AAPL

MarketCap:626.33B
NetIncome(TTM):53.39B
ROE(TTM):43.84%
ROA(TTM):20.25%
PERatio(TTM):12.21

InvestmentAnalysis
November26,2015

CompanyDescription
AppleIncdesigns,manufactures,marketsmobilecommunication&
mediadevices,personalcomputers,portabledigitalmusicplayers,
sellsavarietyofrelatedsoftware,services,accessories,networking
solutions,&third-partydigitalcontent.

ExecutiveSummary
Apple is in a very competitive industry, however this year they have
managed to successfully launch the iPhone 6s and beat competitors
in every operatingsegment
including

the

declining

ones. Furthermore, Apple has found great success in

Chinaanditspercentagegrowthisinthedoubledigits.

Recommendation

InvestmentThesis

iPhonerevenuesinFY2016expectedtogrowby9%
Applestealingmarketsharefromcompetitorsinthesmartphonesegment
iPhonecannibalizingApplesproductline
AppleheadingintotheholidayseasoninChinawithitsstrongestproductline
Globalinternetusageisexpectedtoincreasein2016

CompanyProfile
A leader in the technology sector, Apple Inc has continuouslymanagedtocrushcompetitorsdue
to being a marketing powerhouse. They have managed to create and nurture brand loyalty
throughout the world. Always pushing to innovate our lifestyles, Apple Inc is considered a leader
in product design. Following a differentiation strategy, it has managed to price its products at
premium prices. Recently Apple Inc has been facing an innovation crisis. The iPhone represents
an alarming portion of the companys revenue, as the iPhone is becoming a commodityproduct.
The company is also facing issues with product cannibalization. The iPhone is eating into the
profits of the tablets and laptops, due to the mobile industry growing so fast. Apple Inc is trying
respond to this issue by creating and promoting complementary products such as the iWatch.
Issues regarding internal product cannibalization have yet to be resolved. The current attempts
are not sufficient enough. Furthermore, it has yet to find a product to replace the iPhone as a
revenue driver, in view of the fact that the iPhone is coming to the end of its product life cycle.
Failure to do so couldbeasignalthatAppleIncisheadingintothematuremarketandleavingthe
growthone.

IndustryOutlook
KeyEconomicDrivers
GlobalpercapitaIncome
Emerging economies have a relatively low penetration of high-technology electronics. Therefore,
an increase in per capita disposable income can generate strong sales growth for consumer
electronic devices. Per capita disposable income is expected to increase in 20161. In emerging
economies, old iPhone models are in still indemandduetoitslowpricebutitishardforAppleto
priceitselfaslowaslowcostcompetitorssuchasHuawei.
GDPoftheBRICnations
The level of economic activity and capital investment expenditure influences demand for
electronics and electronic components. As incomes continue to rise in emerging and newly
industrialized nations, such as BRIC nations (i.e. Brazil, Russia, China, and India), thesecountries
are increasing their demandforconsumerelectronics.GDPgrowthofBRICnationsisexpectedto
Clients1.ibisworld.com,.'MarketResearchReports|ProcurementResearchReports|IbisworldUS'.N.p.,
2015.Web.21Nov.2015.
1

3
increasein2016,representingapotentialopportunityfortheindustry.Thisespeciallyaffects
Apple,as58%ofApplessellsisforeign.
GlobalConsumersentimentindex
As consumer sentiment and spendingrecoverfromworldwiderecessions,anincreaseindemand
for industry products is expected as more people spend money on high value consumer
electronics and discretionary products such as TVs, cameras and other electronics. Economic
slowdowns in China, Japan and the European Union may temper consumer sentiment, despite
increasingdisposableincome.
Technologicalchangeoftheglobalentertainmentsector
An increase in technological change for the global entertainment sector will increase industry
demand as consumer electronics manufacturers develop and sell new products. Technological
change for the global entertainment sector is expected to increase in 2016. However, some
technological changes cause consumer electronics to converge into multi-purpose devices,
posing a threat to some single-purpose industry products. Apple is facing issues with product
cannibalisation.
Globalinternetusage
The number of broadband connections worldwide, or high-speed internet connections, has hada
major impact on the number of televisions sold, given the rise of onlinestreamingservices.Now
many viewers in developed economies can access television shows through additional devices
such as computers, tablets and mobile phones. Global internet usage is expected to increase in
2016, representing a potential threat for the industry. While this poses a threat to the industry, it
also presents an opportunity for Apple 8.52% of Apples revenues come from online services
suchastheiCloud2.

