 309,003 329,916 349,686 369,641 391,290

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable 22,367 30,196 35,490 37,762 39,446 41,000 42,347 43,461

Accrued warranty & related costs 2,967 4,159 5,843 6,130 6,404 6,656 6,875 7,056
Accrued marketing & selling expenses 1,291 2,321 2,794 2,889 3,017 3,136 3,239 3,325
Income taxes payable 1,200 1,209 1,721 1,853 1,881 1,922 1,953 2,006
Accrued compensation & employee benefits 959 1,209 1,433 1,444 1,509 1,568 1,620 1,662
Deferred margin on component sales 1,262 1,057 2,337 2,452 2,561 2,662 2,750 2,822
Other current liabilities 6,177 8,498 11,053 11,648 12,167 12,647 13,062 13,406
Accrued expenses 13,856 18,453 25,181 26,416 27,539 28,592 29,498 30,277

Commercial paper 0 6,308 8,499 6,060 4,321 3,081 2,196 1,566

Current Portion of long-term debt 0 0 2,500 4,611 5,693 6,171 6,517 6,887

Total current liabilities 36,223 54,957 71,670 74,849 76,998 78,844 80,558 82,191

Total Deferred Taxes (Liabilities - Assets) 13,036 15,941 18,516 21,850 22,966 23,878 24,253 25,344

Total Deferred Revenue 10,060 11,522 12,564 14,880 15,544 16,156 16,687 17,126
Long-term debt 16,960 28,987 53,463 66,007 71,557 75,564 79,858 84,143
Other liabilities 3,719 4,567 9,365 6,628 6,923 7,196 7,432 7,628
Total Other non-current liabilities 30,739 45,076 75,392 87,515 94,024 98,916 103,978 108,896

Total Liabilities 79,998 115,974 165,578 184,215 193,988 201,638 208,789 216,432

Stockholders' Equity:
Common stock and Additional Paid in Capital 19,764 23,313 27,416 27,420 27,425 27,429 27,434 27,434
Retained earnings 104,256 87,152 92,284 97,713 108,847 120,963 133,763 147,769

Accumulated other comprehensive income (loss) -471 1,082 -345 -345 -345 -345 -345 -345

Total shareholders' equity 123,549 111,547 119,355 124,788 135,927 148,047 160,852 174,858

Total Liabilites and Stockholders' Equity 203,547 227,521 284,933 309,003 329,915 349,685 369,640 391,290
Apple
Cash Flow Statement

Fiscal Years Ending 09/30/2015 2011 2012 2013 2014 2015

Cash flows from operating activities:
Net income (loss) 25,922 41,733 37,037 39,510 53,394
Depreciation & amortization 1,814 3,277 6,757 7,946 11,257
Share-based compensation expense 1,168 1,740 2,253 2,863 3,586
Deferred income tax expense (benefit) 2,868 4,405 1,141 2,347 1382
Loss on disposition of property, plant & equipment 0 0 0 0 0
Accounts receivable, net 143 -5,551 -2,172 -4,232 611
Inventories 275 -15 -973 -76 -238
Vendor non-trade receivables -1,934 -1,414 223 -2,220 -3,735
Other current & non-current assets -1,391 -3,162 1,080 167 -179
Accounts payable 2,515 4,467 2,340 5,938 5,400
Deferred revenue 1,654 2,824 1,459 1,460 1,042
Other current & non-current liabilities 4,495 2,552 4,521 6,010 8746
Net cash flows from operating activities 37,529 50,856 53,666 59,713 81,266

Cash flows from investing activities:

Purchases of marketable securities -102,317 -151,232 -148,489 -217,128 -166402
Proceeds from maturities of marketable securities 20,437 13,035 20,317 18,810 14538
Proceeds from sales of marketable securities 49,416 99,770 104,130 189,301 107,447
Purchases of other long-term investments 0 0 0 0 0
Payments made in connection with business acquisitions, net -244 -350 -496 -3,765 -343
Payment for acquisition of property, plant & equipment -4,260 -8,295 -8,165 -9,571 -11,247
Payment for acquisition of intangible assets -3,192 -1,107 -911 -242 -241
Other cash flow from investing activities -259 -48 -160 16 -26
Net cash flows from investing activities -40,419 -48,227 -33,774 -22,579 -56,274

Cash flows from financing activities:

Proceeds from issuance of common stock 831 665 530 730 543
Excess tax benefits from stock-based compensation 1,133 1,351 701 739 749
Taxes paid related to net share settlement of equity awards -520 -1,226 -1,082 -1,158 -1,499
Dividends & dividend equivalent rights declared 0 -2,488 -10,564 -11,126 -11,561
Repurchases of common stock 0 0 -22,860 -45,000 -35,253
Proceeds from issuance of long-term debt, net 0 0 16,896 11,960 27114
Proceeds from issuance of commercial paper, net 0 0 0 6,306 2,191
Net cash flows from financing activities 1,444 -1,698 -16,379 -37,549 -17,716

Cash flows from all activities:

