Sunday, October 23, 2011

Apple Price Target: $640 Per Share

Today I am posting my 12-month price target for Apple of $640 per share. This target price forecasts a 63% advance in the share price within twelve months and tracks slightly below my anticipated 66% growth in earnings per share in Apple's current fiscal year. 
Apple's Share Price Today
Apple closed trading on Friday, October 21st, at $392.87. At that price the shares traded at 14.19 times trailing 12-month earnings of $27.68 per share. The lowly price-earnings multiple stands in stark contrast to the company's 66% revenue growth in the fiscal year ended last month and the corresponding 82.7% growth in earnings per share. At the end of the fiscal year, Apple had cash and marketable securities of $81.57 billion or almost $87 in cash standing behind each outstanding share. The company's cash per share provides a strong foundation for share price appreciation at a rate in tandem with the anticipated rate of growth in earnings per share.

Apple's languid September quarter revenue growth of 39% and eps growth of 52% reversed the recent upward momentum in the share price.  While the quarter's outcome was indicative of Apple's revenue growth challenges in fiscal quarters immediately preceding the annual iPhone product refresh, it was not indicative of anticipated average rates of revenue and earnings growth in the four fiscal quarters immediately ahead.

The Cyclical Nature of Apple's Revenue and Earnings Growth
Each of Apple's four fiscal quarters have strong seasonal or product cycle influences on their respective revenue and earnings growth outcomes. For example, the current fiscal quarter (FQ1 2012) includes a fourteenth shipping week that occurs once every six years and encompasses the immediate post-Christmas shopping week. The quarter will also realize above average rates of revenue and earnings growth due to the release of the iPhone 4S early in the quarter. While FQ4 2011 was negatively impacted by the pending iPhone model refresh, the current quarter will benefit from the release of the new iPhone handset. 

Apple 12-Month Price Target
There were a number of challenges revealed in Apple's September quarter results I will address later in this column. Those challenges are amplified by a slow-growth global economy and increasing competition in the smartphone device market. Based on Apple's FY 2011 performance, anticipated global growth in iPad sales and the successful launch of the iPhone 4S, I've established a 12-month price target of $640 per share. 

This 12-month price target of $640 anticipates FY 2012 revenue growth of 55% and eps growth of 66%. It also anticipates a price-earnings multiple of no more than 14 times forecast FY 2012 earnings of $46 per share. 

Apple's Share Price Performance
The chart and table data below illustrate and detail Apple's share price performance over the most recent twenty months. It includes the share price as of Friday, October 21, 2011 and the closing share price on the first trading day of the month following the release of earnings dating back to February 1, 2010.

Cash Per 
Cash %
of Price
Feb 1, 2010
May 3, 2010
Aug 2, 2010
Nov 1, 2010
Feb 1, 2011
May 2, 2011
Aug 1, 2011
Oct 21, 2011

The chart and table data above indicate a gradual compression of Apple's price-earnings multiple over the most recent twenty months and at Friday's closing price a gradual rise in the percentage of cash per share reflected in the price. 

Cash As A Percentage of the Share Price
The chart below illustrates the rise in the percentage of cash reflected in the share price over the same twenty-month period. The September quarter results and the market's response to those results drove the price-earnings multiple to a twenty-month low and cash per share as a percentage of the share price to a near twenty-month high. I am using the current price-earnings multiple as a baseline for my 12-month price target of $640 per share. I do not anticipate further compression of the price-earnings multiple as cash per share continues to rise and the company moves off the September quarter performance low.
Apple FY 2011 Revenue Growth
I forecast a 55% rise in revenue for Apple in FY 2012. In FY 2011 the Apple iPhone and the Apple iPad represented 62.28% of the $108.249 billion in reported revenue. In the current fiscal year I expect the revenue contribution from the two product lines to reach 70% of the anticipated $168.50 billion dollars in reported revenue. 

Yesterday I updated my Apple product unit sales page to include quarterly unit sales results by product line for the most recent three fiscal years. The data and accompanying unit sales charts on the page provide an historical framework for my 55% revenue growth forecast. 

