Saturday, August 11, 2012

Apple Price Target: $950 Per Share

Today I am updating my 12-month Apple price target to $950 per share. This price target represents an expected share price appreciation of 52.8% from Apple's closing price of $621.70 on August 10th, 2012. I expect share price appreciation, on average, to trail behind the rate of earnings per share growth over the next 12 months as Apple's massive market cap influences the share price performance and as the company's price-earnings multiple continues to contract.

Over the next twelve months I anticipate reported revenue growth of roughly 50%, corresponding earnings per share growth of about 60% and the aforementioned 52.8% rise in the share price value. I anticipate 12 months from today a price-earnings multiple of 14 times trailing 12-month earnings, suggesting a slight compression in the multiple from today's valuation of 14.61 times trailing 12-month earnings of $42.55 per share. For the four fiscal quarters ending June 29, 2013, I expect trailing 12-month earnings of about $68 per share. 

Apple's P/E Multiple and Cash Per Share
The graph below illustrates Apple's rising cash per share and falling price-earnings multiple over a 10-fiscal quarter period. The dates selected for all of the graphs in today's article are the first trading day of the month following the release of the company's quarterly results. The dates were selected to provide a uniform reference and to eliminate the impact of rising earnings multiples immediately preceding the release of quarterly results. 
No matter the rising cash per share, Apple's price-earnings multiple has been on a steady and indisputable decline over this 10-quarter period. I expect this trend to continue over the next 12 months. 

Apple will continue to trade at a modest multiple to earnings relative to the company's rates of revenue and earnings growth. All of the wishful thinking in the world and spirited comparisons of Apple's valuation to other large enterprises with more lofty earnings multiples will not change the outcome. 

As of Friday's closing price, Apple's market cap stands at nearly $583 billion. I expect over the next twelve months for the market cap to reach $900 billion. Already Apple's market cap is greater than the combined market caps of IBM, Microsoft, HPQ and Dell with about $40 billion in market cap to spare. Apple is among the most widely held equities on the planet and the company's massive market cap will influence the share price valuation no matter the modest price-earnings multiple relative to current rates of growth.

Cash As A Percentage Of Apple's Share Price
On August 1, 2012, Apple's cash and marketable securities total equaled just over 20% of the share price. This is in the mid-range of a 10-quarter trend. The graph below illustrates Apple's cash and marketable securities per share as a percentage of the share price since February 1, 2010. 

Apple's recently reinstated quarterly dividend of $2.65 per share and $10 billion, three-year share repurchase program can be amply financed from domestic operations. Apple's cash per share will continue to rise and cash as a percentage of the share price is likely to remain within the current 10-quarter range over the next twelve months. Apple will continue to generate cash at a rate of $1 billion or more per week even with the scheduled quarterly dividend distributions. 
EPS Growth and Share Price Appreciation
Since November 1, 2010, Apple's share price appreciation on a quarterly basis has lagged the rate of growth in earnings per share. I expect this trend to continue over the next twelve months. While a lagging share price performance relative to earnings growth is not usually a welcomed outcome, it provides support for the share price as Apple's overall market cap continues to rise at an impressive rate. 
Overall EPS Growth and Share Price Appreciation
From May 3, 2010 through August 1, 2012, Apple's cumulative eps growth has outpaced the cumulative share price appreciation. On a cumulative basis, I expect the gap to widen over the next twelve months. Apple is transforming into a more conservative investment choice with a current income component for shareholders seeking a mix of growth and income from their investment choices. 
Apple Remains In An Equity Class All Its Own
As a mega cap with attractive rates of revenue and earnings growth, Apple remains in an equity class all its own. Over the next twelve months more than 75% of Apple's revenue will be sourced from product lines that did not exist in the market as recently as six years ago and a rising percentage of the company's reported revenue during this time will be sourced from new and established markets outside the United States.

The Apple iPad is only now emerging from its nascent phase of global market development and through the coming holiday quarter strong competition to the iPad in the tablet-style product market does not and will not exist. 

The dynamic nature of the company's revenue mix and Apple's relentless geographic expansion lead to a continuing discount in the company's valuation relative to revenue and earnings growth. The potential of the iPad's unit sales growth and corresponding revenue growth can not be reliably gauged or forecast at this time. The iPad's global potential is understated in the company's current valuation of less than 15 times trailing 12-month earnings. 

There is not  a single competitor on the planet that develops its own hardware, operating systems and content distribution services on Apple's worldwide scale. As a global retailer, Apple benefits from the margin generated by its own bricks and mortar retail stores as well as the margin generated through the company's expansive online sales systems. 

There are now over 400 million iTunes customers with accounts backed by credit cards and Apple has delivered billions of dollars in sales revenue to developers from apps sales through the company's iTunes and iTunes-related app stores. The lack of similar and similarly-sized competitors leaves the company without a contrast or comparison for share price valuations. The market will continue to chase Apple's rising revenue and earnings outcomes for the foreseeable future.