Net Increase (decrease) in cash & cash equivalents -1,446 931 3,513 -415 7,276

Cash & cash equivalents, beginning of the year 11,261 9,815 10,746 14,259 13,844
Cash & cash equivalents, end of the year 9,815 10,746 14,259 13,844 21,120
Apple
Forecasted Cash Flow Statement

Fiscal Years Ending 09/30/2015 2016E 2017E 2018E 2019E 2020E

Cash flows from operating activities:
Net income (loss) 52,706 53,488 54,669 55,526 57,058
Add: Depreciation 11,329 11,782 12,893 13,612 14,938
Add: Amortization 40 40 40 40 40
Changes in:
Accounts Receivable Net -1,365 -1,414 -1,305 -1,131 -936
Inventories -961 -148 -136 -118 -98
Total Deferred Taxes (Assets - Liabilities) 3,334 1,116 912 374 1,091
Other current assets -3,457 -579 -535 -463 -384
Other non-current assets -84 -251 -232 -201 -166
Accounts payable 2,272 1,684 1,555 1,346 1,114
Accrued Expenses 1,236 1,123 1,053 906 779
Deferred revenue 2316 663 613 531 439
Other non-current liabilities -2,737 295 273 236 196

Net cash flows from operating activities 64,628 67,799 69,798 70,660 74,072

Cash flows from investing activities:

Short-term marketable securities -578 -5,594 -7,752 -7,970 -8,195
Long-term marketable securities -14,353 -6,017 -5,228 -4,943 -4,989
Property & equipment, gross -12,751 -13,832 -14,910 -15,949 -16,933
Goodwill 0 0 0 0 0
Commercial paper -2,439 -1,739 -1,240 -884 -630

Net cash flows from investing activities -30,121 -27,182 -29,129 -29,746 -30,747

Cash flows from financing activities:

Current Portion of Long-term debt 2,111 1,082 479 346 370
Long-term debt 12,544 5,550 4,007 4,295 4,284
Payment of cash dividend -12,277 -12,353 -12,554 -12,726 -13,052
Repurchase of Common Stock -35,000 -30,000 -30,000 -30,000 -30,000
Common Stock and Additional paid-in capital 4 4 4 4 0
Accumulated other comprehensive income 0 0 0 0 0

Net cash flows from financing activities -32,617 -35,717 -38,064 -38,081 -38,398

Cash flows from all activities:

Net increase (decrease) in cash & cash equivalents 1,890 4,899 2,605 2,832 4,927

Cash & cash equivalents, beginning of year 21,120 23,010 27,908 30,513 33,345
Cash & cash equivalents, end of year 23,010 27,908 30,513 33,345 38,272
Apple
Common Size Income Statement

Fiscal Years Ending 09/30/2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of sales 58.42% 57.07% 55.12% 56.36% 56.88% 57.14% 57.54% 57.19%
Depreciation & Amortization 3.95% 4.35% 4.82% 4.64% 4.62% 4.86% 4.96% 5.31%
Gross margin 37.62% 38.59% 40.06% 39.00% 38.50% 38.00% 37.50% 37.50%

Research & development expense 2.62% 3.30% 3.45% 3.90% 4.20% 4.20% 4.20% 4.20%
Selling, general & administrative expense 6.34% 6.56% 6.13% 6.20% 6.20% 6.20% 6.20% 6.20%
Total operating expenses 8.96% 9.87% 9.58% 10.10% 10.40% 10.40% 10.40% 10.40%

Operating income (loss) 28.67% 28.72% 30.48% 28.90% 28.10% 27.60% 27.10% 27.10%

Interest income 0.95% 0.98% 0.00% 1.37% 1.42% 1.46% 1.51% 1.56%
Interest expense -0.08% -0.21% 0.00% -0.48% -0.57% -0.59% -0.60% -0.62%
Other income (expense), net -0.19% -0.24% 0.55% -0.34% -0.34% -0.34% -0.34% -0.34%
Income (loss) before provision for income taxes 29.35% 29.26% 31.03% 29.45% 28.61% 28.13% 27.67% 27.70%

Provision for (benefit from) income taxes 7.68% 7.64% 8.18% 7.96% 7.73% 7.60% 7.47% 7.48%

Net income (loss) 21.67% 21.61% 22.85% 21.49% 20.88% 20.53% 20.19% 20.22%
Apple
Common Size Balance Sheet

Fiscal Years Ending 09/30/2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
ASSETS
Cash & cash equivalents 8.34% 7.57% 9.04% 9.38% 10.90% 11.46% 12.13% 13.56%
Short-term marketable securities 15.38% 6.15% 8.76% 8.59% 10.41% 12.92% 15.41% 17.92%

Accounts receivable, gross 7.72% 9.60% 7.24% 7.50% 7.50% 7.50% 7.50% 7.50%
Less: allowance for doubtful accounts 0.06% 0.05% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04%
Vendor non-trade receivables 4.41% 5.34% 5.77% 5.47% 5.47% 5.47% 5.47% 5.47%
Accounts receivable, net 12.08% 14.89% 12.98% 12.93% 12.93% 12.93% 12.93% 12.93%

