Apple’s market cap crossed $742 billion with Tuesday's close of $127.83. This is almost two times the market cap of Exxon’s $391 billion and Google’s $372 billion and more than double Microsoft’s $360 billion. Not surprisingly there is a lot of speculation about Apple getting to a $1 trillion market cap or 35% higher. Apple’s stock price would need to get to $171 based on my projected March quarter’s share count of 5.84 billion shares. There are sell-side analysts that have price targets close to $171 with UBS’ Steve Milunovich recently raised target of $150 and Brian White at $160 while Carl Icahn is now at $216. (Note that I own Apple shares and have sold Calls on my Apple shares).
The “easiest” way to $1 trillion is for a higher PE multiple
Apple earned $7.42 in calendar 2014, which is a 17.1x PE multiple on Apple’s current stock price and compares to the S&P 500’s 17.4x on last year’s earnings.
The Street is currently estimating Apple to earn $8.58 in fiscal 2015 (PE multiple of 14.8x) and the Street’s PE multiple for the S&P 500 is 17.1x for a 16% premium to Apple’s (I’m assuming minimal adjustment for Apple’s September fiscal year end vs. the market’s December). While I believe there are valid reasons for Apple’s valuation to be at a discount to the S&P 500’s for Apple to get to a $1 trillion market cap its PE multiple on fiscal 2015’s earnings would need to get to 20.0x. This is not impossible (but I consider unlikely) since the company’s fiscal 2015 EPS estimate could also increase which would lower the 20.0x PE multiple.
When looking at Apple’s fiscal 2016 EPS of $9.16 (an increase of 7% over fiscal 2015’s EPS) this is a PE of 13.9x on the current stock price. To get to a $1 trillion market cap the PE multiple would have to rise to 18.7x. It does seem like earnings estimates are on an upward slope which should mean the PE multiple would decline. Offsetting this tailwind is Apple’s revenue and earnings growth rate will probably be lower in fiscal 2016 vs. 2015 due to the huge success of the iPhone 6 and 6 Plus in fiscal 2015.
It does look challenging for Apple to get to a $1 trillion market cap in the next year or two based just on a higher PE multiple with current earnings forecasts.
Increased EPS at the current PE multiple
If the PE multiple doesn’t change then EPS would need to increase by 35% which for fiscal 2015 would be $11.58 and $12.37 in fiscal 2016. A number of assumptions such as gross and operating margins remaining unchanged could be challenging since Apple had the highest adjusted gross margins since the June 2012 quarter.
The company would have to generate $304 billion in fiscal 2015 (vs. the current $225 billion) or $316 billion in fiscal 2016 (vs. the current $234 billion) to get to these EPS numbers.
Taking a look at fiscal 2016 as the earliest Apple could even remotely get to a $300 billion revenue level the iPhone would have to be the driver. Unannounced products such as an Apple TV, which Carl Icahn uses to justify his $216 target and the rumored Apple electric car shouldn’t be taken into account.
To generate $225 billion in revenue during fiscal 2015 I’m projecting that Apple will sell about 232 million iPhones with an Average Selling Price (ASP) of $642 (it was $687 in the December quarter) and that it will account for 65% of Apple’s total revenue.
Assuming that the iPhone’s percentage of total revenue drops to 60% in fiscal 2016 (the Watch and Apple Pay contribute) and that the company has to generate $316 billion in revenue (35% more then the current $234 billion projection) the iPhone would account for $190 billion. If the iPhone’s ASP remains that same at $642 in fiscal 2016 (which I doubt) Apple will need to sell 295 million iPhones for fiscal 2016 or a 27% increase off a very tough fiscal 2015 compare (I’m projecting over 232 million sold in fiscal 2015, up 37% for the year). While iPhones should still increase its share since the 6 and 6 Plus have only been out for five months it is seeing its market share start to level off in some key markets.
Based on just increased revenue and earnings it again looks challenging for Apple to get to a $1 trillion market cap in the next year or two.
Lower share count should help
Since Apple started buying back its shares in the December 2012 quarter it has decreased its share count by 11% after spending about $73 billion. I estimate that at the end of the June 2015 quarter Apple could have $90 billion in excess cash when you remove $20 billion to run the business and pay additional taxes to bring the offshore cash back to the US. Assuming a stock price of $130 (slightly above the current price) Apple could buy back 692 million shares or about 12% of the current shares.
This would definitely help Apple to close the 35% gap to $1 trillion but this also assumes investors are giving zero value to the cash the company currently has which I find doubtful. Management would also have to decide to pay a lot of additional taxes or take on substantially more debt.
Combination of higher earnings and PE multiple
If Apple is able to continue to increase earnings, which overall I expect it to do but not at a consistent rate due to product launches creating spikes such as the iPhone 6 and 6 Plus and subsequent tough compares, the company’s market cap should get to $1 trillion.
Lets assume that half of the 35% increase in market cap comes from earnings and half from the PE multiple. Based on fiscal 2016 numbers (which investors will be more focused on late this year) Apple’s current 13.9x fiscal 2016 PE multiple would need to rise to 16.3x which may be doable. However if revenue and EPS grow at their current 4% and 7% in fiscal 2016, respectively, I believe having the PE multiple increase could be difficult. But lets look past that for now.
To get the remaining $129 billion increase in market cap from higher revenue and earnings again let’s look at the iPhone. Fiscal 2016 revenue would need to be $275 billion and the iPhone would have to generate $165 billion. With an ASP of $642 Apple would have to sell 257 million iPhones or an increase of 11% in fiscal 2016. Potentially doable but again off a very tough compare.
Overall it looks challenging for Apple’s to get to a $1 trillion market cap in the next year and probably two unless the company can substantially increase its revenue and earnings. 2017 is probably the earliest to expect the shares to cross this threshold.
