Saturday, August 21, 2010

AAPL At $400 Per Share By May: Here's Why

AAPL At $400 Per Share By May:Here's Why

Over the past several weeks I've been quizzed and queried about my continuing call for AAPL to reach over $400 per share by early May 2011. Indeed, I expect AAPL to reach $500 per share within three years

No matter the low price to earnings multiple at which Apple's share price currently trades relative to 12-month trailing earnings, surpassing $400 per share within nine months does not require a significant expansion of the company's current p/e multiple nor the release of additional hardware devices. 

At Friday's closing price of $249.64, AAPL is trading at a p/e multiple of only 18.79 times trailing 12-month earnings. This is not only a low multiple to current rates of growth, it's a significant discount to near-term revenue and earnings expectations. I expect by May of 2011 for the price-earnings multiple at which AAPL currently trades to expand to just over 20 times trailing 12-month earnings from 18.79 times earnings today.
What justifies a share price of over $400 by May 2011 are the following factors:
Revenue and Earnings Growth
I forecast Apple's rate of revenue growth for this fiscal year at about 50%. For the first nine months of this fiscal year revenue has exceeded the prior year's total by more than 46%, and only the June quarter included the benefit of Apple iPad sales. In the June quarter Apple realized a 61% increase in revenue due in large part to the release of the Apple iPad in the quarter and its contribution of $2.166 billion in revenue. The Apple iPad alone contributed 22.3% to revenue growth over the prior-year period and represented 13.8% of the June quarter's revenue total.
The Apple iPad and iPhone
For the first two quarters of fiscal year 2011 there will be no iPad revenue comparisons with the prior-year periods and all iPad revenue and earnings contributions will be a boost to results in prior-year comparisons. In my recent blog entry titled Apple and the Law of Large Numbers, I mentioned in the September quarter more than 50% of Apple's revenue will be sourced from products that did not exist in the market as recently as three and one-half years ago. The Apple iPad and associated sales will constitute greater that 20% of Apple's earnings and contribute more than 20% of earnings per share. 
The Apple iPhone will continue to realize strong year-over-year unit sales gains as the global market for smartphones expands rapidly. The Apple iPhone will deliver unit sales gains of more than 50% for the next several quarters and unit sales gains at an even faster clip through at least the 2nd fiscal of 2011. For the first nine months of FY 2010, iPhone unit sales have risen about 94% over the same nine-month prior year period. 
My early FY 2011 revenue and earnings forecast calls for revenue of roughly $100 billion and resulting eps of over $23 per share. 

Gross Margins
There's been much talk about gross margin pressure from aggressive pricing on products such as the Apple iPad and higher build costs on the iPhone 4. What many observers don't consider are the revenue and margin benefits from the sales of related products and services. These revenue and margin enhancers improve on the gross margin performance of the underlying hardware devices and will mitigate gross margin pressures over the next several quarters.
In the June quarter the iPhone had an ASP (average selling price) of $595. However, total revenue for the iPhone product segment averaged about $635 for every unit reported sold. The product segment includes handset sales and sales of Apple-branded and third-party accessories. Likewise, while Apple reported the iPad ASP in the June quarter was $640, product segment revenue per device sold averaged $662. 
Over the past seven quarters Apple's gross margin on sales has averaged 40.3%. No matter management's low-ball guidance of gross margins, results should remain relatively close to the recent averages due in part to the sales of associated products and services. 
Apple's Effective Tax Rate
The reduction in Apple's effective tax rates due to rising international revenue and earnings is a form of post gross margin profit expansion. While much attention is paid to the nominal gross margin percentages reported by the company, less attention is paid  to Apple's lower tax rates on operating income. Management's guidance on the effective tax rate for the September quarter is 26.5%, down from the most recent seven-quarter average of 29.1%. As international sales for Apple continue to rise, the effective tax rate on operating income should remain comparatively lower for the foreseeable future. 
Using the June quarter as an example, the effective tax rate was 24.2%, down from the seven-quarter average of 29.1%. This reduction from the recent quarterly averages delivered an additional $210 million to net income and $.23 to earnings per share. 
May 2011Share Price Forecast and Trailing 12-Month EPS
For the sake of simplicity in this example, I will use 67% eps growth for the first two quarters of FY 2011, actual results for the third fiscal quarter of 2010 and an estimate of 70% eps growth for the September and final quarter of FY 2010 to arrive at my trailing 12-month eps number for trading in May 2011. 
Using these percentages to forecast earnings growth, I expect Apple's trailing 12-month earnings by May 2011 to be at or above $19.90. To reach $400 per share the price-earnings multiple would need to expand to 20.1 times trailing 12-month earnings from today's multiple of 18.79 times earnings. Even if Apple's p/e multiple remained constant at today's multiple, the shares would trade at $374 per share.
Before anyone claims the eps estimates are in any way aggressive or ambitious, the estimated 67% eps growth estimate for the first two quarters of FY 2011 matches the performance of the first nine months of this fiscal year and the 70% eps growth estimate for the September quarter falls below the June quarter's results. Similar to the recent June quarter, for the September, December and March quarters there are no iPad sales in the prior-year results.
The release of the Apple iPad, continuing strong growth in iPhone unit sales, lower effective tax rates, the boost to revenue and the influence on margins from iPad and iPhone accessories sales all combine to push AAPL to $400 per share by May 2011.
Robert Paul Leitao


  1. Apple can't even hold $250 in this economy. If the economy remains fixed, so will Apple's share price. It'll never see $300, let alone $400. The hedge funds have Apple locked down and will probably only allow it to fluctuate in a range of $10 or so.