Inventories 1.03% 1.15% 1.01% 1.35% 1.35% 1.35% 1.35% 1.35%

Other current assets 4.03% 5.36% 4.08% 5.30% 5.30% 5.30% 5.30% 5.30%

Total current assets 40.86% 35.13% 35.87% 37.55% 40.88% 43.96% 47.12% 51.06%

Long-term marketable securities 62.15% 71.21% 70.20% 72.76% 72.00% 71.24% 70.77% 70.72%

Gross property, plant & equipment 16.69% 21.34% 21.08% 25.29% 29.61% 34.09% 38.80% 43.81%
Accumulated depreciation & amortization 6.98% 10.06% 11.46% 15.54% 19.48% 23.58% 27.78% 32.36%
Property, plant & equipment, net 9.71% 11.28% 9.61% 9.74% 10.13% 10.50% 11.02% 11.44%

Goodwill 0.92% 2.53% 2.19% 2.09% 2.00% 1.92% 1.86% 1.81%

Acquired intangible assets, net 2.45% 2.27% 1.67% 1.57% 1.49% 1.42% 1.36% 1.31%
Other assets 3.01% 2.06% 2.38% 2.30% 2.30% 2.30% 2.30% 2.30%
Other non-current assets 6.38% 6.85% 6.23% 5.96% 5.79% 5.64% 5.52% 5.42%

Total assets 119.10% 124.47% 121.91% 126.01% 128.80% 131.34% 134.42% 138.65%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable 13.09% 16.52% 15.19% 15.40% 15.40% 15.40% 15.40% 15.40%

Accrued warranty & related costs 1.74% 2.28% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Accrued marketing & selling expenses 0.76% 1.27% 1.20% 1.18% 1.18% 1.18% 1.18% 1.18%
Income taxes payable 0.70% 0.66% 0.74% 0.76% 0.73% 0.72% 0.71% 0.71%
Accrued compensation & employee benefits 0.56% 0.66% 0.61% 0.59% 0.59% 0.59% 0.59% 0.59%
Deferred margin on component sales 0.74% 0.58% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other current liabilities 3.61% 4.65% 4.73% 4.75% 4.75% 4.75% 4.75% 4.75%
Accrued expenses 8.11% 10.09% 10.77% 10.77% 10.75% 10.74% 10.73% 10.73%

Commercial paper 0.00% 3.45% 3.64% 2.47% 1.69% 1.16% 0.80% 0.55%
Current Portion of long-term debt 0.00% 0.00% 1.07% 1.88% 2.22% 2.32% 2.37% 2.44%

Total current liabilities 21.19% 30.06% 30.67% 30.52% 30.06% 29.61% 29.30% 29.12%

Total Deferred Taxes (Assets - Liabilities) 7.63% 8.72% 7.92% 8.91% 8.97% 8.97% 8.82% 8.98%

Total Deferred Revenue 5.89% 6.30% 5.38% 6.07% 6.07% 6.07% 6.07% 6.07%
Long-term debt 9.92% 15.86% 22.88% 26.92% 27.94% 28.38% 29.04% 29.81%
Other liabilities 2.18% 2.50% 4.01% 2.70% 2.70% 2.70% 2.70% 2.70%
Total Other non-current liabilities 17.99% 24.66% 32.26% 35.69% 36.71% 37.15% 37.81% 38.59%

Total Liabilities 46.81% 63.44% 70.85% 75.12% 75.73% 75.73% 75.93% 76.69%

Stockholders' Equity:
Common stock and Additional Paid in Capital 11.56% 12.75% 11.73% 11.18% 10.71% 10.30% 9.98% 9.72%
Retained earnings 61.00% 47.68% 39.49% 39.85% 42.49% 45.43% 48.64% 52.36%

Accumulated other comprehensive income (loss) -0.28% 0.59% -0.15% -0.14% -0.13% -0.13% -0.13% -0.12%

Total shareholders' equity 72.29% 61.02% 51.07% 50.89% 53.07% 55.61% 58.49% 61.96%

Total Liabilites and Stockholders' Equity 119.10% 124.47% 121.91% 126.01% 128.80% 131.34% 134.42% 138.65%
Apple
Value Driver Estimation

Fiscal Years Ending 09/30/2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
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 benefit 1.01% 0.88% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%
Foreign rate differential -9.20% -8.87% -8.92% -8.92% -8.92% -8.92% -8.92% -8.92%
Marginal Tax Rate 26.81% 27.01% 27.02% 27.02% 27.02% 27.02% 27.02% 27.02%

EBITA:
Net sales 170,910 182,795 233,715 245,214 256,147 266,243 274,986 282,223
- Cost of sales -99,849 -104,312 -128,832 -138,212 -145,709 -152,138 -158,214 -161,411
- Depreciation & Amortization -6,757 -7,946 -11,257 -11,369 -11,822 -12,933 -13,652 -14,978
- Research & development expense -4,475 -6,041 -8,067 -9,563 -10,758 -11,182 -11,549 -11,853
- Selling, general & administrative expense -10,830 -11,993 -14,329 -15,203 -15,881 -16,507 -17,049 -17,498
+ Implied Interest on Operating Leases 138 148 157 196 209 227 244 265
EBITA 49,137 52,651 71,387 71,063 72,186 73,710 74,766 76,747

