OK, I give up. Apple $1,000?
|More from WSJ.com: |
• The War on Dividend Yields
Tax Refunds Move to Debit Cards
• Still Renting After All These Years
Eighteen months ago I questioned whether Apple stock could keep up its amazing momentum: "Over the past five years the stock has gained an average of 56% a year, an extraordinary achievement," I wrote. "For the shares to rise at a similar rate from here would take it to $1.25 trillion by 2014. Even to grow at a more modest 20% a year would take it to $333 billion—more valuable than Exxon Mobil (NYSE: XOM - News) today and twice the value of Procter & Gamble (NYSE: PG - News) or Johnson & Johnson (NYSE: JNJ - News). Anything is possible, but that's quite a bet." For Apple investors, I felt, the easiest gains were surely over.
Since then, of course, Apple has made me look like a total idiot. The shares have more than doubled. This week, helped by the news that the iPhone is coming to Verizon, they touched a new all-time high of $344. The company is now valued at $315 billion, more than P&G, J&J or any company other than Exxon Mobil. Far from slowing down, the shares have actually speeded up. I calculate the growth rate works out to an annualized rate of 67%.
As for the underlying business: Sales are booming. Net income soared 70% last year. Competitors have been in disarray. You have to wonder what companies like Nokia (NYSE: NOK - News) and Microsoft (NASDAQ: MSFT - News) are doing. For Apple, each quarter has been a blowout. We will see a new iPad shortly. Earnings next week, if the past is any prologue, will beat expectations.
Even fund managers Jeremy Grantham and Ben Inker, those skeptical souls at GMO, are fans: Apple is now the eighth-largest holding in their "Quality Equity" portfolio. As GMO thinks the stocks in this portfolio are by far the best bets in the market, that's quite an endorsement. (Never mind that Microsoft is their second-biggest holding.)
Time for me to eat a double helping of humble pie. What flavor? Apple, naturally!
I'll have it with some crow. And a side order of oeuf au visage.
So what about that five-year prediction? Can Apple keep going? Will it reach $1.25 trillion in value by 2014? Or anything close?
Only time will tell. But if Apple stock were somehow able to continue booming at the same astonishing rate of the past 18 months, it would hit $500 by October and $1,000 by February 2013.
Ridiculous? Absurd? Impossible? You make the call. You often see musings like this right at the peak of a stock's fortune. Wouldn't that be ironic? But the options market is already taking bets that Apple will top $500 in the next couple of years. The $500 call options, good till January 2013, cost $20 per share.
In "Through the Looking-Glass," Lewis Carroll's White Queen was able to imagine six impossible things before breakfast. Let's content ourselves with one: Apple $1,000. What would it look like? What would have to happen for the company to get there?
There are about 920 million Apple shares outstanding. So at $342 per share, the company has a market value of $315 billion. When you net off cash and liabilities, the enterprise value is about $290 billion.
At $1,000 a share, the value would be around $900 billion.
Right now Apple trades at around 17 times forecast earnings. If that rating stays about the same, then a market value of $900 billion would have to be supported by net income of about $53 billion.
Is that achievable?
Last year Apple earned a more modest $14 billion. That had soared 600% over the previous five years.
The company has 40% gross profit margins. You may think that's ridiculous, but ours is not to reason why. People line up around the block to pay up. Individuals with a perfectly good iPhone will stand in line for six hours—updating their Facebook page—so they can be among the first in their town to own a new one. Customers are even happy to pay an extra $100 for an iPad with extra memory, even though they know the cost of that memory is maybe a dollar or two (if that). These people are not price-sensitive. They might be better described as price-immune.
Last year Apple spent just 2.7% of revenues on research and development, and 8.5% on sales and overhead, and paid just under 25% income tax on profits. If these ratios stayed the same, in order to generate $53 billion in net income Apple would need to earn about $70 billion before tax. And that, in turn, would require about $240 billion in revenues.
Naturally, that's subject to all sorts of unknowables. Would overhead fall in proportion to sales? Could profit margins be sustained? As Apple makes more and more money overseas, what would happen to its average tax rate? We'll have to see.
Annual sales of $240 billion would be nearly four times last year's figure. According to Thomson Reuters (NYSE: TRI - News), analysts have penciled in $89 billion in the year ending this September, and $104 billion in the year after that, with net income rising to $18 billion and $22 billion. They think revenues could hit $160 billion by 2015.
How could it get to $240 billion?
Apple's most mature market by far is the U.S. Sales here made up the lion's share of the $25 billion net sales reported for the Americas division last year and the $10 billion sold through the company's stores.
Here in the U.S., you can hardly move these days for Macs and iPhones—outside of an office, anyway. I was recently on an Acela train in the Northeast. It was pretty full, and many people were using a laptop or a tablet computer. On a whim I walked the length of the train: Nearly all the computers were Apples. And while sales of the iPad may be just getting going, some will come at the expense of Macs. Last year, according to company filings, Apple earned an average of about $660 revenue per iPad, compared to nearly $1,300 per Mac.
If Apple were to double its U.S. sales from here, that would add another $30 billion or so to revenues. If it also achieved a similar level of sales in Europe—they were about $19 billion last year—that would add another $40 billion. While we're about it, let's imagine it could also raise sales in Japan from $4 billion to about $10 billion. These magnificent forecasts would take total sales to around $130 billion.
That would leave the remainder, $110 billion, to come from emerging markets like China, India and Brazil. Yes, their economies are growing quickly. Yes, they are populous. But this is still quite a stretch.
In dollar terms, China, India and Brazil's economies are still, in aggregate, much smaller than that of the U.S. And the gap in per-capita income is vast. That of the U.S. is about $47,000. That of Brazil is about $10,000, and China $4,000. Are these countries likely, in total, to spend four times as much on Apple products as the U.S. does currently?
You make the call. Me? I'm too busy enjoying my Apple pie.
Write to Brett Arends at firstname.lastname@example.org