  2. @laughingboy48

    The market is dynamic, not static. The forward assumptions used in the examples are conservative, not ambitious. Even if the current p/e multiple remained static, it would represent a compression of the multiple relative to growth.

    In the September, December and March quarters all iPad and related revenue activity will have no prior-year comparisons pushing revenue and earnings growth higher over the next nine months than the rates of revenue and earnings growth realized in the past nine months or three fiscal quarters.

    The share price will rise at least proportionally to earnings growth over the next nine months.

  3. your estimate of $400 share price suggests an earnings growth of just over 17%, which seems in line with conservative predictions. Right now, AAPL share price seems 'fixed' to the DOW. Until US/Global economies settle, I also cannot imagine $300-$400 within the next 12 months. Having said that, i continue to pick up AAPL shares as they stagnate in the 240's! I am long, so I am optimistic about your $500 call within 3 years! :)

  4. As always, DT, your essay is highly intelligent and persuasive. But so far, at least, it seems like one of those logical paradoxes, in which the mathematical arguments appear almost irrefutable--except that they are somehow seemingly pragmaatically refuted by the fact that the AAPL share price has basically hovered around 235-265 since April, and is now at the lower edges of this range. So, for AAPL stock to hit even exactly 400 by May, which is no more than nine months away, it suddenly has to gain an average of 17 points every single month until then. AAPL hasn't had one month since April where it gained that many points, and yet now you predict it will average this kind of gain in every month--starting in September?

    Again, I can find no logical flaws in your essay--but of course the paradox is that whatever the traders make the price of AAPL, that's where it is, even if it is an illogical price or appears to be vastly cheap. Apple smashed earnings estimates in April, and the price went up in one day from 243 to 259 (Ah, that was a heady time!). But by the time of the next earnings report in June, AAPL had dropped to 251. Another strong earnings moved the stock to 261 that day...and now it is back at 245. Imagine what would happen if Apple only barely beat estimates in a quarter, much less did not beat them. I know that you are figuring that this cannot happen, although Wall Street could decide to greatly raise estimates if they felt like it, just so Apple would miss.

    I am thrilled that you are bold enough to make such a prediction, and Iam greatly hoping that you somehow will be proved correct. I would even settle for you missing by 20%, and having AAPL at 340 by next May! But--and I freely admit that I am not nearly as well versed in the laws and history of the stock market--you are making this prediction in the face of articles that state that the small investor is leaving the market; in the middle of an economic downturn which stubbornly lingers; with a Dow average which is moving toward its yearly lows, and which seemingly would have to hit 13,000 at least, for Apple stock to hit 400. My concern is that you have been brilliantly observing and analyzing the Apple "tree," but doing so without sufficient reference to the "forest" of the economic state of affairs which would seemingly have to obtain in order for AAPL shares to reach the lofty heights you predict for them. If people are fleeing the market; if the hedge funds find that they can make money daily by battering the naive and hopeful AAPL investors who keep thinking that the share price must simply reflect a reasonable multiple of the P/E ratio; in short, if "Wall Street" is comfortable with the stock price being where it is, why must it absolutely, necessarily go higher?

    So to sum up this long comment in the form of a question, are you so confident about Apple's future success that you can see this 400 figure without necessary reference to where the stock market is by next May, how the economy is doing, what the unemployment level might be? Is there some mathematical/economic model which necessitates that the multiple on AAPL stock must be around 20 by next May, rather than, say, 10? And if the multiple stays at 10--maybe simply because there are not enough investors willing and able to pay even $300 a share for Apple stock--does this necessarily have to be only temporary?

    (I'll write this comment as "Anonymous," only because I don't think I have the other necessary ID accounts, but I am a regular reader of the Apple Forum, and I continue to hold substantial shares of AAPL stock).

  5. Stock seems to be going in the wrong direction right now.

    Since the bulk (>70%?) of Apple's profits are in the iPhone right now, the market is wondering what Android growth and Windows Mobile 7 imminent entry may do to these profits.

    Same with iPad. While off to an incredible start, a tsunami of competitors is about to hit the beach in the next 6 months. So I guess folks are wondering what those will do to iPad's growth and profitability.

    I think it is anybody's guess as to how this may playout.My guess is Apple may settle to a 10%-30$ ultimate smart phone/tablet market share which is not a bad place to be, especially if they can continue to command premiums as they do with the Macs.


  6. I enjoy reading your predictions, now that we are getting close to May, and the i pad is a big winner, lets see if we can get to $400.00 by May.

  7. A few months late, but hey, it got there and with a pe of only 16!

  8. Rich:

    I currently expect $590 per share by May of 2012.