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An Exercise Showing Apple's Fair Value To Be Around $300

May 07, 2018 4:21 PM ETApple Inc. (AAPL)BB, DIA, SPY, BB:CA240 Comments
DoctoRx profile picture


  • AAPL's Q2 showed sales and earnings, with strong internals for its growth products.
  • AAPL has been emerging as a value stock, and now that it is regaining control of vast amounts of cash, it plans a $110 B buyback ASAP.
  • With routine, 7% growth estimates (global GDP + 1-2%), AAPL can engineer its way without net debt to $22 EPS by 2023.
  • An 18X P/E in 2023 of current year's EPS, in line with the P/E of the S&P 500 today, implies a $400 price and an 18% CAGR.
  • Finally, the possibility is raised that AAPL can grow much larger via AR/VR breakthrough products.

Background - Apple may again lead the market up

Apple (NASDAQ:AAPL) may be doing it again, and the bears and doubters may have to watch it go much higher, in a way similar to its action several years ago.

In early 2010, Apple busted through the double top it set in 2007 (early in the year, then in mid-year). The price was around $28-29 in today's, post-split terms. By September 2012, the stock had more than tripled, peaking at $100. Even though new highs were set again in 2014/5, by June 2016, AAPL was back to the first 2012 high it had set in April. Thus, AAPL's emergence to recognized greatness, from before the Great Recession to 2010, saw a prolonged period of digestion. Then, AAPL provided leadership and led the market's (SPY) surge toward new highs, which for the SPY did not occur until 2013. As of now, something similar is happening. The SPY is churning, and AAPL is breaking out again to fresh all-time highs. AAPL's consolidation very roughly around $100 - the old high from Q3 2012 - is leaving that prior resistance level as just another stock market memory.

AAPL's leadership today is high quality: a Dow (DIA) stock setting sales and earnings records for its fiscal Q2, with ownership of the stock led by the world's most successful buy-and-hold value investor, Warren Buffett.

The calculations herein suggest that eventually, AAPL may peak much higher, and may feel the love not just from admirers of Mr. Buffett, but much more generally and with a modestly higher P/E and a significantly higher relative P/E to the SPY.

Introduction - purpose of the article

This article uses simple arithmetic to show that AAPL easily has about an 18% CAGR total return over the next 5 years if:

  • it

This article was written by

DoctoRx profile picture
Over 40 years of investing in individual stocks. Retired physician (cardiologist). Also retired from various roles in the US pharmaceutical industry. Main focus is on growth stocks, mostly biotech and tech, but with fundamental value considerations. Secondary focus on macro trends driving asset allocation.

Analyst’s Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Not investment advice. I am not an investment adviser.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (240)

xxxxxxxxxxxxxxxxxx profile picture
Baaah. Not sure what noise lemmings make?

Friday (yesterday)'s opening was pretty. Wiped out the whole week.
lost money profile picture
Just buy the stock and start making money....too much analysis over nothing....never follow the herd of sheep mentality.
I mean no disrespect, I'm curious as to your thought process. Wouldn't "just buy the stock and start making money" imply a "herd of sheep" mentality if one doesn't put any thought into why they were buying?
SuperPac profile picture
Apple I-phone X may be expensive but Apple stock isn't. Not even at 186 dollars.

Apple's diluted EPS in 2017 fiscal, 9.21. The consensus EPS for 2018 is 11.4, growth of 23% over 2017. Obviously, partly achieved via buybacks. 2018 PE expected is 16.3. How is that expensive? There are companies of lesser kind selling at 22 and 25 PEs. Why is Apple expensive at 16 plus?

The author's analysis is good. That's most likely Apple's trajectory over the longer term. Eventually it won't matter whether Apple reaches 400 in 2023 or 2024. The point is those who are long Apple will make a lot of money over the longer run, say, 7 or 10 years.

I am long Apple.
Great article and good case for Apple doubling in price within 5 years. I am more optimistic as I believe multiple mew products and services will be released and/or rumored about within that time frame adding to the value.
mit558 profile picture
Over the next 5 years AAPL can buy back 20% of its shares (incl. the current gagrantuan buyback authorization). This alone will increase substantially the PE ratio.