Using a Porter's five forces3 model toanalyzetheconsumerelectronicsindustry(appendixII),we

came to the conclusion that the industry is unattractive due to three main factors: new entrants
are able to easily enter the industry; a high level of competitions; and the amount substitutes.
Certain products like smartphones can do everything and eventually all other products will
become irrelevant and merge into one. innovation, differentiation and customer loyalty is how
Apple addresses the unattractiveness of the industry and this is why the consumer electronic
industryisattractiveforApple.
SimilartoaharddrivebutonlineTheiCloudisanonlineservicethatstoresdocuments,photosandecton
theinternetforfutureuse.
3
GlobalConsumerElectronics.(2015,April).
MarketLineIndustryProfile.
Retrievedfrom

http://www.marketline.com
2

S.W.O.T
Strengths
First and foremost, Apples most prominent competitive advantage is customer loyalty. They have
managed to sell the same phone year after year with minimal changes to the product. Due to the
fact that, It has managedtopsychologicallyconveytotheconsumersthatowningAppleproductsis
partofalifestyle.
Secondly, Apples financial performance has managed to surpass the top competitors in the
industry. Its return onequity(TTM),
return on assets(TTM), EBITDA
(TTM) and dilutedEPS(TTM)arein
much better shape than its
competitors.
Furthermore, Apple is recognized
as the industry leader in product
designandmarketing.

Weaknesses
Apple has yet to justify its product
pricing. Consumers started shifting
to cheaper alternative. Alternatives
such as the Samsung and HTC
phonesarecatchingupintermsofperformance,specsanddesignatacheaperprice.
The high product expectation that Apple has created may prove to be the companys biggest
weakness.These high expectations mean that Apple cant throw experimental products or
services at the market without hurting itsbrand.Thisinabilitytoiteratequicklymakesitharderfor
Apple to innovate as rapidly as Google does in the service space or as fast as Samsung in the
hardwarespace.
Since the death of Steve Jobs, Tim CookhasnotmanagedtofilltheleadershiprolethatJobsleft
behind. It is still unclear in which direction he is tryingtodriveApple.TimCookhasnotmanaged
toinnovate.AppleslatestattempttoinnovateistheApplewatchandithasyettoimpress.

Opportunities
The industry is at an advantages due to growing household incomes, particularly in emerging
markets such as Asia, Eastern Europe and South America. This has supported demand for
consumerelectronics.

5
The televisionindustryisexperiencingaconsumershifttowardsonlinetelevision.Thiscould
helpAppleTVtofinallytakeoff.
The industry is undergoing rapid growth in the number of users of smartphones. Consumers are
becoming less reliant on computers to complete routine tasks such as checking emails, social
media or the news. It is becoming necessary for content providers and websites to invest inapp
development.

Threats
Chinese smartphone manufacturers have managed to entertheindustrywithalow-coststrategy.
They have succeededatcopyingcompetitorswhileachievingeconomiesofscale.Seeingthatthe
industry is driven by innovation, they do not pose much of a threat as their investment in R&D is
substantially lower than that of Apple. However, this could hurt the future sale of old iPhone
modelsthatarestillsellingmainlyduetotheirlowpriceindevelopingeconomies.
The USD is expected to remain strong, as the U.S economy is performing well. This could affect
Apples revenues. This poses a concern in terms of competitive pricing of its products
internationally,duetothefactthat59%ofApple'srevenueisforeign.
There has been a raising concern regarding Apples biggest supplier. Foxconn is facing pressure
to increase the wages of its employees.Foxconn Technology Group is aTaiwanesemultinational
electronics contract manufacturing company headquartered inTucheng
,NewTaipei
,Taiwan
.Itis
the world's largest electronics manufacturer ,and the third-largest information technology
company by revenue. Foxconn has been involved in several controversies relating to how it
manages employees in China. There has been a history of suicides at its factories blamed on
working conditions. This hascreatedexternalpressureforFoxconntochange;ifsoitwillraiseits
pricesandaffecttheindustryandApplescosts.