Less: Adjusted Taxes:

Income tax provision (benefit) 13,118 13,973 19,121 19,509 19,799 20,236 20,553 21,120
- Tax Shield on Interest income -433 -485 0 -906 -980 -1,052 -1,121 -1,190
+ Tax Benefit on Interest expense 36 104 0 318 392 425 449 475
+ Tax Shield Other income (expense), net 87 116 -347 224 234 243 251 258
+ Tax Shield on Implied Lease Interest 37 40 43 53 56 61 66 71
Adjusted Taxes 12,845 13,748 18,816 19,198 19,501 19,913 20,198 20,734

Plus: Change in Deferred Tax Liabilities:

Deferred income tax provision (benefit) 1,141 2,347 1,382 3,334 1,116 912 374 1,091
Net Change in DT Liabilities 1,141 2,347 1,382 3,334 1,116 912 374 1,091

NOPLAT
NOPLAT: EBITA - Adjusted Taxes + Change in DT 37,433 41,250 53,953 55,199 53,801 54,709 54,942 57,105

Operating Current Assets:

Average of cash on B/S since 2009 10% 10% 10% 10% 10% 10% 10% 10%
x Revenue 170,910 182,795 233,715 245,214 256,147 266,243 274,986 282,223
"Normal" Cash (Revenue x Avg %) 17,091 18,280 23,372 24,521 25,615 26,624 27,499 28,222
Cash and cash equivalents 14,259 13,844 21,120 23,010 27,908 30,513 33,345 38,272

Lower of "Normal" Cash or Actual Cash 14,259 13,844 21,120 23,010 25,615 26,624 27,499 28,222
Accounts receivable, net 20,641 27,219 30,343 31,708 33,122 34,427 35,558 36,493
Inventories 1,764 2,111 2,349 3,310 3,458 3,594 3,712 3,810
Vendor non-trade receivables 7,539 9,759 13,494 13,409 14,007 14,559 15,037 15,432
Other current assets 6,882 9,806 9,539 12,996 13,576 14,111 14,574 14,958
Operating Current Assets 51,085 62,739 76,845 84,433 89,777 93,315 96,380 98,916

Operating Current Liabilities:

Accounts payable 22,367 30,196 35,490 37,762 39,446 41,000 42,347 43,461
Accrued warranty & related costs 2,967 4,159 5,843 6,130 6,404 6,656 6,875 7,056
Accrued marketing & selling expenses 1,291 2,321 2,794 2,889 3,017 3,136 3,239 3,325
Income taxes payable 1,200 1,209 1,721 1,853 1,881 1,922 1,953 2,006
Accrued compensation & employee benefits 959 1,209 1,433 1,444 1,509 1,568 1,620 1,662
Deferred margin on component sales 1,262 1,057 2,337 2,452 2,561 2,662 2,750 2,822
Other Current Liabilites 6,177 8,498 11,053 11,648 12,167 12,647 13,062 13,406
Operating Current Liabilities 36,223 48,649 60,671 64,179 66,985 69,592 71,845 73,738

Net PPE:
Property & equipment, net 16,597 20,624 22,471 23,893 25,943 27,960 30,297 32,292

PV of Operating Leases:
PV of Operating Leases 4,002 4,245 5,290 5,625 6,108 6,582 7,133 7,602

Other Operating Assets:

Acquired intangible assets, net 4,179 4,142 3,893 3,853 3,813 3,773 3,733 3,693
Other non-current assets 10,902 12,522 14,565 14,609 14,820 15,013 15,174 15,300
Total Other Long-Term Operating Assets 15,081 16,664 18,458 18,462 18,633 18,786 18,907 18,993

Other Operating Liabilities:

Deferred revenue - non-current 10,060 11,522 12,564 14,880 15,544 16,156 16,687 17,126
Other liabilities 3,719 4,567 9,365 6,628 6,923 7,196 7,432 7,628
Total Other Long-Term Operating Liabilities 13,779 16,089 21,929 21,508 22,467 23,352 24,119 24,754

Invested Capital:
Invested Capital 36,763 39,534 40,464 46,727 51,010 53,699 56,752 59,312

Value Drivers:
NOPLAT 37,433 41,250 53,953 55,199 53,801 54,709 54,942 57,105
/ Beginning IC 34,683 36,763 39,534 40,464 46,727 51,010 53,699 56,752
ROIC: 107.93% 112.20% 136.47% 136.41% 115.14% 107.25% 102.31% 100.62%

Beginning IC 34,683 36,763 39,534 40,464 46,727 51,010 53,699 56,752

x (ROIC - WACC) 99.32% 103.59% 127.86% 127.80% 106.52% 98.64% 93.70% 92.01%
EP 34,445 38,083 50,548 51,714 49,776 50,314 50,316 52,216

NOPLAT 37,433 41,250 53,953 55,199 53,801 54,709 54,942 57,105

- CapEx 2,081 2,770 931 6,262 4,283 2,689 3,053 2,560
FCF 35,352 38,480 53,022 48,937 49,518 52,019 51,889 54,545
Weighted Average Cost of Capital (WACC) Estimation

