Tuesday, July 27, 2010

Taking Stock of Apple Stock:Revenue Projections

Ben Vested

Apple announced blow out earnings just a week ago but it is never too soon to think about what future quarters will bring.

Here is a revenue/stock price analysis of AAPL for the next year by quarter  BEFORE adding in announcement of new products.

The only really meaningful assumptions made are as follows.

1, No major downturn to the current world wide economy
2, No major supply constraints for iPhone and iPad
3, Near past trends in other products are good predictors of the near term future performance
Apple is currently selling for 19x trailing 12 earnings and has pre-anounced revenue of $18 Billion for Q4 (FY10 ending Sept 30) 

2009 coming into 2010 was confusing there was iphone ipod and Mac. 2008-9 economy sucked, The Stock Market sucked. The iMacs were due for renewal, iPod had reached saturation and The deferred accounting for iPhone made understanding earnings going forward. As a result Apples earnings were difficult to predict and a good hunk of that growth had to have built in earnings for Product X.

This year is much clearer. The economy sucks but is at least stable and Apple has shown itself to be reasonably recession proof. Legacy products (Mac and iPod) represent about half of Apples business and are stable mature businesses with some growth. The other half of Apples business are two new products very early in their sales growth. (these two halves add up to about 90% of the business) iPad and iPod.  While the iPhone is the coolest gizmo ever the iPad makes it clear that iOS and mobile computing in general will change our computing paradigm.

One open question about Apple revenue is not demand but supply, Can Apple supply the scads of iPads and iPhones the market wants?  White iPhone aside I think Apple can meet most iPhone demand but iPad demand caught Apple a little flatfooted.  I think supply of iPad will be somewhat constrained for "a while". 

Current demand for iPad is far in excess of the 1 million a month Apple spoke of (earnings call) as their pre-release manufacturing bogey.  I suspect that as a prudent company Apple built in some headroom in capacity when they made their order so while it may be difficult to triple supply as they may have to replicate an entire line/factory/expertise (or any of a million other things) I suspect that it may be possible that they were (or will in short order) able to significantly increase, even double capacity in the near term. (Total speculation)

These Tables represent EPS and the indicative price per share over the next year given a set of income projections that while bullish are reasonable. (I will go more into the model at a later date). The P/E scale is based on the highest and lowest P/E's Apple has traded at over the last 5 years. What is NOT in the model is whatever product i"X" Apple has planned for market over the next year.  So while my analysis is bullish for the products I modeled, it is conservative in that the model does not include any revenue from as yet unannounced products.  It is impossible to know what the revenue impact of for example a new Apple TV offering or a completely redone (please please please) Mobile Me service.
Earnings Per Share Stock Pricing Matrix
YOY Revenue GrowthQuarterTrailing 12 Earnings per share15202535
61%Q3 201013.28199266332465
68%Q4 201015.00225300375525
83%Q1 201116.88253338422591
43%Q2 201117.85268357446625
48%Q3 201119.56293391489685
Dollars per Share Earnings Multiple Matrix
YOY Revenue GrowthQuarterTrailing 12 Earnings per share200300350400
61%Q3 201013.2815232630
68%Q4 201015.0013202327
83%Q1 201116.8812182124
43%Q2 201117.8511172022
48%Q3 201119.5610151820
Take it for what it is worth. But on a historic growth basis Apple does appear to have significant room to grow.  Assuming Apples share price remains at 20x earnings, in that case Apples share price would increase 47% over the next year.  There are a couple of price barriers to Apple stock and they are related. The first is issue with growth of the share price as we look at it going forward. While I think the earnings growth for the next year or two is locked in. It is not clear what will happen next The other issue is market cap.  Apple has a market cap second only to EXXON. Fricken EXXON.

Lastly, this is not an analysis or rebuke to Apples cash position since it is stellar the cash has little effect on the stock price (Although it is hugely diltutive to ROA). and it is a good thing that they are cash flow positive 1.3billion dollars a month.

That said should pay a dividend. by the end of fiscal 2010 Apple will have ~$50 Billion in cash and marketable securities. There is no rational reason for the company to have this much cash. None.

Really Lastly. The Author is long APPLE. You need to do your own math and most certainly don't follow the advise of semi anonomous internet talking heads to buy your stocks. As a buddy of mine tells me a lot. Don't invest in ANYTHING you do not understand. for most of us that does not leave much.

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