Getting Real About Apple Inc. (AAPL)

Apple Inc. (NASDAQ:AAPL) is almost certainly the most written about company on the planet. As the stock ascended to $700 per share last year, making Apple the most valuable company in the world, predictions of a run to $1,000 and beyond seemed to be published every day. The party soon ended, with the stock price crashing over the past few months down to around $450 a share. This, of course, has been accompanied by claims that Apple Inc. (NASDAQ:AAPL) is a has-been, that innovation is dead and that Apple is doomed.

Apple’s iPhone and iPad are losing global market share to Google Inc (NASDAQ:GOOG)’s Android devices, with Microsoft Corporation (NASDAQ:MSFT)’s Windows-based devices becoming a serious competitor as well. There are two things to remember, though. First, Apple Inc. (NASDAQ:AAPL) makes its own hardware. Google gives away Android for free, meaning that they make nothing directly from their increased market share. This also allows Android phones to be made extremely cheaply, with Apple having no low-cost alternative. It’s no wonder, then, that Android is gaining market share. But these low-cost phones most likely come with low margins — not exactly Apple’s forte.

Second, the markets for smart phones and tablets are growing extremely quickly. The smart phone market grew by 39.5% in 2012, with Apple Inc. (NASDAQ:AAPL) having a 18.8% market share compared to Android’s 68.3%. Because the market is growing so fast, Apple could actually lose market share over time and still sell more phones than it does today.

I doubt that Apple Inc. (NASDAQ:AAPL) will ever make a truly cheap phone, and their market share is most likely capped by this fact. But they make a lot more money per phone than Google does. The smartphone market will end up looking like the PC market, with Apple having a small market share but a very profitable product.

IDC predicts that Apple will actually increase their overall market share by 2016, with Windows Phone gaining share and Android losing share.

If this prediction turns out to be true then the total volume of phones Apple sells will be significantly higher than today. Of course, any prediction like this should be taken with a grain of salt.

How Much Is Apple Really Worth?

I’m not going to try to predict iPhone sales in 2016, or gross margins in Q4 of this year. These types of guesses are full of uncertainty. Instead, I’ll lay out three different scenarios and determine how much Apple is worth in each one. As you’ll see, the market is extremely pessimistic regarding Apple.

So Much Cash

At the end of 2012 Apple had $137 billion in cash and investments and no debt. On a per share basis this comes out to about $144 of cash per share. Almost a third of Apple’s market capitalization is derived from this cash. With a market cap of about $440 billion the market is thus valuing all of Apple’s future earnings at roughly $296 billion.

So Much Profit

Apple has seen free cash flow grow dramatically over the past few years. In 2008 Apple recorded FCF of $8.4 billion, a number that grew to $41.5 billion in 2012. The TTM free cash flow, which includes the most recent quarter, is $46.3 billion. This equates to about $48.90 per share of FCF.