WACC = Re * (E/V) + Rd * (1 - t) * (D/V) + Rpfd * (PFD/V)

Cost of Equity
Re = Rf + B * (E[Rm] - Rf)
Rf 2.820%
E[Rm] - Rf 4.85%
Beta 1.316
Re 9.20%
Apple Bond Matures on 5/3/2023 3.02%
- (10-yr Bond (yahoo finance)) 2.13%
Cost of debt + (30-year Treasury Yield (Yahoo Finance)) 2.82%
Rd 3.71% --------------> = Cost of Debt 3.71%

Cost of Preferred Stock

Rpfd 0.00%

Market Value of Equity

Shares outstanding 5578
Shares Price 121.06
E $675,273

Market Value of Debt

Long-term debt 53,463
Commercial Paper 8,499
Operating Leases $5,290
D 67,252

Market Value of Preferred

PFD 0

Market Value of Firm

V = E + D + PFD $742,525

weight of equity 90.94%

weight of debt 9.06%
weight of preferred 0.00%
Marginal Tax Rate 27.02%

WACC 8.61%
Apple
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:
CV Growth 1.50%
CV ROIC 100.62%
WACC 8.61%
Cost of Equity 9.20%

Fiscal Years Ending 09/30/2015 2016E 2017E 2018E 2019E 2020E

DCF Model
Period 1 2 3 4 5
FCF 48,937 49,518 52,019 51,889 54,545
Continuing Value 790,707
PV 45,056 41,975 40,598 37,284 568,155
V(operating) 733,068

Non-operating Assets:
Excess Cash 0
Short-term marketable securities 20,481
Long-term marketable securities 164,065
V(non-operating) 184,546

Non-operating Liabilities:
Employee Stock Options 120
PV of Operating Leases 5,290
V(other) 5,411

Debt:
Commercial paper 8,499
Current Portion of LT Debt 2,500
Long-term debt 53,463
V(debt) 64,462

V(e) 847,741
Shares Outstanding 5,578
Intrinsic Value of Stock (FY End '14) 151.98

EP Model
Period 1 2 3 4 5
Economic Profit 51,714 49,776 50,314 50,316 52,216
Continuing Value 733,955
PV 47,612 42,193 39,267 36,154 527,376
NPV 692,603
Beginning Invested Capital (end 2015) 40,464
V(operating) 733,068

Non-operating Assets:
Excess Cash 0
Short-term marketable securities 20,481
Long-term marketable securities 164,065
V(non-operating) 184,546

Non-operating Liabilities:
Employee Stock Options 120
PV of Operating Leases 5,290
V(other) 5,411

Debt:
Commercial paper 8,499
Current Portion of LT Debt 2,500
Long-term debt 53,463
V(debt) 64,462

V(e) 847,741
Shares Outstanding 5,578
Intrinsic Value of Stock (FY End '14) 151.98

Intrinsic Value of Stock (Today) $153.26

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

Fiscal Years Ending 09/30/2015 2016E 2017E 2018E 2019E 2020E

EPS $ 9.70 $ 10.33 $ 11.02 $ 11.67 $ 12.46

Key Assumptions
CV growth 3.00%
CV ROE 33.99%
Cost of Equity 9.20%

Future Cash Flows

P/E Multiple (CV Year) 14.70
EPS (CV Year) $ 12.46
Future Stock Price $ 183.21
Dividends Per Share 2.13 2.27 2.43 2.57 11.36
Future Cash Flows 183.21

Period 1 2 3 4 5
Discounted Cash Flows 1.95 1.91 1.86 1.80 140.69

Intrinsic Value (FY End '14) $ 148.21

Intrinsic Value of Stock (Today) $149.46

Apple
Relative Valuation Models
Peer Comparison
EPS EPS
Ticker Company Price 2015E 2016E P/E 15 P/E 16
GOOGL Google Inc. $761.60 $28.98 $34.07 26.3 22.4
HPQ Hewlett Packard $14.01 $1.77 $1.71 7.9 8.2
MSFT Microsoft Corporation $54.92 $2.77 $3.12 19.8 17.6
INTC Intel Corporation $33.84 $2.22 $2.35 15.2 14.4
IBM IBM $138.25 $14.94 $15.10 9.3 9.2
MSI Motorola Solutions, Inc $68.01 $3.29 $3.95 20.7 17.2
CSCO Cisco Systems $28.45 $2.30 $2.45 12.4 11.6
Average 15.9 14.4

AAPL Apple $121.06 $9.28 $9.70 13.0 12.5

Implied Value:
Relative P/E (EPS15) $ 147.91
Relative P/E (EPS16) $ 139.31

Brand Leaders
EPS EPS
Ticker Company Price 2015E 2016E P/E 15 P/E 16
KO Coca Cola $41.96 $1.99 $2.07 21.1 20.3
MCD McDonalds $113.31 $4.87 $5.32 23.3 21.3
WMT Wal-Mart Stores Inc. $58.78 $4.51 $4.15 13.0 14.2
F Ford Motor Company $14.52 $1.63 $1.91 8.9 7.6
JNJ Johnson & Johnson $101.92 $6.18 $6.41 16.5 15.9
GE General Electric $29.92 $1.31 $1.52 22.8 19.7
NKE Nike $131.78 $4.30 $4.92 30.6 26.8
Average 19.5 18.0