Correct me if I am wrong, but share buybacks are such an effective way to increase investor returns because:
- they prevent shareholders to invest profits in shares of other companies or just spend it. This way, the share buyback program increases the demand for AAPL shares, and therefore the shareprice.
- they improve the PE ration, a key metric many investors use to value stocks.
- they reduce the dividend expense.
DoctoRx profile picture
MIT, you are correct, in that the "E" in PE increases on a per share basis if the stock is bought back at an attractive price. What's attractive is determined by future results. I am guessing that AAPL has a strong road map for its product development and knows its on track to buy back what will look like underpriced stock as it rolls out better and better products.
AAPL is for years undervalued and still is, 30 P/E would be normal as is a $300 price tag. problem is that Apple is too big to grow and it is artificially keeping the price low with the dividends, I think it is to maintain a steady growth instead of having high fluctuations disrupting high-grade personnel compensations (engineers etc).
rpj82 profile picture
Doc, what is your opinion on impact of CWH (Camping World Holdings) earnings on stock price of THO today? thanks.
rpj82 - "...what is your opinion on impact of CWH (Camping World Holdings) earnings on stock price of THO today? thanks."

I don't know about Doc, or CWH or THO for that matte, but my opinion is that you should buy Apple (or more Apple). Don't make investing more complicated than it needs to be.
DoctoRx profile picture
RPJ, I will say that LCII had a more upbeat take on the state of RV sales at dealers. See its conf call transcript for details. Maybe CWH is an outlier?
rnsmth profile picture
I am long Apple, it is a double weight position in our portfolios (7.6% weight)

I watch the dividend. Share price fluctuates, dividend increases rapidly. That is what I like to see in a financially strong company.
Still kicking myself for not buying more @ $161 on 4/27/18. Long aapl since 2007.
idaustin profile picture
Re: “I further assume that AAPL's free cash flow approximately equals its earnings, that AAPL will return all of its FCF to investors going forward”

So, playing devil’s advocate amongst the chorus of cheerleaders here, if your assumptions re: fcf are theoretically correct, how can growth be 7%?

SGR = ROE x retention

Sounds like retention will be pretty close to zero in your model
DoctoRx profile picture
Idaustin, growth can be 7% organically, remembering that the company would continue to be investing in R&D and capital equipment, etc. So it would be moving forward, just not need to have a positive capital balance on the balance sheet.
TAS profile picture
BRK owns 5% of Apple. This is a big enough slice for me with all of their other quality holdings.

As a matter of fact, BRK with $120B in cash to buy on the next downturn, in addition to their current holdings, is an ideal holding.
LONGBULL+ profile picture
Fact : When asked whether he thought Berkshire's current holdings of Apple's stock was enough, Munger simply said, "No."

Munger, who said he does not own an iPhone, said the U.S. tech giant is "reasonably priced," strong and has a smart management team under CEO Tim Cook. "That's a very desirable combination," he added.

My guess is Berkshire will buy more shares they usually own 10% of a company so there is still 5% to go.................
ispank profile picture
For elderly, deal with technological devices are such challenging. They could not keep up with the constantly changing of techies. They can only handle simple, old fashion devices. Enough said.
skifun333 profile picture

I'm in my mid 60s and what you say is not true. Perhaps this could apply to someone 80+?
DocRx - I'm completely with you on the potential of AR, but skeptical about AR-enabled glasses (socially provocative) or VR headsets (leave you defenseless against real-world threats). I'd like to see AR delivered on a pocket-able iPhone. So I can point my iPhone at a shrub, bird, mountain, or gizmo and immediately learn whatever I want to know about it.

Thx for another great article!
DoctoRx profile picture
Tstab, you're welcome! Thanks for reading and your comment.