Competitors
Microsoft-Medium4
Close competitor sincetheconsumerelectronictookoff,notconsideredasmuchofathreatasin
the past to Apple anymore; This is due to microsoft expanding their operations to enterprise
solutions, gaming and commercial software publishing. Microsoft is a close competitor toApple
mainly due to their competing operating systems. Microsofthasbeenwinningintermsofmarket
share in the operating system of computers, but heavily losing in the smartphone one. Although
the internet has been experiencing extreme growth and is expected to continue growing, more
4

Threatlevelforupcoming2years:high,medium,low

6
consumers are becoming less reliant on computers. Mature markets with high internet
infrastructure such as South Korea and Japan havealreadymadethemovetohighlymobile
systems.InresponseMicrosofthasreleasedtheSurfacePro,whichiscompetingdirectlywiththe
new iPad Pro.Thesedevicesareintendedtoreplacelaptops.Overallthesefactorscombinedwith
MicrosoftbeingamaturecompanyposesamediumthreattoApple.

Google-High
Google started as a simple search engine and escalated into one of the most innovative
companies in the world. Today Alphabet is competing against Apple in close to every operating
segment including smartphone OS, smartphone hardware, tablet OS, laptop and services. They
have been battling out for smartphone market shares, recently Tim Cook announced that 30%of
android users switched to the new iPhone. Furthermore, an issue for google is that it does not
have access to the Chinese market; due to not wantingcensorshiponitsproducts.Nevertheless,
as soon as google manages to enter China this will pose a very high threat to Apple as China
constitutes 25% of Apples revenue and is expected to increase. An additional threat from
Alphabet is its innovation; In such industryinnovationiswhatdrivesprofits.OverallGoogleposes
substantialthreattoAppleespeciallyinservices5.

Samsung-Medium
The South Korean giant, has been Apples main competitors ever since the release of the
Samsung smartphones. It has been heavily backed by the South korean government due to its
important role in the countrys economy.
Samsung Electronics Co. announced that net profit for
the second quarter fell 8% compared to last year.assalesoftheGalaxyS6smartphonefellshort
of expectations. The decline was the fifth straight year-over-year profit drop, as low-cost rivals
from China and India continued to weigh on Samsung's market share and profit margins,
particularly for mid range smartphone models6. Fortunately for Samsungitsrevenuesmadefrom
sellingmemorychips,applicationprocessorsanddisplaypanelstootherbusinesseshelpcushion
the blow. In response, Samsung is trying to differentiate itself by developing its own operating
system for its smartphones.Currently, Apple is the only company that design both its hardware
and software. Supposing that Samsung succeeds at introducing a non androidoperatingsystem
on its smartphone, could lead to Apple
losing market share. Overall for the next
year Samsungisexpectedtolosemarket
share until they find a solution to
differentiate itself from low cost rivals.
This poses a medium threat to Apples
revenueforecastfor2016

5
6

Servicesincludeinternetservices,iCloud,AppleCare,ApplePlay
MarketWatch,.'SamsungProfitDownAsSmartphoneSalesDisappoint'.N.p.,2015.Web.23Nov.2015.

SegmentedOperations
Americas
The home segment of Apple has been
experiencing an annual growth of 9.85%. It
represents40%ofnetrevenue.

Europe
Europe, represents 22% of Apples net revenue.
In the past 5 years the European market has
beengrowingat8.65%annually.

China
The Chinese market has been responding
tremendously to Apples products in recent
years. According to CNN, thesocialpressureof
having an Appleproductisstrong,especiallyas
the wealthy elites set trends7. China has been
experiencing the highest annual growth in the
company. It has been experiencing 38.65%
annual growth, Which represents 25% of
Apples revenue. Tim Cook, CEO of Apple Inc
believes China will become the number one
marketforthecompany.