AAPL Apple $121.06 $9.28 $9.70 13.0 12.5

Implied Value:
Relative P/E (EPS15) $ 180.68
Relative P/E (EPS16) $ 174.19
Apple
Key Management Ratios

Fiscal Years Ending 09/30/2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Liquidity Ratios
Current Assets 69,833 64,213 83,832 92,083 104,716 117,049 129,564 144,103
/ Current Liabilities 36,223 54,957 71,670 74,849 76,998 78,844 80,558 82,191
= Current Ratio 1.928 1.168 1.170 1.230 1.360 1.485 1.608 1.753

(Current Assets 69,833 64,213 83,832 92,083 104,716 117,049 129,564 144,103
- Inventory ) 1,764 2,111 2,349 3,310 3,458 3,594 3,712 3,810
/ Current Liabilities 36,223 54,957 71,670 74,849 76,998 78,844 80,558 82,191
= Quick Ratio 1.879 1.130 1.137 1.186 1.315 1.439 1.562 1.707

(Cash 14,259 13,844 21,120 23,010 27,908 30,513 33,345 38,272

+ Marketable Securities) 132,502 141,395 184,546 199,477 211,088 224,068 236,980 250,164
/ Current Liabilities 36,223 54,957 71,670 74,849 76,998 78,844 80,558 82,191
= Cash Ratio 4.052 2.825 2.870 2.972 3.104 3.229 3.356 3.509

Activity or Asset-Management Ratios

Annual Sales 170,910 182,795 233,715 245,214 256,147 266,243 274,986 282,223
/ Average Accounts Receivable 19,667 23,930 28,781 31,025 32,415 33,774 34,992 36,025
Receivables Turnover 8.69 7.64 8.12 7.90 7.90 7.88 7.86 7.83

365 365 365 365 365 365 365 365 365

/ Receivables Turnover 8.69 7.64 8.12 7.90 7.90 7.88 7.86 7.83
Average Collection Period 42.00 47.78 44.95 46.18 46.19 46.30 46.45 46.59

Cost of Goods Sold 99,849 104,312 128,832 138,212 145,709 152,138 158,214 161,411
/ Average Inventory 1,278 1,938 2,230 2,830 3,384 3,526 3,653 3,761
Inventory Turnover 78.160 53.838 57.772 48.843 43.056 43.146 43.307 42.915

365 365 365 365 365 365 365 365 365

/ Inventory Turnover 78.160 53.838 57.772 48.843 43.056 43.146 43.307 42.915
Inventory Period 4.670 6.780 6.318 7.473 8.477 8.460 8.428 8.505

Financial Leverage Ratios

Total Debt (includes operating leases) 20,962 39,540 67,252 77,692 81,985 85,227 89,188 93,311
/ Total Assets 203,547 227,521 284,933 309,003 329,916 349,686 369,641 391,290
Debt Ratio 10.30% 17.38% 23.60% 25.14% 24.85% 24.37% 24.13% 23.85%

Total Debt 20,962 39,540 67,252 77,692 81,985 85,227 89,188 93,311
/ Total Equity 123,549 111,547 119,355 124,788 135,927 148,047 160,852 174,858
Debt-to-Equity Ratio 16.97% 35.45% 56.35% 62.26% 60.32% 57.57% 55.45% 53.36%

Profitability Ratios
(Sales - COGS) 71,061 78,483 104,883 107,003 110,438 114,105 116,772 120,811
/ Sales 170,910 182,795 233,715 245,214 256,147 266,243 274,986 282,223
Gross Profit Margin 41.58% 42.93% 44.88% 43.64% 43.12% 42.86% 42.46% 42.81%

Net Income 37037 39510 53394 52706 53488 54669 55526 57058
/ Sales 170910 182795 233715 245214 256147 266243 274986 282223
Net Profit Margin 21.67% 21.61% 22.85% 21.49% 20.88% 20.53% 20.19% 20.22%

Net Income 37,037 39,510 53,394 52,706 53,488 54,669 55,526 57,058
/ Average Total Assets 188,514 215,534 256,227 296,968 319,459 339,801 359,663 380,465
Return on Assets 19.65% 18.33% 20.84% 17.75% 16.74% 16.09% 15.44% 15.00%

Net Income 37,037 39,510 53,394 52,706 53,488 54,669 55,526 57,058
/ Average Shareholder Equity 120,880 117,548 115,451 122,072 130,358 141,987 154,449 167,855
Return on Equity 30.64% 33.61% 46.25% 43.18% 41.03% 38.50% 35.95% 33.99%

Payout Policy Ratios

Dividends per Share $1.63 $1.82 $1.98 $2.13 $2.27 $2.43 $2.57 $2.74
/ Earnings per Share 5.72 6.49 9.28 9.70 10.33 11.02 11.67 12.46
Payout Ratio 28.5% 28.0% 21.3% 22.0% 22.0% 22.0% 22.0% 22.0%

