Saturday, September 25, 2010

AAPL Target Price: $450 Per Share

At Friday's closing price of $292.32, AAPL has risen about $29 or 11% in two weeks. The good news is there's much more room for the share price to rise. On September 11th in a Posts At Eventide entry titled FY 2011 Analyst Estimates: Why AAPL Is Set To Pop, I noted the modest analyst estimates for FY 2011 that begins this weekend. Wall Street pros are continuing to be conservative in their price targets. Readers of this blog know I have a long-standing price target of $400 by early May. According to Philip Elmer-DeWiit at  Apple 2.0, perennial Apple bull Gene Munster has recently raised his price target to $390 per share and for good reasons.
In evaluating and forecasting Apple one must look beyond the individual product lines and look at the performance of the company as a whole. In fiscal year 2011 Apple may have a second consecutive year of 50% revenue growth and 60%+ growth in earnings per share.
To put Apple's growth in perspective, in fiscal year 2011 revenue from iPad device sales and iPad-related accessories and services may equal or exceed Apple's total reported revenue in fiscal year 2007. Overall, in fiscal year 2011 Apple may reach $100 billion in revenue, a four-fold increase in revenue in four fiscal years. The Apple iPad is obviously a significant factor in Apple's revenue growth. But consider the Apple iPad may represent 25% of the company's FY 2011 revenue take. 
Assembling all of the product and services pieces should yield price targets well above current Wall Street projections and well beyond today's trading range. Continuing analyst upgrades and price target revisions will fuel further gains in the share price no matter the run up in the share price over the past two weeks. 
Apple's two fastest growing product lines (the iPhone and the Apple iPad) are having a pronounced halo effect on Mac sales. Mac unit sales growth for fiscal year 2010 will meet or exceed 30%. Even with the release of the Apple iPad, Mac unit sales will continue to rise at an impressive pace in fiscal year 2011. The iPad is taking revenue share from PC sales in the sub-$1,000 market, a market Apple barely addresses with the $999 MacBook. 
At AAPL's closing price on Friday of $292.32, the shares are trading at a multiple of 22 times trailing 12-month earnings. I expect this multiple to remain fairly consistent over the next twelve months. I am raising my AAPL price target to $450 per share. I expect that share price to be reached no later than early November 2011.

The Importance of Apple Retail Stores
Apple is continuing to open new retail stores (about two dozen new stores or about an 8% increase in stores in the September quarter alone) and these new stores are a magnet for Apple device sales. In the June quarter retail store sales represented over 16% of Apple's reported revenue and generated $593 million in retail margins. In the same quarter the company reported a 73% increase in store revenue and a 57% increase in store foot traffic. The stores hosted over 60 million visitors during the three-month period. The September quarter results for the retail stores should be no less impressive. 
Due to the increasing importance of the retail stores to growth in product sales and Apple's overall margins (Apple keeps the retail margin on products sold through the stores), it's not a matter of "if" Apple will continue to innovate and release new products. It's a matter of "when" new products will come to market and how the new products will integrate with the company's multi-product iOS paradigm. New products are necessary to maintain high foot traffic to the retail  stores and the sales of accessories and services. 
Content Sells Devices
This was proven by the meteoric rise in iPod unit sales following the opening of the iTunes store in 2003 and the release of iTunes for Windows. This was confirmed by the dramatic rise in iPhone unit sales following the opening of the Apple app store and the release of the 3G iPhone in 2008. It's now become an axiom following the release of the Apple iPad and its spectacular sale performance while in limited supply in its first quarter of commercial availability. The iPad came to market with more than 200,000 apps compatible with the product and the full complement of entertainment content on iTunes for consumer consumption.Future Apple products will further exploit iTunes content and/or enhance the delivery of content to consumers. Necessarily iTunes and the iOS factor into all new product decisions.

The need for Apple to release new products is quickly emerging as the global footprint of Apple retail stores expands and foot traffic to the stores becomes increasingly important to revenue and earnings growth. The retail margin on products sold alone necessitates growth in retail store sales to propel earnings higher and keep the pace of earnings growth at FY 2010's impressive pace.
The Changing Personal Computer Market
The Apple iPad iPhone product lines along with the Apple iPod touch product lines are destroying the economic underpinnings of the sub-$1,000 PC market. The Macintosh product line is positioned to exploit changes in consumer attitudes towards personal computers. Households no longer need multiple PCs. With the massive consumer migration to smartphones and emergence of tablet-sized devices, the market for conventional PCs is about to shrink. From a unit sales perspective, notebook PCs have been the primary source of unit sales gains in a market in economic decline. With only one PC needed in most homes, the Macintosh becomes a more attractive purchase option. Macs integrate superbly with Apple's line of handheld digital devices and the development of Macintosh applications and iOS apps that work in concert with one another such as solutions from the OmniGroup and Filemaker represent a rich field for developers.
In the $1,000+ PC market Macintosh computers are aggressively priced and now have the advantage in compatibility and device integration over competing PC products. The release of the Apple iPad, the global popularity of the Apple iPhone and the push into handheld gaming with the iPod touch positioned as a leading gaming device all make the Mac more attractive as the choice for homes with one personal computer to serve the needs of each household member. Macs sales will continue to rise as the industry itself begins to falter due to shrinking margins and changes in consumer needs.
In this blog post I am heralding an accelerating decline in the economic relevance of personal computers and the PC industry. I am stating we are at the beginnings of a long-term decline in PC unit sales following the emergence of the Apple iPad and competing tablet-sized digital devices. 
Macintosh unit sales growth should continue at a 20%+ pace in FY 2011 even as consumers continue their migration to handheld digital devices. Revenue generated from Mac sales provides the foundation for extraordinary overall revenue growth from the Apple iPhone and Apple iPad sales activity. The importance of the Macintosh to Apple's revenue and earnings growth should not be overlooked. For the first nine months of fiscal year 2010, Mac unit sales alone represented 28% of Apple's reported revenue exclusive of sales of software and peripherals.

