Wow, Apple (AAPL) sure has been quiet of late. While the S&P 500 and its tracking exchange traded fund, SPY (SPY), have risen about 20% from the summer lows of last year, Apple is up over 20% since the beginning of this year. Still, while few stocks garner as much attention as Apple has over the last several years, Apple's recent disappointment at the Mac Conference has kept the world's largest company out of the news of late.
I recently wrote several months ago, when Apple was trading at around $640 a share, that the stock was likely to sell-off because the company lacked near-term catalysts. I also wrote more recently that the stock was likely undervalued at around $530, and that in the $550-600 range the stock would likely consolidate over the next couple months. While all traders have good calls and bad ones, these calls were correct.
Apple has consistently traded at around 11-12x an average estimate of next year's likely earnings, and the stock has stayed in the $550-600 range for much of the last several months. What is interesting to me about Apple's current valuation is that despite the company consistently beating analysts' estimates over the past couple years, it wasn't until the recent blowout fourth quarter earnings report and the company's decision to initiate a buyback and dividend plan that Apple's multiple finally expanded by about 20% over the last several months. While the world's biggest company has consistently grown its net income by over 50% the last several years, and recently doubled its revenue in China this past year, Apple has traditionally traded at 9-10x an average of estimate of next years likely earnings the past couple years.
While, obviously, analyst estimates have repeatedly been wrong by a wide margin in forecasting Apple's earnings, Apple analysts have now revised these individuals' estimates considerably, and the company currently has around 70% of the tablet market, and over 50% of the smartphone market. Apple's long-term growth is obviously hard to predict. Still, given that the company recently increased iPhone sales by over 88% in the last year in China, and has over 50% of the highly competitive smartphone and tablet market, Apple's growth rate is likely to slow severely over the next couple years.
This is why I question the premium multiple that Apple traders and investors are giving the company of recent. As I wrote in my recent article discussing Apple's dividend, Apple has around $100 billion in cash on its balance sheet, the company generates around $30 billion a year in free cash flow. The company's current dividend and buyback plan are $9 billion over three years. Unfortunately, for income investors, Apple generates only around one third of its revenue in the United States, and only around $30 billion of the company's cash is in the U.S. Apple also is paying a net tax of 5% on its foreign income, and a net tax of 35% on its U.S. income, so repatriation would be very costly. Obviously, since Apple's strongest growth has come abroad in the past couple quarters, the company is likely to reinvest a higher percentage of its international revenue as well.
Even if Apple increases its free cash flow by over 30% in the next several years, the company will still generate less than $15 billion in free cash flow in the United States, and Apple has consistently been comfortable returning about a third of its annual free cash flow to shareholders with dividends and buybacks. Also, if Apple's growth rate begins to slow at a moderate to accelerating pace, the company will likely need to increasingly allocate more capital to its fairly limited buyback plan to support the share price.
To conclude, Apple's growth rate and cash flow are very impressive, but the company still has little incentive to repatriate significant cash to the United State with the corporate tax rate in the United States higher than rates in nearly every other nation where Apple is a significant presence.
Apple's growth rate will likely be strong near-term, but the company's market share in the smartphone market and tremendous recent success in China will likely limit the company's near-term growth prospects and similarly sized companies such as (GE) and Exxon-Mobil (XOM), faced significant hurdles maintaining growth when these companies reached the market cap Apple has grown into today. With Apple's best growth likely to come in China and other emerging markets in the next several years, the company will likely continue to reinvest most of its international revenue abroad.
While Apple's strong balance sheet and significant free cash flow are impressive today, if the company needs to increase its buyback plan even moderately as growth slows, the company will likely have limited capital in the U.S. for the dividend.