I hope everyone had a great Christmas! I had a great one thanks and I’m also now the lucky owner of an Apple Watch to kick me into gear for my January running spree. That brings me nicely onto my first post of 2017, why I bought some Apple shares.

Let me take you through a few disclaimers first. I bought in on 24th Feb 2016 at $94.04 and I still hold that same position.

So, Apple have had a bit of a rough time recently with some high profile investors announcing they’ve sold down their stake as growth in iPhone revenues turned negative. iPhones are the largest revenue source and China the largest market and sentiment turned negative once it started becoming clear that Apple was losing out to local rivals like Oppo, Vivo and Huawei and Samsung. The big fear with Apple is that the iPhone has been such a blockbuster hit that the company will struggle to follow it up with new products or just keep the iPhone far enough ahead of rivals to maintain their margins. Warren Buffet is a high profile investor doing the opposite and announced he has started building a stake at the end of 2016. Potentially an indicator that this growth stock has turned into a ultra reliable cash generating machine?

I think this negativity has been overdone. My baseline scenario assumption is that hardware sales have bottomed out, services will now grow 15% per year for the next few years, and R&D costs may have plateaued somewhat. Another issue Apple have faced is the cyclicality of their release schedule, so hopefully there will a bump at the start of 2017 as figures from the new iPhone and iMac sales come through. Finally the impact of a surging dollar in 2016 has reduced the dollar value of reportable profits. If this looks like it may have stabilised then there shouldn’t be much more of a negative on that front.

So taking those assumptions as a conservative baseline I see the following revenues:

Historical Forecasted Year 2012 2013 2014 2015 2016 2017 2018 2019 Revenues ($m) 156,508 170,910 182,795 233,715 215,639 219,291 223,491 228,321

This leaves scope for hardware and other products to see some growth again, and also for a larger than 15% growth rate in services. Q4 2016 saw services growth of 24% QoQ, but I’ve used a more conservative average of the previous 2 years. I also see operating costs at 69% of revenues for the next 3 years, which is 2 percentage points below the last few years. Adding in Other Income, expected to grow 20% per year and depreciation gives an EBIT Margin of 27% for the next 3 years. After taxes, capEx and working capital changes my free cash flow projections for the next 3 years are as follows:

2017 2018 2019 Forecasted FCF 34,453 34,029 33,631

Again, as part of this baseline scenario, I will assume no long term growth. Discounting these 2 growth stages back to today implies a fair Enterprise Value of $762.6B. I have assumed a capital structure with a debt/equity ratio of 0.6, a cost of equity of 7% and cost of debt of 1.3%. With 5.5b shares outstanding this implies a target share price of $166.

Risks still inherent in this are many however:

Firstly could Trump place import tariffs which would both increase costs in the US, and potentially trigger retaliatory actions which may reduce the value of Apple’s intellectual property. Secondly, a general slowdown in the Chinese economy, or just a continued reduction in apple’s market share could reduce revenues further below this scenario Continued dollar strength would have a negative impact on revenues recorded overseas. This isn’t too farfetched if higher inflation and bond yields are expected in the US, as a result of fiscal expansion from the incoming administration. The new Google Pixel phone could be a big hit. The first Android phone developed by the same company developing the OS could unlock new benefits for consumers and negate any impact exploding Samsungs might have had on Apple sales.

I think ultimately that there is significant upside in Apple, at the very least I intend on holding into the Q1 results at the end of January to see how the new iPhone sales have gone and what the services numbers look like. I think the doom and gloom over hardware is overdone and there is significant upside in a few other areas of the business. Apple have their own automotive moonshot in the pipeline, and who knows what that might be ultimately worth. The company is throwing off cash through dividends and buybacks too so a long term holding isn’t out of the question either.

The next steps for me will be to either sell at around $150, or update my assumptions at the end of January. Watch this space!