Dividends per Share 1.63 1.82 1.98 2.13 2.27 2.43 2.57 2.74
x Shares Outstanding 6,477 6,086 5,753 5,434 5,176 4,959 4,760 4,578
( Total Dividend 10,552 11,076 11,391 11,595 11,767 12,027 12,216 12,553
+ Stock Repurchases ) 22,860 45,000 35,253 35,000 30,000 30,000 30,000 30,000
/ Net Income 37,037 39,510 53,394 52,706 53,488 54,669 55,526 57,058
Total Payout Ratio 90.21% 141.93% 87.36% 88.41% 78.09% 76.88% 76.03% 74.58%
Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014)

Operating Operating
Fiscal Years Ending 30-Sep Leases Fiscal Years Ending 30-Sep Leases
2015 772 2015 662
2016 774 2016 676
2017 744 2017 645
2018 715 2018 593
2019 674 2019 534
Thereafter 2592 Thereafter 1877
Total Minimum Payments 6271 Total Minimum Payments 4987
Less: Interest 981 Less: Interest 742
PV of Minimum Payments 5290 PV of Minimum Payments 4245

Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.71% Pre-Tax Cost of Debt 3.71%

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

Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment
1 772 744.4 1 662 638.3
2 774 719.6 2 676 628.5
3 744 667.0 3 645 578.2
4 715 618.0 4 593 512.6
5 674 561.8 5 534 445.1
6 & beyond 674 1979.4 6 & beyond 534 1441.8
PV of Minimum Payments 5290.2 PV of Minimum Payments 4244.6

Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating
Fiscal Years Ending 30-Sep Leases Fiscal Years Ending 30-Sep Leases
2014 610 2013 516
2015 613 2014 556
2016 587 2015 542
2017 551 2016 513
2018 505 2017 486
Thereafter 1855 Thereafter 1801
Total Minimum Payments 4721 Total Minimum Payments 4414
Less: Interest 719 Less: Interest 686
PV of Minimum Payments 4002 PV of Minimum Payments 3728

Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.71% Pre-Tax Cost of Debt 3.71%

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

Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment
1 610 588.2 1 516 497.5
2 613 569.9 2 556 516.9
3 587 526.2 3 542 485.9
4 551 476.3 4 513 443.4
5 505 420.9 5 486 405.1
6 & beyond 505 1420.9 6 & beyond 486 1378.8
PV of Minimum Payments 4002.5 PV of Minimum Payments 3727.6
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 1.2

Average Time to Maturity (years): 4.10
Expected Annual Number of Options Exercised: 0.3

Current Average Strike Price: $ 15.08

Cost of Equity: 9.20%
Current Stock Price: $121.06
1 2 3 4 5
2016E 2017E 2018E 2019E 2020E
Increase in Shares Outstanding: 0.3 0.3 0.3 0.3 0
Average Strike Price: $ 15.08 $ 15.08 $ 15.08 $ 15.08 $ -
Increase in Common Stock Account: 4 4 4 4 -

Change in Treasury Stock -35,000 -30,000 -30,000 -30,000 -30,000

Expected Price of Repurchased Shares: $ 121.06 $ 132.20 $ 144.37 $ 157.65 $ 172.16
Number of Shares Repurchased: (289) (227) (208) (190) (174)

Shares Outstanding (beginning of the year) 5,578 5,289 5,063 4,855 4,665
Plus: Shares Issued Through ESOP 0.3 0.3 0 0 0
Less: Shares Repurchased in Treasury 289 227 208 190 174
Shares Outstanding (end of the year) 5,289 5,063 4,855 4,665 4,491
VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AAPL

Current Stock Price $121.06
Risk Free Rate 2.82%
Current Dividend Yield 1.50%
Annualized St. Dev. of Stock Returns 33.05%

Average Average B-S Value

Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 1.2 15.08 4.10 $ 100.39 $ 120

Total 1.2 $ 15.08 4.10 $ 107.63 $ 120

Sensitivity Analysis
DCF Price Mac Growth 5-yr CAGR
$153.26 -1.00% 0.00% 1.00% 2.00% 3.00% 3.50% 4.00% 4.50% 5.00%
-1.00% $137.71 $138.21 $138.72 $139.26 $139.83 $140.12 $140.41 $140.71 $141.02
0.00% $140.62 $141.12 $141.64 $142.18 $142.74 $143.03 $143.35 $143.68 $144.02
1.00% $143.74 $144.29 $144.86 $145.46 $146.08 $146.40 $146.73 $147.06 $147.40
2.00% $147.26 $147.81 $148.38 $148.98 $149.60 $149.92 $150.24 $150.58 $150.92
iPhone Growth 3.00% $150.92 $151.47 $152.04 $152.64 $153.26 $153.58 $153.90 $154.24 $154.58
5-yr CAGR 3.50% $152.80 $153.35 $153.93 $154.52 $155.14 $155.46 $155.79 $156.12 $156.46
4.00% $154.73 $155.28 $155.85 $156.45 $157.07 $157.39 $157.71 $158.05 $158.39
4.50% $156.69 $157.24 $157.81 $158.41 $159.03 $159.35 $159.68 $160.01 $160.35
5.00% $158.69 $159.24 $159.81 $160.41 $161.03 $161.35 $161.68 $162.01 $162.35

