Having shed about 25% of its market capitalization since last year, Apple Inc. continues to be mired in a bull vs. bear tug-of-war. Though the company’s valuation multiple sits at a rather cheap looking 11X this year’s earnings, there are few people arguing that its best days sit in front of it.
The company’s three core revenue generators, iPhone, iPad, and Mac all showed flat to down trends in its most recent quarter, both in terms of number of units and cash sales. iPhone alone represented more than 2/3 of revenue. The remainder of the company’s operating model, which includes things like Apple Watch, Apple Care, Beats, and other smaller revenue sources, contributed less than 15% of the top line.
With such a limited number of products contributing to such a preponderance of its business, many see Apple vulnerable either to just a plain slow down in iPhone uptake, the rapidity of consumer upgrades, or just to a global economic slowdown. On the flip side, the critical mass the company has achieved through the so-called Apple ecosystem continues to grow, and isn’t something likely to break down over night.
You might wonder why Apple trades at nearly half the valuation multiple of a company like Procter & Gamble (PG), which is showing similar slow growth trends. Answer is that PG has a huge product portfolio and a more reliable recurring revenue stream.
The $150 per share Apple argument
For Apple Inc. ‘s stock to reach $150 a share, it will require adding another $283 billion, yes billion, of market capitalization to its current value. To put that into real terms, there are only 5 other companies on the planet that are currently valued more than $283 billion: Microsoft Corporation , Facebook Inc , Exxon, J&J, and General Electric.
Though Apple certainly seems to be experiencing a lull right now, it would not be the first time that the company was somewhat counted out. After topping out at a split adjusted $100 a share in 2012, the stock lost better than 40% of its value before roaring back once again after bottoming in 2013, more than doubling by the Spring of 2015.
Of course relying on an investment thesis of “well it happened before and it will happen again,” is not exactly the strongest foundation to rest a case. Still, with the notion that Apple has a good track record of bringing disruptive products to market before or better than anyone else, I’d argue that the pipeline may be more flush than is currently expected. On the other hand, several Apple Watches won’t be enough to build to the mass (and profit) that iPhone has.
Since the market seems to be pricing in rather low growth projections, a surprise burst of revenue from a next-gen iPhone, better than expected global uptake of its entire product line, or a strategic alliance or acquisition, could bring about a surge of renewed market support. Even moderate earnings growth could lead to multiple expansion. Keep in mind that at current valuation, 50% expansion would equal less than a 17 multiple. Microsoft sells in excess of that right now. Facebook, about double that. Amazon – too speculative to even price in terms of bottom line output.
The $50 Apple stock argument
For the stock to drop 50% from current trades, there would need to be a near-term catalyst for widespread abandonment of the Apple ecosystem. Absent an abrupt development, one would need to envision other more slowly impactful scenarios. One would be Apple simply losing its innovative touch and being flanked by competitors’ disruptive advances over a stretch of time. Another might be a generally secular slowdown in the upgrade or demand cycle or slow margin degradation from lack of pricing power.
There might also be something else out there that we haven’t considered as of yet.
For those that think that’s an impossible scenario, I’d think again. If we turn back the clock 15 years, Apple was barely a blip on anyone’s tech-investment short list. Blasts from the past include Nokia, Motorola, Dell, and National Semiconductor. Of course the breadth of products, fan base, and captive ecosystem that Apple has built makes those companies look like small potatoes. Still, those companies seemed invincible also when they were at the top of their game.
Getting back to some quantitative thoughts, it would take substantial market cap erosion for Apple to get to $50. However, the exact same thing occurred in the 2012-13 downdraft I alluded to above. As I am long AAPL at time of writing, I don’t see that as a likely outcome, however.
But I don’t see $150 as likely over the next couple of years either. What I see is a company that has quickly matured, has tons of cash, and flexibility to build shareholder value during a period of revenue lull.
At the end of the day Apple probably doesn’t represent the best technology stock you could right here, but it doesn’t represent the worst one either.