Posted by Shyam Moondra
Recently, when Apple Inc. reported its financial results for the first quarter of 2012, the investors were in total disbelief. Apple’s revenues grew by a whopping 60% and profits almost doubled from last year’s first quarter. And yet, the current Apple stock price is about 7% lower than what it was before the earnings were announced, at a time when the overall market is hovering near the recent 12-month high. How can this anomaly be explained?
Per Yahoo Finance, based on the estimates of 50 analysts that follow Apple, the average 2013 sales revenue is projected to be $195.47 billion (20.4% increase over 2012) and the average EPS is projected to be $53.93 (15% increase over 2012). At the current share price of $603, the trailing PE comes out to be 14.68 (compared with S&P 500 PE of 15.06) and forward PE comes out to be a meager 11.18. Since the financial crisis of 2008 and subsequent severe recession, Apple has consistently produced record profits and yet its PE today is the same as what it was more than ten years ago. So the question is why Apple doesn’t get the respect it deserves.
The investors find Apple’s astronomical revenue and profit growth as surreal, given its huge size. With the current market capitalization of $564 billion, Apple is the most valuable company in the world. Apple has amassed a cash hoard of $110 billion, exceeding the national budgets of some of the industrialized countries. Only a couple of weeks ago, at a share price of $644, the market cap swelled to over $600 billion, a distinction achieved by only two other companies in the history - Microsoft and Cisco (they both have, however, declined in value over the recent years because of dramatic slowdown in their growth rates). If Apple were accorded the same FPE as those of other high-growth technology companies, as the following Table shows, the Apple share price would be in the range of $655 to $4,635.
Company
|
2013
Revenue Growth
|
Forward
PE
|
Apple
Share Price
|
Amazon
|
28.2%
|
85.93
|
$4,635
|
Baidu
|
41.6%
|
20.91
|
$1,128
|
Priceline.com
|
21.0%
|
19.52
|
$1,053
|
Ebay
|
14.5%
|
15.16
|
$818
|
Google
|
19.0%
|
12.14
|
$655
|
Apple
|
20.4%
|
11.18
|
$603
|
Microsoft
|
8.5%
|
10.52
|
$567
|
Cisco
|
6.0%
|
10.09
|
$545
|
The above Table shows that even though Apple is still growing at twice the rate of those have-beens, Microsoft and Cisco, the market seems to peg the Apple stock as if it were already a has-been. This is in spite of the fact that, in the foreseeable future, most analysts project that Apple’s growth would be around 20% a year, twice the average rate for S&P 500 companies. For the first quarter of 2012, based on the reported decline in the number of iPhones sold by Verizon and AT&T, many analysts feared that Apple would miss the consensus estimates for the quarter. However, iPhone’s initial penetration of the Chinese market more than offset the softer U.S. market, thereby yielding unexpected blowout profits for the quarter. Presently, Apple is in the process of negotiating a deal with China Mobile, the world’s largest mobile telecommunications company, which would open up a huge new market for several years to come.
Apple represents an unparalleled success story in the corporate world. It started out as a small computer company (even today it has only a tiny 5% share of the worldwide computer sales). However, thanks to its genius founder, the late Steve Jobs, it came out with an array of fascinating electronic products that quickly dominated the consumer market. Apple's ingenuity lies in seamless integration of hardware and software to provide enhanced user experience. Its iPod decimated SONY's Walkman music player that was all hardware and lacked iPod's software capabilities that enabled the users to not only store music but also digitally organize the music folders for quick access to any specific song. That success was quickly followed with iPhone with touch screen capabilities that revolutionized the smart phone business, putting Nokia, Research in Motion, and Motorola on the defensive. They also introduced iTunes that totally changed the way recorded music is marketed and sold. Finally, Apple came out with the hugely successful tablet, the iPad, for which consumers would wait in lines running for blocks in major cities around the world. It’s almost as if Apple could do no wrong; their executions of all product development, production, and distribution phases were flawless.
The question now is what could Apple do to make its stock realize its full and fair value, which many analysts believe to be around $1,000 within the next couple of years. The following are the ways to unlock the Apple stock value:
- Keep producing exciting products and impressive profit growths. A new iPhone 5 is rumored to arrive some time this year. An initial iTV could be the next new product which will combine hardware and software to provide tremendous user experience and make the present TVs obsolete. Next year, we could see the new iPad 4 that will keep the sales of immensely popular tablet in high gear for a few years. The iPad market is rapidly expanding beyond the traditional enterprise applications to include military, education, and health care segments. Apple's iMac continues to grow at a faster rate than the overall computer market. Apple is also aggressively working to create an iCloud ecosystem with all of its product lines working together seamlessly. On the recent quarterly conference call, Apple's CFO Peter Oppenheimer said "we have got some fabulous new products in the pipeline." There is every indication that Apple will continue its exceptional growth saga for at least five more years.
- Recently, Apple announced that it will use part of its cash hoard of $110 billion to pay dividends to common share holders and also buyback its own shares in the open market. This amounts to roughly $10 billion a year. Apple has the resources to do better than that; next year they should increase the dividend by at least 10% and make more substantial buybacks (to the order of 10% of the float rather than 1% that they just announced). These actions will give a significant boost to the stock price.
- Apple should consider splitting the stock 10:1. While the stock split doesn't directly increase the value of the investors' holdings, the split does broaden the shareholder base. Besides, it's much easier for the stock to go up from $60 to $90 rather than from $600 to $900. A stock split would also demonstrate the management's confidence in the continuing growth of the company.
- In the next few years, as the company continues to grow, the market cap would also grow to the $1 trillion range. A company of that size would naturally become less efficient and difficult to manage. Apple should start thinking about splitting the company into two or three separate companies (which would lead to higher growth) vs staying as a single company that keeps producing compatible products under the umbrella of a cloud technology ecosystem.
Disclosure: The blogger is long on the Apple stock.