My unit sales forecasts by product line are detailed below:
The Apple iPhone
The release of the iPhone 4S, the realization of a new carrier agreement with Sprint and the continued expansion of the global reach of the iPhone suggest another strong year for iPhone unit sales. In FY 2011 iPhone unit sales rose about 81%. I expect an 80% unit sales growth performance from the iPhone line in FY 2012. In addition to unit sales growth generated by the new iPhone 4S handset and the new carrier agreement with Sprint, the iPhone 3GS, now in its third year of production and offered at the subsidized price of $0, will boost unit sales.
The September quarter fall off in iPhone unit sales indicates consumer sensitivity to Apple's annual iPhone refresh cycle. Although the original iPhone 4 is an attractive handset, it remains only a "placeholder" in the regions that are not participating in the initial launch of the iPhone 4S. Apple's ability to meet demand for the iPhone 4S in the first six months of the fiscal year and the manner in which Apple handles the transition to the next iPhone handset release will have a material impact on unit sales in the current fiscal year. The sooner the iPhone 4S becomes available in all sales regions, the better the total iPhone unit sales results.
The Apple iPad
At the end of the last quarter Apple chose not to fill global channel supply of iPads to within the desired 4 to 6 weeks of demand. This may provide an early boost to unit sales during the holiday quarter. However, I expect the 173% unit sales growth rate for the iPad that occurred in the final two quarters of FY 2011 to moderate dramatically in FY 2012. I'm targeting 80% to 85% iPad unit sales growth in FY 2012, contingent on the successful refresh of the product line in early spring 2012. 
Outside of the Apple iPad, a global market for tablet-style products does not currently exist. Apple is the undisputed global leader in this emerging product category. Electronic book readers have begun to proliferate, but the Apple iPad is a product that transcends the PC and is attracting customers from that market much more than it faces competition from limited-use book readers in a smaller yet somewhat similar form.  If there's one product that serves as a proxy for the growth and development of Apple's iOS multi-device product paradigm, it's the Apple iPad. Now that the sales of the Apple iPad have reached critical mass and regional sales expanded greatly last fiscal year, the fact that Apple is essentially establishing the market for tablet-style products will moderate year-over-year unit sales growth. 

The Macintosh
The Mac has turned in surprisingly strong sales results. The September quarter's 26% unit sales rise indicates the growing popularity of Macintosh computers in stark contrast to the unit sales growth rate of the industry as whole and an industry that is entering a phase of economic decline. I anticipate about a 20% gain in Macintosh unit sales in FY 2012 due to what I call the "Apple product mutual halo effect" and continued expansion of Apple's retail store presence. Apple has returned to the #3 spot among domestic PC makers and will continue to gain both domestic and global market share in the current fiscal year. The Mac's 22.5% unit sales growth in FY 2011 may moderate slightly in the current fiscal year due to increasing sales of the Apple iPad. 

The Apple iPod
Outside of the December quarter, the iPod's unit sales performance has become immaterial to the company's financial results. In FY 2011, the iPod line represented about 6.9% of the company's revenue total and 46% of that revenue was generated from sales in the holiday quarter. The Apple iPod touch, an iOS-based device, is the one bright spot for sales in the iPod product line.
The mass adoption of smartphones with digital music player functionality has reduced global demand for specific-use digital music players. Apple maintains a commanding lead in the global market for digital music players, but the iPod line's significant year-over-year unit sales decline may continue for at least the next few quarters. I anticipate a 20% unit sales decline in the current fiscal year. 

Challenges To Apple's Revenue Growth In FY 2012
The September quarter results, in particular, revealed challenges for Apple's management to confront this fiscal year. These challenges are in the context of anticipated 55% revenue growth and anticipated 66% rise in earnings per share over the next twelve months.

Apple Retail Stores
In the September quarter Apple's retail store segment realized only a 1% year-over-year rise in revenue despite a 12% increase in the average number of stores open in the quarter and with a 25% rise in the number Macs sold through the stores. The sequential rise in revenue for the stores was limited to a 2% gain even with a 43% increase in the number of Macs sold. Apple retail store sales are sensitive to the company's major product refresh cycles and expanded distribution of the Apple iPhone. The stores as both sales and service centers and the ability to convert high store traffic to higher sales at the stores is a challenge for management in the current fiscal year. 

Dependence On Asia-Pacific For Revenue Growth
In the September quarter the Asia-Pacific region's 139% revenue growth performance represented about 48% of the company's reported 39% rise in revenue. In the quarter the region represented 23% of total revenue. Continued global expansion into previously underserved regions of the world is an integral component of Apple's ability to sustain strong revenue and earnings growth in the years ahead. An anticipated agreement with a second major iPhone carrier on the China mainland may, in the short-term, increase the company's dependence on the region for growth.

Successful Global Launch Of the iPhone 4S
The iPhone alone may represent 50% of Apple's revenue in FY 2012 and the ability to deliver the iPhone 4S in ample supplies to all sales regions will have the the single biggest impact on the fiscal year's outcome. Although Apple is now a $110 billion revenue enterprise, product refresh cycles and management's ability to deliver new products on time and in quantities to satisfy initial demand remain the two biggest determiners of the company's rates of revenue and earning growth.

Apple At $640 Per Share
My $640 price target forecasts 55% revenue growth based on 80% growth in iPhone unit sales and 80% to 85% growth in iPad unit sales. Factored into the forecast is earnings per share growth of about 66% inclusive of 40% gross margins. I expect the gap between revenue growth and eps growth to narrow in the current fiscal year as management seeks to sustain strong unit sales growth through attractive product pricing. Management's successful launch of the Apple iPhone 4S is the first and most important step in moving the share price to this target.
Robert Paul Leitao
Disclosure: The author is long Apple shares.