I reiterate my forecast of $100 billion in revenue for Apple in FY 2011 and via of this post I'm issuing a revised price target for AAPL of $450 per share. This target is based on anticipated FY 2011 earnings of $24 per share.

Robert Paul Leitao


  1. Great article rpl! I really thought the part about the changing personal computer market was right on and isn't something we see talked about very much. I think you could have talked more about apple's surging growth in international markets and with that you could actually make your $450 target sound low. Also imagine the markets gaining some momentum in the middle of next year and I even see some expansion of the multiple. I'm not shy to let you know I have a $550 target, which I think is actually conservative if all these forces start to work together.

  2. Ted:

    Thanks for the feedback. I intend to cover international sales activity exclusively in an Eventide post following 4th fiscal quarter results. I'll be looking at the full fiscal year results and the international sales trends.

    You bring up one of the challenges we face forecasting Apple's revenue and earnings growth from a US perspective. With much of Apple's sales growth occurring in international markets, we have fewer anecdotal reports and less empirical data from which to base observations and forecasts.

    On your price target of $550, we'll see what happens. I'm not seeing that price on the near horizon, but longer term as Apple continues to expand its product lines and retail store presence, it's a real possibility.

  3. Robert,

    I'd love to read your (current) comprehensive forward looking views on the competitive risks Apple faces (inclusive of Android, Chrome, Win 7 mobile, HP-Palm, Nokia, and RIMM)....

    I think you're one of very few who could provide great clarity and insight. I know one reader/investor who would appreciate your post.

  4. Yeah, sure. Amazon stock is moving up faster than Apple stock over the last few weeks. There is almost no conceivable way that Apple can continue to sell more products. Nearly every product they offer creates overwhelming demand by consumers. iPhones, iPods and iPads are selling like no tomorrow. Apple continues to open up retail stores all around the globe and those stores are packed just like the recent openings in China.

    Still, Amazon must be selling more Kindles than all of Apple's products combined because Amazon's share price is rising even faster than Apple's share price. The Kindle is doing more for Amazon than all of Apple's products combined is doing for Apple's share price.

    Amazon's share price will probably double before Apple's share price even get's to $350. Apple will fizzle out long before reaching $450. As it is, it's barely managing to hold it's own even with all that demand for its products. The hedge funds are holding Apple back and basically control Apple's share price.

  5. g5user1usa:

    Your views are not supported by facts. Amazon refuses to release Kindle unit sales numbers. What leads you to believe Amazon sells more Kindles than Apple sells iPads or is selling more Kindles than Apple is selling in units of all of its products combined? There isn't an analyst around who would credibly make such a statement.

    The fact is Apple is more than twice the size of Amazon (measured in revenue) and exponentially more profitable. Your claim that because Amazon's share price is on the rise it means that Amazon is selling more Kindles than all of Apple's products combined is contrary to the facts known from the SEC filings of both companies. In the June quarter Amazon reported revenue of $6.566 billion versus $15.7 billion for Apple. In the same quarter Amazon reported net income of $206 million versus $3.253 billion for Apple.

    Can you provide some factual evidence to support your claim Amazon since the beginning of July is somehow selling more Kindles than Apple is selling in all of its product segments combined?

    Please check the facts.

  6. Robert, I think g5 was being extremely sarcastic, at least that's how I read it.
    Your posts are great, I have made a lot of money because of them. Thanks

  7. David:

    Thanks for the feedback. It's challenging to determine what's a sarcastic remark and what's a lack of knowledge or understanding. I've read comments posted at other online venues suggesting there's a relevant Amazon v. Apple comparison. I don't see it.

    Not to take anything away from Amazon's success, but the company is an online distributor seeking to change its revenue model through the sales of electronic books versus printed books. Amazon is attempting to commoditize the electronic book market in favor of margin on Kindle sales.

    But Amazon is working in a market in which it already dominates and the Kindle is no match for tablet products such as the Apple iPad.

    To my knowledge Amazon does not release Kindle unit sales numbers and there's no way Amazon's electronic book reader will outsell the Apple iPad. It's not that the Kindle is a bad product, but it's essentially a single-use hardware device developed to sell electronic books to readers.

    Amazon is a successful enterprise, but not on the scale of Apple.

    I'm glad you appreciate my work.