A reckoning is only as honest as its discount rate. Run Mr. Market's protocol against Apple Incorporated using the long Treasury yield directly — 4.38% as of this morning — and you get an intrinsic value of $493 per share. Mr. Market is asking $293. That looks, on its face, like a sixty-eight-percent margin offered to the patient buyer.

It is not. Or rather: it is, by the formula, but the formula is being asked to do something it should not. Apple compounded its consensus earnings at twenty percent across the last five years. The protocol caps explicit growth at twenty percent and fades it down to the rate of long-run U.S. GDP across a decade. At a 4.38% discount rate, twenty-percent growth in years one through three runs faster than the discount can cool it. The terminal value, anchored at 2.3% perpetual growth and a 4.38% rate, is multiplied by a factor of forty-nine. Most of the answer comes from year eleven onward.

A reckoning is only as honest as its discount rate.

The protocol's author saw this coming. The developer note instructs: add one to two percentage points if rates are extremely low or if the business carries above-average risk. Apple is not extremely-low-rate territory anymore — Treasuries have been north of four percent for some time — but the second clause is doing real work. A business compounding earnings at twenty percent because it is selling a generational consumer product is not the same kind of investment as a business compounding earnings at six percent because it is selling sweetened water that people happen to drink at lunch. Both are wonderful. They are not equivalently certain.

So we add two percentage points to the discount rate for technology and communication-services businesses, and the answer changes. At 6.38% — the long Treasury plus a tech premium — Apple comes out closer to fair value, the Δ% drops into the twenties, the BUY flag dims to a WATCH. We have not changed the protocol. We have applied the discretion the protocol explicitly invites.

The rule we follow, here and elsewhere: any adjustment must apply to every stock in the same category, the same way, every time. Tech businesses get a two-point premium; cyclicals and biotechs get a one-point premium; everyone else gets the long Treasury directly. Banks, insurers, and REITs receive the OCF-only sector exception in step I instead, because their economics break the cash-flow proxy itself, and we have flagged those reckonings as informational only.

What does this leave us with on Apple, today? A business that is high-quality, durable, expensive, and not on sale. The Δ%, after the premium, is positive but not generous. Mr. Market is asking a fair price for an excellent business. Buffett famously preferred this — “a wonderful company at a fair price” over the alternative. He also rarely paid up for it. Apple at $293 is, at the margin, a business worth tracking, not a business worth buying. Pass.

— The editors