Apple Going To $1 Trillion?

November 27, 2014 0 Comments

Yesterday, its been announced that Apple (AAPL) has reached the $700 billion dollar valuation mark. $300 billion more than Exxon Mobile (XOM), the second largest company in the world. On Twitter I managed to make a sarcastic remark regarding the size of the largest company in the world.

This chart truly shows the gravity of the size between Apple, and at least 50 of the largest Corporations in the S&P 500.
Most Wall Street Analyst had given up on Apple’s ability to wow the market with new products, but the iPhone 6 and 6 Plus has been a great hit. Tim Cook even announced on a recent earnings conference call that Apple is “selling every iPhone that we make.” Apple is projected to sell more than 71.5 million iPhones during the holiday quarter, but then expected to see a major drop in overall demand. This is natural as more and more phones make it to the marketplace.

It would be interesting if Apple did actually sell that many phones within the upcoming weeks. Unlike the iPhone 5 (which was basically just a slimmer, lighter, narrow-screen, LTE ready version of the iPhone 4), the iPhone 6 managed to garner some support and excitement for current users and users who were still on the fence about the new phone. While I’m still skeptical about the iPad Air 2 and iPad Mini 3, there is still strong support for the new mobile payment system Apple Pay. We also can’t forget about the newest Apple Product to be released early 2015, the Apple Watch. Morgan Stanley predicts that Apple will manage to sell at least 30 million units of the smart watch. From what I have researched (and I’m not 100% sure) the asking price should be $349 dollars. This means that Apple can expect to see an additional $10 billion dollars in revenue.

Some may believe Apple becoming a $1 trillion dollar company a stretch, but if new products continue to impress we can possibly see the company reaching this level, perhaps beyond that. The company is currently trading at a multiple of 18x, which is currently trading below the industry average of 19.6 P/E and a market P/E of 19.1.

Apple is currently worth roughly $700 billion (or $697.9 billion as of today) and has 5,864.84 million outstanding shares, currently trading at $119 dollars a share. If Apple was to have a $1 trillion valuation in the future, with the current amount of shares outstanding, the stock would have to increase $170 dollars a share ( $1 trillion Valuation / 5.864 billion Shares ). At the current P/E Ratio, Apple would need to have $9.44 Earnings Per Share, which would give Apple a net income of $55.3 billion.

In 2014, Apple had total earnings of $39.5 billion with 6.49 EPS. To make 55.3 billion with 9.44 EPS, Apple would have to increase its earnings by 40%. This is completely doable. In 2012, earnings increased 60%, but dropped 11.2% the year after that. The increasing valuations of the company is completely dependent upon increasing earnings.

The street mainly focuses on earnings when it comes to Apple stock. As the chart shows, each the earnings disappointed investors, the stock fell. Despite the fact that iPhone sales increased dramatically in 2012, the new iPhone 5 failed to deliver market expectations. In 2013, iPhone sales dramatically slowed down. This was coupled with the iPad mini, which brings in less sales than the iPhone and the larger iPad models. We also can’t forget the iPhone 5s/5c, which did almost nothing to improve on the original 5 model. This can explain why earnings have slowed during 2013 and the latter part of 2014.

So how exactly do we get to $1 Trillion valuation? Assuming Apple has no other products it would ‘wow’ the market with, it could use Icahn’s favorite method of choice and engage in some share buybacks. However, just to get the company to a $1 trillion dollar valuation, this might not be the best use of the company’s cash holdings (not that it can’t afford it).

On the other hand, apple’s biggest driver in sales has been the iPhone, so that is the product Apple needs to rely on for growth. Remember, Apple would need to earn 55 billion in net income at current multiples to make a 1 trillion dollar valuation. It would need to sell more than 80 million iPhones in order to secure that value. It’s not impossible, but it can be extremely difficult. It’s certainly not something that can be done next year, but we will see what the Apple Watch has in store. I looks promising (to me, as I plan on purchasing one for myself); however, it may fail to impress the rest of the market. The best thing Apple has been good at is creating technology for average, normal people, not gadgets for geeks.

At this point, I guess it will take a couple of years and a couple more iPhone sales.

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