On September 11, 2010 I published a post titled FY2011 Analyst Estimates: Why AAPL Is Set To Pop. At the time the post was published AAPL had ended the week's trading at $263.41. Seven months later and with AAPL closing on Friday at $335.06, the share price is poised to again move higher and more than surpass the all-time trading high of $364.90 set on February 16, 2011.
Analyst FY 2011 Estimates
At Friday's closing price of $335.06 and a price-earnings multiple of 18.69 times trailing 12-month earnings per share, AAPL is trading at a deep discount to the company's 67% rate of eps growth in FY 2010 and the December quarter's eps growth rate of 75.2%. The current Wall Street consensus for the March quarter is revenue of $23.18 billion and eps of $5.33 per share or an eps growth rate of 60%. For FY 2011, ending in September, analysts are expecting revenue of $100.43 billion or about 54% revenue growth and eps of $22.97 or eps growth of about 51.2%. Both estimates are well below current rates of growth. In the December quarter revenue rose 70.5% and eps 75.2%. But the disconnect between the analyst consensus and the company's current rates of growth become even more dramatic for fiscal year 2012 that begins in late September.
FY 2012 Analyst Estimates
Expanding on a comment I made on a recent Apple 2.0 column titled AAPL: What Could Go Wrong?, the Street FY 2012 estimates for AAPL deny reality. The current Wall Street analyst consensus for FY 2012 is revenue of $117.95 billion and eps of $26.51. It's possible (and increasingly probable) Apple will meet or exceed those average estimates this fiscal year. In other words, the Street is forecasting zero revenue and earnings growth for next fiscal year. If Apple's December quarter rates of revenue and eps growth remain consistent, the company will report revenue of $111.20 billion and eps of $26.54 this fiscal year. For the March quarter I estimate revenue growth of 87% and eps growth of just under 90%. For the fiscal year I expect earnings per share of no less than $27.
To reach the Street's current FY 2012 revenue consensus in FY 2011 revenue would need to rise this fiscal year by about 81%. To reach the FY 2012 eps consensus in FY 2011, eps would need to rise this fiscal year about 75% or about the same rate of eps growth reported in the December quarter.
Apple's Dynamic Revenue Mix
To sustain strong revenue and eps growth over the next eighteen months and through FY 2012, Apple does not need to release additional new products. In the recent December quarter (and according to my estimates again in the March quarter), iPhone revenue growth exceeded total revenue from iPad sales activity. The company's existing product lines (now including the Apple iPad) already provide a strong foundation for revenue and earnings growth for at least the next eighteen months.
iPad revenue will surpass the revenue generated from Macintosh unit sales in the current June quarter, positioning the iPad as Apple's second highest revenue generator behind only the iPhone. The expanded domestic iPhone distribution that now includes Verizon network subscribers and the expected expansion of iPhone distribution in China sometime prior to the start of FY 2012 will sustain high rates of iPhone unit sales growth through the next fiscal year. The global market for the Apple iPad is in its early stages of development and iPad unit sales growth will also support strong revenue growth for the next several quarters. These factors alone suggest FY 2012 revenue of at least $165 billion and eps of at least $40, well above current Wall Street analyst estimates.
iTunes Revenue and Other Income
There are other sources of revenue and revenue growth for Apple that are commonly overlooked. As the number of iOS-based devices in the market continues to rise each quarter, revenue from the various iTunes stores is also on the rise and revenue growth from apps sales, ads and digital content will grow dramatically over the next few years. Further, the Mac app store has only recently opened. The return on Apple's cash and marketable securities (now totaling well over $60 billion) will rise as interest rates rise and add to the eps growth provided by growing device sales.
There is a definite halo effect among Apple products and at the epicenter of product sales are the Apple retail stores. In the December quarter retail store revenue rose 95% and new stores are opening each quarter. The Apple iPad appears to be a retail store magnet for customers. Since the release of the Apple iPad the rate of retail store revenue growth has surpassed the rate of revenue growth for the company as a whole.
Price-Earnings Multiple as a Forecasting Tool
Although price-earnings multiples are a popular measure for evaluating share prices, I consider it useful only for comparisons of companies in the same or similar industries. For example, Apple's price-earnings multiple shouldn't be compared to the price-earnings multiple of Amazon (AMZN) or Google (GOOG). These are two popular but misguided comparisons. However, I do use this measure to evaluate historical market valuations of Apple and to forecast share price movements based on a price-earnings multiple range.
On February 16, 2011 when Apple reached its current all-time high of $364.90 the shares were trading at a multiple 20.36 times earnings versus the price-earnings multiple of 18.69 at Friday's closing price. On February 1, 2011 I published a post titled Apple's P/E Multiple With And Without Cash In The Valuation. I expect AAPL to be valued within its current range of between 18 and 20 times trailing 12-months earnings. I don't expect the share price to trade below 18 times earnings or above 20 times earnings for extended periods of time. I do expect the share price to rise in concert with quarterly earnings and within the aforementioned price-earnings multiple range.
Why AAPL is Set to Pop
Analyst price targets are determined by anticipated earnings growth and market conditions. My current target price and share price forecasts reflect anticipated earnings growth at a pace similar to the December quarter's growth rate of 75% for the balance of FY 2011 and continued strong growth through Apple's FY 2012 beginning in late September. My current target price is $590 per share.
Current Street estimates forecast eps growth of about 52% in the current fiscal year and eps growth of about 16% in FY 2012. These estimates lead to a mean target price of $424.80 as of this writing and a price-earnings multiple of 18.50 times Street consensus of $22.97 eps for the current fiscal year. These eps estimates and target prices will be revised following the release of Apple's March quarter results later this month. On average the current Street eps estimates for FY 2012 fall below my expectations for Apple's performance in the current fiscal year and the upward revisions in Street estimates following release of the company's March quarter results will be dramatic.
I reiterate my current price target of $590 per share and expect the upward revisions in Street eps estimates and price targets to add fuel to the strong share price gains to be realized through the remainder of the current fiscal year.
Robert Paul Leitao