Japan
Another interesting region is Japan. a highly
competitive region for the iPhone due to
Samsung and other competitors having huge
market shares. Nevertheless, Apple has been
growing at a rateof13.32%annuallyandJapan
represents7%oftotalrevenues.

iPhone

iPhone is the major source of revenue for

Apple. It has been growing at a CAGR of
25.36%. According to Tim Cook, this is due to
the fact that many smartphone users have
made the switch from Android devices to the
iPhone8. Furthermore, heading towards the
next quarters Apples iPhone revenue is
expected to continue growing due to Apple
expecting iPhone 5s users to upgrade to the
latest iPhone. Additionally, Chinese new year
is a big spending season for China. Tim Cook
isexpectingtheChineseconsumertopurchase
the new iPhone models9. With an increase in
demand for the Companys entry-priced
iPhones and the addition of a significant new
carrier in the second quarter 2014 justifies the
high growth from china. Overall consumers
have been very receptive to the new bigger
RestofAsiaPacific
Lastly, this segment has been growing 10.91% screen iPhones and the iPhone contributes
annually. This is in line with the normal growth 66.34%toApplestotalrevenue.

ofthecompany.Itrepresents6%ofrevenues.
JeongwenChiang,SpecialtoCNN.'WhyChinaLovesApple-CNN.Com'.
CNN
.N.p.,2015.Web.20Nov.
2015.
8
Crothers,.'Apple'sCookSaysAndroidUsersBoltingToIphone-Really?|FoxNews'.
FoxNews
.N.p.,2015.
Web.20Nov.2015.
9
Bloomberg.com,.'AppleSChineseNewYearSalesMayBringASecondHolidayBoost'.N.p.,2015.Web.
20Nov.2015.
7

iPad
The iPad is facing difficulties finding growth. It
has declined by 23% in the 2015 compared to
2014 and is declining at a CAGR10 of -9.12%.
Factors contributing to this decline include a
lack of innovative products,iPhonecannibalism
and lack of competition. Lack of innovative
products results in less incentives for
consumers to upgrade their device to thelatest
one. As the iPhone is becoming more
sophisticated it is becoming harder to find use
for iPads, due to the iPhone being able to
execute the same functions. Apples iPad
constitutes 25% of tablet market11. Unlike the
iPhone, this results in Apple receiving no
competitive pressure to change. iPad
represents9.94%ofApplesrevenue.

Mac

Services
Revenue made from services is growing at a
CAGR of 15.59%. Services includes revenue from
the iTunes Store, App Store, Mac App Store,
iBooks Store, Apple Music, AppleCare, Apple Pay,
licensing and other services. According to
management discussions this growth is primarily
due to growth in net sales from Internet Services,
AppleCare and licensing. Growth in internet
services are expected to growth, as theinternetis
growing at a massive rate. According to Internet
World Statistic, internet usage is growing at 45%
annually13 and cloud computing software at 20%
year over year14. This represents 8.52% of Apples
revenues

Mac has been experiencing slow growth,

growing only at a CAGR of 3.13%. This slow
growth is mainly attributedtoastrongUSdollar
that made it more expensive to overseas
customers to purchase Mac products. Yet, it is
still much better than the PC industry which
declined 7% this quarter12. This segment OtherProducts
represents10.90%ofApplesrevenues.
4.31% of Apple revenues come from other
products that includes sales of Apple TV, Apple
Watch, Beats products, iPod and Apple-branded
and third-party accessories. Apple Watch is the
latest attempt from Apple to try to penetrate a
new market. Unfortunately it has not succeeded
and revenue for this segment is declining at a
CAGRof1%.
Compoundedannualgrowthratebetween2012-2015
Taylor,FindTheBest.'5ReasonsPeopleAren'tBuyingTabletsAnymore'.
TIME.com
.N.p.,2014.Web.20
Nov.2015.
12
Dormehl,Luke.'MacSalesAreSlowingDown,ButDon'tBlameApple'.
CultofMac
.N.p.,2015.Web.20
Nov.2015.
13
Internetworldstats.com,.'InternetGrowthStatistics-TheGlobalVillageOnline'.N.p.,2015.Web.21Nov.
2015.
14
Forbes.com,.'ForbesWelcome'.N.p.,2015.Web.21Nov.2015.
10
11