Revenue and Earnings Growth Over The Next 12 Months
There are a number of large and virtually untapped international markets for Apple products including Brazil and much of the Americas. China has emerged as Apple's second biggest revenue country and is the only country outside the US to deliver more than 10% of the company's annual revenue total. I detail my unit sales growth expectations by product line below. Please see my Apple Unit Sales page at Posts At Eventide for historical Apple product unit sales numbers.

The Apple iPhone
The production ramp for the successor to the iPhone 4S will be on a scale not seen before even by iPhone standards. Consumers will wait on the purchase of Apple products in favor of acquiring the latest and most innovative products from the company. Demand for the next iPhone handset began building in the June quarter. I expect iPhone unit sales growth in the first two quarters of the coming fiscal year to surpass the 107% unit sales growth rate achieved in the first two quarters of the current fiscal year.

The Apple iPhone will be Apple's principal revenue driver over the next four quarters while the Apple iPad line will deliver the fastest rates of unit sales and revenue growth. Over the first three quarters of the current fiscal year, iPhone unit sales rose roughly 78% to nearly 100 million units. I expect the next iPhone to more than match that unit sales growth performance. The next iPhone's new form as well as the prospects for a carrier agreement with China Mobile increase the likelihood of superb unit sales growth for the next iPhone handset. 

The iPhone has been available on Verizon and Sprint for less than a two-year subsidized smartphone contract period and T-Mobile may be added as an iPhone carrier during this 12-month period.  The iPhone 4 will perform extraordinarily well as the product line's $0/$.99 subsidized offering and will serve as an attractive handset choice for consumers as Apple moves further into the pre-paid handset market. Currently, only AT&T offers the 3GS handset at the low, post-subsidy price of $1 or less. 

The Mac
I expect the Macintosh line of personal computers to deliver on average high single-digit  unit sales growth over the next twelve months in contrast to negative global unit sales growth for the PC industry. The introduction of the Retina display in the MacBook Pro line, an anticipated iMac refresh and the benefit to Mac unit sales from high Apple retail store traffic will deliver at least modest unit sales growth.

The global PC industry has entered an era of economic decline and the Macintosh line of personal computers will be among the few standouts in a fast-maturing industry pressured by the emergence of the Apple iPad and the lessening need for traditional PCs in homes and enterprises. 

The Apple iPad
Over the first three quarters of the current fiscal year, the iPad delivered 108% year-over-year unit sales growth. I expect iPad unit sales growth at or near 100% over the next four fiscal quarters. At this time the iPad is just emerging from a nascent phase of global market development and the recent introduction of the new iPad in mainland China will support strong unit sales growth in the current quarter. Over the most recent four fiscal quarters, Apple has sold over 55 million iPads and I expect iPad unit sales over the next four quarters to surpass 100 million units.

iTunes and the iPod Line
In all but the holiday quarter each year, the revenue segment inclusive of iTunes will deliver more revenue than is generated from the sales of iPod digital music players. I expect the iPod touch to increase its percentage of all iPods sold and I expect the sales of specific-use digital music players to continue to decline. I expect revenue from the segment inclusive of iTunes to rise more than 30% over the next 12 months.

Revenue Growth, Gross Margin and EPS Growth
Over the first nine months of the current fiscal year, Apple's average gross margin was 45% on each recognized revenue dollar. I expect gross margin to moderate over the next twelve months due the next iPhone's new form, a higher percentage of overall revenue generated by the Apple iPad and increased competitive pressure influencing Apple's level of pricing control. Still, Apple's gross margin over the next twelve months will remain the envy of competitors in the smartphone and tablet-style product markets.

Over the first nine months of the current fiscal year, Apple averaged revenue growth of about 51% and eps growth of just over 72%. Over the next 12 months I expect Apple to deliver similar rates of revenue growth but moderating gross margin will narrow the gap between the company's rates of revenue and earnings growth. I expect 12-month trailing earnings per share to reach $68 by August 1, 2013, following the release of the company's June quarter results. Please see my AAPL Results page at Posts At Eventide to view the company's quarterly results for the most recent fifteen fiscal quarters.

The Impact of a Stock Split
There's little doubt a stock split would have an immediate and positive impact on Apple's share price. But over the long-term the impact of a share split may be negligible or only slight. By this time next year I expect Apple's market cap to have reached $900 billion and over the long-term Apple's pace of product innovation and overall equity market conditions will have a greater influence on the share value than a stock split that may or may not occur over the next twelve months.

Over the next twelve months I expect Apple to deliver about 50% revenue growth based on the continuing success of the iPhone and iPad product lines. I also expect a moderation in average gross margin to deliver eps growth of about 60%. I anticipate a continuation of the gradual compression of Apple's earnings multiple to deliver a nearly 53% rise in the share price to $950 from the closing price of $621.70 on August 10, 2012.

Robert Paul Leitao

Disclosure: The author is long Apple shares