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Apple Will Trade at $2,800 by 2025

Microsoft (MSFT) and Apple (AAPL) are two very different companies and face different situations when it comes to earnings and growth. Apple's EPS is consistently strong and shows an upward trend as shown below. Microsoft's earnings are wildly erratic, also shown below.

Apple EPS from 2005 to 2015

2005 - $0.26

2006 - $0.39

2007 - $0.65

2008 - $1.07

2009 - $1.46

2010 - $2.55

2011 - $5.01

2012 - $6.30

2013 - $5.76

2014 - $7.41

2015 - $9.19


Microsoft EPS from 2005 to 2015

2005 - $1.20

2006 - $1.17

2007 - $1.76

2008 - $1.87

2009 - $1.81

2010 - $2.35

2011 - $2.75

2012 - $1.95

2013 - $2.70

2014 - $2.48

2015 - $1.49

Apple's earnings are more predictable than Microsoft's. Apple's EPS has increased every year except 2013, in which there was a drop from $6.30 to $5.76 a share. Microsoft's earnings, on the other hand, are jumpy, with no upward trend. Microsoft's future earnings cannot be predicted. While the company might have some merit, lack of strong earnings shows that Microsoft's future earnings would be impossible to predict with any amount of accuracy.

Currently Apple is trading at $120.80 a share against earnings of $9.22 a share. If you paid $120.80 for a share of Apple, your initial rate of return would be 7.6% ($9.22 / $120.80 = 7.6%). Microsoft is currently trading at $54.16 a share against earnings of $1.50 a share. If you paid $54.16 for a share of Microsoft, your initial rate of return would be 2.7%.

In 2005 Microsoft had EPS of $1.20, while Apple had EPS of 26 cents. Ten years later in 2015, Microsoft has an EPS of $1.49 and Apple has an EPS of $9.19. For Microsoft you get an annual compounding rate of 2.19% versus Apple's 42.83% compounded. From 2010 to 2015, Apple's earnings grew 29.23% annually, while Microsoft's earnings shrunk by 8.71%. These two numbers tell you several different things about each company. The first is that Apple has had a lower rate of earnings in the last five years than it did in the 10-year period from 2005 to 2015. The question that needs to be asked is: What caused this change? What changed in Apple's business economics? The questions that needed to be asked for Microsoft's decline is what caused the earnings decline in the last five years? What changed in the company?

From 2005 to 2015, Apple's net income grew from $1.60 billion to $53.39 billion, or at an annual compounding rate of 42%. In the same time period, Microsoft's net income went from $13.06 billion down to $12.27 billion, having shrunk 0.62% annually for the last 10 years. If we project the EPS of Apple forward 10 years to 2025, using a 42% rate of growth, we would get projected EPS of $307.34 for 2025. So in 2025, Apple will have per share earnings of $307.34.

A review of the P/E ratio for Apple for the period of 2005 to 2015 shows that the stock traded at anywhere from 9.32 to 21.49 times earnings. Being conservative, we'll use the low end of the P/E range, 9.32 times earnings for our calculations. So our projected 2025 earnings of $307.34 a share equates to a projected 2025 market price for the stock of $2,864.40 ($307.34 x 9.32 = $2,864.40).

This article first appeared on GuruFocus.