Here’s What Apple Can Do to Reach a $1 Trillion Valuation

24 Mar 2015 | Author: | No comments yet »

Apple Inc just got its first $1 trillion valuation from Wall Street.

Cowen’s Apple analyst, Tim Arcuri, and Cantor Fitzgerald’s Brian White increased their price targets for Apple’s shares to $135 and $180, respectively. Analysts at Cantor Fitzgerald on Monday said they thought Apple’s shares – which are currently trading at about $127, valuing the company at $733bn – could soon be worth $180 each, which would value the iPhone maker at $1.05tn.In the first Wall Street note to value Apple at more than $1 trillion, analysts at the investment bank said the launch of the Apple Watch and growth in China will propel the technology company to new heights.

White has historically been aggressive with his Apple target but his EPS estimates are not much higher than Arcuri’s and both are above Street estimates. With his new price target, $180, he’s betting that within 12 months, Apple’s market capitalization (stock price times number of shares outstanding) will have passed $1 trillion.

The prospect of an Apple Car is another huge market, he thinks: ”Using IHS Automotive auto unit estimates and pricing from Kelley Blue Book, we estimate a $549 billion opportunity in the U.S. market.” Within the next five years, we believe 15-20% of the mobile subscribers in China could be candidates for a higher-end smartphone such as the iPhone, representing an opportunity for Apple that we estimate at approximately $133 billion to $178 billion. While Apple’s shares have not quite made up the almost $2 they fell in the last ten minutes of trading on Friday they are almost 95% of the way there at $127.80. (Note that I own Apple shares). Next month, Apple will enter its first new product category in five years, while media reports over the past several weeks have highlighted potential new areas of future innovation. Arcuri increased his fiscal 2015 EPS estimate for Apple from $8.84 to $9.21 (Street is at $8.61) based on stronger iPhone sales and his fiscal 2016 projection from $8.81 to $9.74 (Street is at $9.31). He is projecting that Apple will buy back $15 billion per quarter of its shares (which I think could be aggressive since it would require taking on much more debt with the biggest unknown being a tax holiday on overseas cash).

He is raising his price target from $115 to $135 which is based on a 11x PE multiple (ex-cash) on an average of his calendar 2015 and 2016 EPS estimates of $8.73 and $9.52, respectively (or $9.13). We believe the combination of these forces will drive the market to reward Apple’s stock.” Cantor Fitzgerald was already one of the most bullish analysts on Apple’s stock value potential. However, Cantor Fitzgerald also listed some threats to Apple on its path to a trillion dollar valuation, such as problems retaining staff and avoiding litigation with competitors.

White says his current model assumes Apple Watch sales of 20.6 million in the first year on the market and sales of 25.1 million in Apple’s fiscal-year 2016. Morgan Stanley analysts also reckon Apple shares could be worth $160 in a year, but Berenberg Bank, the most bearish, predicts Apple’s shares might crash to $85. The company’s share price has been boosted by better than expected sales of the iPhone 6, while ExxonMobil has been dragged down by a 50pc collapse in the oil price.

Unfortunately White continues to not take additional taxes into account on Apple’s overseas cash or cash to just run the business or for acquisitions. Depending on the assumptions such as fully taxing the international cash (I use a 30% incremental tax rate) and setting aside $20 billion to run the company the net cash drops to $12.62 per share. For his $180 price target White is expecting Apple to sell 25.1 million Watches in fiscal 2016, bring a TV to market with a premium price (unknown timing) and points to the rumored Project “Titan” car helping the company’s innovation buzz. He correctly points out that Apple’s growth rate is above the S&P 500’s while the shares have a lower PE multiple and cites that it is below the company’s historical PE multiple of 19x since 2007.

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