To clarify, the VR headset would be for home/office use, sitting in a chair or standing in a controlled environment. Any AR system for people on the go would be practical; Tim Cook has made it clear that the technology is only becoming ready for an AAPL-quality system. He's also indicated no clarity on timing or on certainty they will succeed in developing anything great.
xxxxxxxxxxxxxxxxxx profile picture
It has occurred to the author that if you are growing at 7% and your P/E
ratio is 18 then your valuation relative to growth is well overstated. This
is revealed by an age old metric called a PEG which in this case should be
1 and is 2.5. And 7% growth when your key product (the iPhone) is
actually declining is difficult. But suddenly it is all about services, I forgot!
DocRX, You may be right on Apple. Warren Buffett rarely buys anything unless there is a steep discount. That said, he does have a lot of excess cash and he may be buying things with less of a discount. But he generally only buys what he considers to be "great companies" and that may suggest that Apple's P/FCF adjusted for cash is low in relation to the prospects going forward, which you have so well illuminated. WD
DoctoRx profile picture
Wdchil, here's hoping! I agree with your thinking re WB; thanks for sharing.
Hello Doctor, yet another wonderful article, and an extra great comment thread here. Like I've said before I am overweight in AAPL, it is over 25% of my portfolio, and I remain super confident in the company's performance. I add whenever I can, I continue to DRIP, and I agree that we could soon see AAPL > $200, from there 300-400 seems plausible. Buybacks, Buffet and continued product sales success will propel this cash machine, for a long time. I also agree w/you about AR & VR possibly being huge for AAPL.... Or something we can't even imagine now, I imagine all the cash that AAPL is spending on R&D will bear fruit.
DoctoRx profile picture
Me66, thanks as always for reading and sharing your thoughts, and your positioning re AAPL: big congrats. I second your comment on the quality of this thread: thanks to all.
Technology has made tremendous leaps over the last 25 years, and APPL is at the forefront. The next 25 years are going to be unimaginable and APPL will still be at the forefront. Buy at every dip, and you'll be killing it.
DoctoRx profile picture
Lkgrge (which I assume refers to the truly lovely lake in upstate NY): you are my sort of believer! Even I don't look out 25 years, but why not?
25 years ago, Apple was going bankrupt due to CEOs trying to manage the company like a traditional manufacturer. As expected, they were failing miserably. On Jobs' return, the company went back to its roots and the turnaround was spectacular. Cook has maintained that non-traditional style and it is working ever better for the company. I expect the next CEO will also come from within the company as they have clearly proven that non-traditional is the new tradition. I only hope to live another 25 years to see Apple still at the top.
Vulpine - "On Jobs' return, the company went back to its roots and the turnaround was spectacular."

Boy are you right about that. If you (or anyone) is looking for a similar story, I've been writing for two years now that it may be Twitter. Since Dorsey retuned, I've noticed that he's executing the Steve Jobs playbook almost to perfection. I loved it at 16 and it's definitely pricy above 30, but if he continues down the path he's on, it's 'watch out above'. Each quarter confirms that they remain on that path.
This year is the last chance you can grab Apple below $200
RiverGarden - While I do not like to time Apple stock prices, I believe its a fool's errand based on previous experience, in this case you are likely 100% correct based on the fact that wearables and services are growing so strongly, as well as the anticipation building up over the stongest and most diverse lineup of iphones, and products in general, ever.
Not to mention...with each month we inch closer and closer to more info trickling about about future potentially blockbuster endeavors including movie/music content, self-driving, AR/VR and glasses.
Damoni Kennard profile picture
With ~18% CAGR you hit $1000 after 10 years.
DoctoRx profile picture
Could happen if AAPL can get a mega-success w AR/VR.
Damoni Kennard profile picture
Even if they don't, I'm still fine as long as they outperform the S&P500.
sterlingguy profile picture
IPhone equals invention of the car. Android system stinks by comparison and is impossible to use unless you don’t need an intuitive interface. Apple Corporation does it bigger, better, faster. What’s to stop this trend? Nothing.
DoctoRx profile picture
Sterling - tell it like it is!

Android, a stolen product, is being cut down to size. AAPL has immense runway as iOS, the "real thing," gains market share for years to come.
Great report, and some other 'what ifs' that come to mind to traject the stock up further could be:
- designing out Intel's X86 chips from its Mac line, and by using ARM architecture entirely, it could very, very closely integrate its iOS with OS X, providing an even better closed eco-system;
- since 5G standards are more open than LTE and previous generations, it could design substantially its own modems, and get away with just paying a much humbled QCOM a simple royalty for the priviledge;
- as gaming becomes more and more prevalent, I wait for the day when Apple decides its own graphics design capability can be extended further into inhouse chip design, and in which case, it could easily boot out AMD's GPUs currently in some Apple products.
DoctoRx profile picture
Alpine - thanks as always for reading and for the kind words.

I am in complete agreement with your detailed points. AAPL is absolutely moving in that direction. Those who say this is not a great tech company are simply wrong IMHO. AAPL puts tech subservient to the entire product, so what people see is so well-finished they overlook the tech brilliance, not limited to increased semiconductor etc. content from AAPL itself, and focus on the "shiny object" part of the story.
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