Comparables
The first step takeninordertosetthetargetpriceforApplesstockwastocalculatethegrowthin
Cash Flows fromOperations(CFOs)for2016.Basedonthehistoricalrateofgrowth,acumulative
average of the moving averages was calculated and amounted to 58.93%. However, we also
calculatethegrowthusingthecumulativeaverageofcashflowfromoperationasapercentageof
sales which was amounted 26.9%. Using a similar method, the rate of growth in Capital
Expenditures(CAPEX)wasfoundtobe4.29%.
Apple is a large firm that iscurrentlygrowingataphenomenalrateof28%mostlyduetoitssales
of the iPhone 6 & 6plus, the weakness of other currencies compared to the U.S. dollar and the
release of the iPhone on time in the Chinese market. In the management discussion Apple is
expecting a growth of 2.55% in the first quarter. Furthermore the percentage that all quarters
st nd rd
th
contribute to the total sales on average was 30%, 25%, 22%, and 23% for the 1
, 2, 3 and 4

nd rd
quarters respectively. With this information we wereabletoforecastthegrowthofthe2,3and
4thquartersas5%,6%,and13%respectively,whichgaveusa9%growthinrevenuefor2016.
In 2016, we expect a growth of 9% in revenue which equals 255 billion in revenue. We took this
valueandusedittocalculatethecashflowfromoperationfor2016.

(255B*thegrowthinCFO26.9%)=68.7B

We then used the revenue to calculate the 4.26% growth in capital expenditurewhichwillgiveus
10.9billionincapex.ThiswillgiveusaFreeCashFlowof57.75B.

10
Pessimistic
Looking at the growth in revenue for the upcoming year (2016), we focused onthepossibilityof
an increase of 6% in sales. In the second, third and fourth quartersof2013to2014theirrevenue
grew by 5%, 6% and 12% respectively. Their own forecast for the first quarter of 2016 is an
increase of 2.55%. Judging by this forecast, the second, third and fourth quarters should seethe
same increase as those in 2013 to 2014. Although the new iPad came out thismonth,wedonot
believe that it will sell well enoughtoincreasethosepercentagesignificantly.Inthispaperwedid
not focus onusingthegrowthfrom2014to2015becauseitwasinflatedduetotheacquisitionof
Beats15, and Apple has not discussed whether they are looking to acquire a company that would
makeasimilarimpact.

Optimistic
We believe thatthegrowthwillbe19.38%.DuetothereleaseoftheiPhone6sonSeptember23rd,
we expect to see an increase of 25% in iPhone sales. Similarly, we expect to see growth of 12%
due to the release of the iPadPro.WeexpectadecreaseinthesalesoftheMacby4%asaresult
of product cannibalism. We anticipate an increase in the revenue generated from other products
due to the release of the Apple TV on october 26, 2015. New featureswillputApple aheadofits
competitors. The revenue of the apple watch and services will grow by 8.75%. Last monthApple
released new accessories in order to make the Apple Watch more attracting . The ability to
accessorizetheAppleWatchwillbeconducivetothisgrowth.
In order to address both the optimistic and pessimistic point ofviewweranasensitivityanalysis
that also includes the
9% growth in revenue
that we use to get the
target price. the two
variable
in
the
sensitivity analysis are
capex as % of sales
against the growth in
revenue, as you can
when the capex % of
sales is 4.29% and the
growth of 9% thetarget
price is $157.44 which
is our target price. when the growth in revenue hits 6% and the capex hits 4.29% the target price
shiftsto$153.11.

