This past Friday, a talking-head on CNBC declared that Apple (AAPL) is overvalued and will be going down to $200 a share. I have come to expect ignorance on TV, but as an Apple shareholder this display got my blood pumping. I wondered if the guy really believed what he was saying or if he had other motives for talking such nonsense. Was it fear mongering or lack of understanding?
He played the "multiple compression" card, saying that Apple should be valued at only 14 times earnings and he complained about the market cap for Apple being too big. So I decided to spend my 3 day weekend in the righteous task of combating ignorance - with the help of some simple but beautiful numbers:
Apple's 2011 Revenue Estimates
I believe these estimates to be conservative and they do not account for any new product lines that may be announced over the coming year. These numbers include the Q1 numbers announced in January as well as estimates for the next three quarters (fiscal 2011).
- iPhone revenue: 70 million units x $625 ASP = $43.7 billion
- iPad revenue: 26 million units x $600 ASP = $15.6 billion
- Mac revenue: 12 million units x $1313 ASP = $15.7 billion
- iPod revenue: 60 million units x $175 ASP = $10.5 billion
- AppStore, iTunes, Apple TV: $5 billion
- Software and Peripherals: $2 Billion
= $92.5 billion in fiscal 2011 revenue
This is below the average analyst estimate of 99.5 billion for 2011. Assuming a conservative gross margin of 37% on the $92.5 in revenue gives us $34.2 billion in gross profit. Assuming a 21% net margin (which is less than 2010) we get net income of $19.4 billion. With 921 million shares outstanding we get earnings per share of about $21. If we value Apple at only 14 times earnings we get $294. If we add in the $65/share in cash that Apple has we get $359. So if Apple meets these very conservative numbers and is valued at only 14 times earnings it should be higher in October (end of fiscal 2011) than it is now.
For the next quarter (Q2) Apple gave earnings guidance of $4.90 a share on revenue of $22 billion and a profit margin of 38.5%. As we know the company usually gives conservative guidance. For example: for Q1 Apple gave guidance of $4.80 a share - they ended up earning $6.43 a share.
In contrast to the conservative estimates above, let's look at a more optimistic scenario for 2011. $100 billion in revenue with net margin of 23% gives us EPS of nearly $25 a share. Times a slightly higher multiple of 17 we get $425 plus $65 in cash = $490. From these sets of numbers we see that Apple is at least fairly valued and most likely undervalued.
Playing the "multiple compression" card and saying that Apple should be trading at only 14 times earnings is weak, especially considering that Apple will be trading at less than 14 times what it will be earning this year. Also, if we subtract the 60 billion in cash (about $65 a share) we see that Apple is already trading not too far above the almighty 14 times earnings mark.
Perhaps the most naive thing of all is to assume that a company as innovative as Apple would fail to come up with any more big ideas this year or beyond. Sure, they might have some failed product launches in the future but I think we'll see a few more big hits from Apple over the coming years. Steve Jobs is sick, I know, but Apple surely has a great 5 year strategic plan in place. And probably a good 10 year plan as well.
The Apple of China's Eye
In projecting Apple's revenue growth, it is impossible to ignore China. In the first quarter of fiscal 2011, revenues from China grew to $2.6 billion, a 400% increase compared to the same quarter last year. For all of fiscal 2010 Apple's revenues from China were only 3 billion. Apple currently has only 4 retail stores in China but plans to have about 25 by the end of 2011, including some much larger stores to accommodate the crowds. It is also likely that a second Chinese carrier will get the iPhone in the next 6 months, which will also boost sales. I think that Apple could do 7 to 8 billion in sales from China this year, with many more years of growth ahead.
By selling mostly hardware, Apple has less trouble from the overlords in Beijing and seems to be in good standing, especially compared to rival Google (GOOG). The often discussed "halo effect" for Apple's products is alive and well and with the popularity of the iPhone and iPad in China, we can expect that sales of Macs and peripherals will follow. We should also see growing sales across the entire Asia Pacific region with Japan and South Korea being key markets.
Answering the Critics
I have no problem with people shorting a stock or predicting a correction but I'm also kind of a stickler for reality and facts. The reality is that Apple will continue to grow this year and beyond. Even the best stocks go through consolidations and corrections, and these are healthy, but as long as the fundamentals keep rolling, so will the stock. Apple ran from $320 to as high as $365 very quickly and could be due for a pullback but as an investor my focus stays on the company's operations, not weekly share price movements or the opinions of talking heads. And from what I can see, the fundamentals for Apple remain very strong.