DCF Price CV growth of NOPLAT

$153.26 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%
1.100 $157.81 $165.24 $173.88 $184.05 $196.18 $210.92 $229.20 $252.47 $283.11
1.150 $153.66 $160.57 $168.56 $177.91 $189.00 $202.35 $218.76 $239.39 $266.12
1.200 $149.75 $156.19 $163.59 $172.21 $182.37 $194.52 $209.31 $227.71 $251.21
1.250 $146.07 $152.07 $158.95 $166.92 $176.25 $187.34 $200.73 $217.22 $238.02
Beta 1.316 $141.51 $147.00 $153.26 $160.46 $168.85 $178.73 $190.54 $204.91 $222.78
1.350 $139.29 $144.53 $150.51 $157.36 $165.31 $174.63 $185.73 $199.16 $215.74
1.400 $136.16 $141.08 $146.66 $153.03 $160.39 $168.98 $179.14 $191.33 $206.24
1.450 $133.20 $137.81 $143.03 $148.97 $155.80 $163.73 $173.05 $184.16 $197.63
1.500 $130.38 $134.72 $139.61 $145.16 $151.51 $158.84 $167.42 $177.57 $189.79

DCF Price CV growth of NOPLAT

$153.26 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%
6.50% $184.72 $196.07 $209.69 $226.34 $247.15 $273.91 $309.58 $359.52 $434.44
7.00% $171.96 $181.34 $192.42 $205.73 $221.98 $242.31 $268.44 $303.28 $352.06
7.50% $161.02 $168.87 $178.03 $188.86 $201.86 $217.74 $237.59 $263.11 $297.15
8.00% $151.54 $158.19 $165.86 $174.81 $185.39 $198.08 $213.60 $232.99 $257.92
WACC 8.61% $141.50 $146.99 $153.25 $160.45 $168.84 $178.71 $190.52 $204.89 $222.75
9.00% $135.95 $140.85 $146.40 $152.75 $160.07 $168.61 $178.70 $190.81 $205.62
9.50% $129.46 $133.72 $138.50 $143.92 $150.12 $157.27 $165.62 $175.48 $187.31
10.00% $123.66 $127.38 $131.53 $136.21 $141.51 $147.56 $154.55 $162.70 $172.34
10.50% $118.44 $121.71 $125.34 $129.40 $133.97 $139.15 $145.06 $151.89 $159.86

DDM Price Mac Growth 5-yr CAGR

$149.46 -1.00% 0.00% 1.00% 2.00% 3.00% 3.50% 4.00% 4.50% 5.00%
-1.00% $130.19 $130.84 $131.53 $132.24 $132.98 $133.36 $133.75 $134.15 $134.55
0.00% $134.06 $134.72 $135.40 $136.12 $136.86 $137.24 $137.63 $138.02 $138.43
1.00% $138.10 $138.75 $139.44 $140.15 $140.89 $141.27 $141.66 $142.06 $142.46
iPhone Growth 2.00% $142.30 $142.95 $143.64 $144.35 $145.09 $145.47 $145.86 $146.26 $146.66
5-yr CAGR 3.00% $146.67 $147.32 $148.01 $148.72 $149.46 $149.84 $150.23 $150.63 $151.03
4.00% $151.21 $151.87 $152.55 $153.26 $154.00 $154.39 $154.77 $155.17 $155.58
5.00% $155.93 $156.59 $157.28 $157.99 $158.73 $159.11 $159.50 $159.90 $160.30
6.00% $160.84 $161.50 $162.18 $162.90 $163.64 $164.02 $164.41 $164.80 $165.21
7.00% $165.94 $166.60 $167.28 $168.00 $168.74 $169.12 $169.51 $169.90 $170.31

DDM Price Payout Ratio

$149.46 15.00% 20.00% 22.00% 25.00% 28.03% 30.00% 35.00% 40.00% 45.00%
1.00% $137.61 $139.96 $140.89 $142.29 $143.71 $144.63 $146.96 $149.29 $151.61
1.50% $139.66 $142.03 $142.97 $144.38 $145.81 $146.74 $149.09 $151.43 $153.77
2.00% $141.76 $144.14 $145.09 $146.52 $147.95 $148.89 $151.25 $153.62 $155.97
iPhone Growth 2.50% $143.90 $146.30 $147.25 $148.69 $150.14 $151.08 $153.47 $155.85 $158.22
5-yr CAGR 3.00% $146.08 $148.49 $149.46 $150.91 $152.37 $153.32 $155.72 $158.12 $160.51
3.50% $148.30 $150.74 $151.71 $153.17 $154.64 $155.60 $158.02 $160.44 $162.85
4.00% $150.57 $153.02 $154.00 $155.48 $156.96 $157.92 $160.36 $162.80 $165.23
4.50% $152.88 $155.36 $156.34 $157.83 $159.32 $160.29 $162.75 $165.21 $167.66
5.00% $155.24 $157.73 $158.73 $160.22 $161.73 $162.71 $165.19 $167.66 $170.13