Saturday, June 13, 2015

Wall Street Discounts Apple’s Revenue and Earnings Trend

On Friday, June 12th, Apple’s share price closed at $127.17. This represents a valuation of 15.72 times trailing 12-month earnings of $8.09 and about 14.10 times the current Wall Street consensus earnings per share estimate of $9.02 for the fiscal year ending in late September.

As I will illustrate in this article, I consider today’s valuation of Apple to be low and I expect the share price to move significantly higher over the next six months. 

Apple’s Revenue And Earnings Trend
Following a five-quarter period of single-digit revenue growth that ended in the June quarter one year ago, Apple’s revenue has risen on a year-over-year basis by nearly 25% over the most recent three fiscal quarters. The graph below illustrates the rebound in Apple’s revenue growth rates and the beginning of the company’s current fast-growth epoch that will continue through next fiscal year.
Apple’s earnings per share have risen nearly 39% over the same nine-month period. The graph below illustrates the return to earnings per share growth that began in FQ1 2014 and the acceleration of the earnings per share growth rate over the most recent six fiscal quarters.
Apple’s Net Income And Gross Margin By Quarter
Since the nadir of 36.87% gross margin in FQ3 2013, Apple’s gross margin has rebounded to 40.78% in the recent March quarter. Rising iPhone unit sales have delivered the company’s highest gross margins in three years and the company is now riding down the cost curve on the larger-screen iPhone handsets. The iPhone 6 series handsets will deliver high gross margin through the two-year handset cycle. The graph below illustrates the company’s gross margin recovery over the most recent seven fiscal quarters.

The graph below illustrates the rising percentage of revenue flowing to the company’s net income line since the release of the iPhone 6 handsets. Fast rates of revenue growth combined with higher gross margin have dramatically increased the percentage of revenue flowing to the net income line. The sharp rise year-over-year in the percentage of revenue flowing to the net income line will continue through the end of FY2015.