Apple.com,.'Apple(Canada)-ApplePressInfo-AppleToAcquireBeatsMusic&BeatsElectronics'.N.p.,
2015.Web.21Nov.2015.
15

11

AppendixII

BuyerPower
The global consumer electronics retail market is characterized by huge volumes ofsmallbuyers,
end-users or consumers. As the impact on a retaileroflosinganyparticularcustomerisnominal,
buyer power is correspondingly weakened. This is more pronounced in developing economies,
where lower incomes may price many buyers out of the market. It is difficult for retailers in this
market to differentiate themselves. Exceptperhapsforhigh-end'boutique'electronicsspecialists,
or the retail outlets operated by manufacturers like Samsung and Apple, most retailers sell quite
often exactly the same products made by the majorelectronicsmanufacturers.Complementthis
with the price sensitivity of consumers, especially for 'big ticket' items like televisions, and the
lack of significant switching costs, and buyer power starts to look stronger. However, one way a
retailer can defend itself against this is by focusing on customer service. A strong company's
performance is usually linked to low employee turnover rates. More experienced employees are
likely to have greater knowledge of the products on sale and therefore can advise customers
better.Overall,buyerpowerismoderate

12
PowerofSuppliers
Major retailers often buy stock directly from manufacturers such as LG and Samsung.Theseare
large multinationals, with considerable bargaining strength. Consumerelectronicsmanufacturing
benefits from scale economies, and so it is likely that there will always be a preponderance of
large manufacturers upstream of the retailers. Retailers rarely integrate backwards into
manufacturing, but some manufacturers run high street retail chains to sell their own products
exclusively. However, it is unlikely that manufacturers would ever extend themselves so far into
direct-to consumerbusinessthatthepureretailersbecomeunimportantfortheirsales.Consumer
electronics isafairlycommoditizedmarket.EvenaninnovativeproductsuchastheoriginalApple
iPodsoonstimulatesmanufacturersintoproducingsimilaritems.Also,whereamanufacturerhas
valuable intellectual property, it can choose to generate revenue through licensing agreements
rather than defending exclusivity in order to charge high prices. For example, Blu-ray player
manufacturers must pay a royalty (in the way of a few $) to the Blu-rayformatpatentholdersfor
each player they make. From the perspective of retailers, this willtendtoweakensupplierpower,
as it means that no one supplier monopolizes a particular product category. Overall, supplier
powerismoderate.

ThreatofSubstitutes
Substitutes for consumer electronics, defined restrictively here as audio and video devices,
include the broader range of ITC categories. For example, convergent devices offeringaudioand
video functions alongside computing and communication functions, such as tablet computers
and smartphones, are a substitute for dedicated devices. For photographicequipment,thethreat
of substitution is largely from smartphones, which have been eating away at camera sales for
some time. The smartphone provides functional cameras and copious other functionalities,
including internet access to upload photos instantly making it amuchmoreenticingprospectfor
the casual consumer. Photographic equipment will, however, remain the choice for professional
photographersorenthusiasts.Overall,thereisastrongthreatfromalternatives.

DegreeofRivalry
The global electronics retail market has several large chain players coexisting with small
independents. Itisrelativelyeasyforacompanytostepupitssalesvolumeinresponsetomarket
conditions; it can order more stock from a variety of providers and hire more staff rather easily.
Global sporting events like the 2014 FIFAWorldCupBrazilcanalsoleadtoasurgeindemandfor
large screen televisions which in turn, increases the level of competition amongst retailers.
Companies will advertise aggressively using global events such as these in order to ensure
consumers spend their cash with them. This in turn increases the degree of rivalry due to
companies becoming increasingly more competitive with the occurrenceofseasonalevents.Itis
difficult for a retailer to differentiate itself from the competitionandswitchingcostsareminimal.
One such way it could distinguish itself is post sale services, such as extending the product's

13
warranty. "Black Friday" is a sales event that originated in the USbuthasbeguntotakeroot
in other developed countries. Retailers will slash prices on a variety of goods including
consumer electronics in the run-up to Christmas. As a result, it is easy for customers to move
from one retailer to another and this boosts the intensity of rivalry. Additionally, this market is
fairly easy to exit given the fixed costs are in retail space, which also eases competitive
pressures. Specialist photographic equipment retailers will see much more fierce rivalry as the
product becomes a niche for enthusiasts and professionals, ratcheting up rivalry. The market's
declinewillfurtherexacerbatethecompetitiveenvironment.Overall,thedegreeofrivalryisstrong

ThreatofNewEntrants
Barriers to entry to the global consumer electronics retail market are strong. Although in
developed economies, where the high street tends to bedominatedbyafewlargeretailchains,it
is stillpossibleforindependentconsumerelectronicsretailerstosurvive.Entryonasmallscaleis
however possiblewithouttheneedforvastamountsofcapital,complexregulatorycompliance,or
the acquisition of intellectual property. In developing economies, retail infrastructure is still
fragmented and some multinational corporations have had a torridtimeattemptingtoexploitthe
market; Dixons Carphone pulled out of Turkey for example. As such, entry may bemorepossible
on a local level. New entrants must also be aware when entering markets with volatileexchange
rates;manyconsumerelectronicswillhavetobeimported,soavolatileexchangerateconstitutes
another barrier to entry. Consumers have few switching costs to tie them to existing retailers.
Retail markets tend to be labor-intensive, but the skill sets required for many customer-facing
staff are not hard to find. On theotherhand,competingdirectlywithleadingincumbents,suchas
Best Buy in the US, would require larger resources, in order to develop infrastructure in terms of
retail distribution and branding. Large incumbents will tend to benefit from extremely large
economies of scale, pushing their per-unit costs down, making them difficult to beat on price.
Complementing this, central administrative costs may not rise as quickly as revenue as the
number or size of stores increases, and the cost of implementing an e-retail website may be
easier for a large company to absorb. All in all, there is a strong riskofnewentrants,butthiswill
bemoresignificantinrapidly-expandingsegmentsthaninmoresluggishones.Thismaycomevia
productinnovationssuchassmartTVsornewgadgetsinthephotographicequipmentsegment.

Overall, the industry is unattractive due to new entrants being able to easily enter. high level of
competitions and the amount substitutes. Certain products like smartphones can do everything
and eventually all other products will become irrelevant and merge into one. innovation,
differentiation and customer loyalty is how Apple addresses the unattractiveness of the industry
andthisiswhytheconsumerelectronicindustryisattractiveforApple.

14
AppendixIII

For the EBITDA projection of FY2016, we based the forecast on a 1-year, 3-year and 5-year
smoothing average growth. Considering the rapid rise of the smartphone market in recent years
andtheiPhonecontributingalargeportioninApple'srevenue,weonlyusethedataofthelastfive
years. Apples 1-year average growth is 38.19%, the 3-year average growth is 44.85% and the
5-year average growth is 38.19%.Wethencalculatedthemeanofthesethreegrowthrates,which
equals 40.41%. This value is higher than the industrys outlook, but we remain optimistic about
thisgrowth.First,thisyearApplemanagedtoreleaseditsnewiPhoneinGreaterChinaontimefor
the first time. Compared to previous years, this will greatly encourage the Chinese market to
purchase the new Apple products. Facts have proved that Apple sold 3 million new iPhone
devices in Greater China in the first week. We estimate that sales will continue to grow in the
future. Second, Apple and Cisco will collaborate to improve the performance of Apple products
and making Apples products more userfriendly.Itwillreducethecostsandcouldraisethesales
of Apples products in the future due to having higher performance than its competitors. Third,
Apple bought Beats Music and Beats Electronics this year. In viewing the outstanding
performance of Beats in the market for the past years, we believe that itcanbringmorebenefits
for Apple inthefuture.Insummary,weareoptimisticandforecastthatApplewillsustainthehigh
growthrateinEBITDAof40.41%forFY2016.UsingthisestimationforFY2016givesus:

EBITDA2016=$84505M(1+40.41%)=$118651.33M

UsingourforecastforEBITDAofFY2016,wecalculateourtargetprice,asfollowed:

15
AppendixIV

16

AppendixV
PERatio

17

Stockprice

CFOtoAsset