Could Apple Inc. Really Be Worth $1 Trillion?
Apple pushes towards $1 trillion
The Buffett-induced rally in Apple Inc.’s (AAPL) stock has push the company’s market cap to over $927 billion, causing investors, analysts, and just about every financial news reporter to speculate as to whether or not it will become the world’s first trillion-dollar company. Yes, Saudi Aramco claims to be worth $2 trillion, but of course they are going to say that, because if they say it enough, maybe someone will believe it. Amazon.com, Inc. (AMZN) and Google, I mean Alphabet Inc. (GOOGL), are also in the chase for $1 trillion, but Apple is the clear favorite, since it’s within spitting distance; maybe a couple more Warren Buffett interviews will get it there, but if that doesn’t happen, let’s see if the fundamentals can.
Apple’s Q2 Performance
Apple released its second-quarter earnings results after the market closed on May 1, and it was a good quarter overall, but nothing too flashy; here’s a breakdown of six notable statistics from the report”
|Metric||Q2 2018||Q2 2017||Change|
|iPhone unit sales||52.22 million||50.76 million||2.9%|
|iPhone sales revenue||$38,032 million||$33,249 million||14.4%|
|Total revenue||$61,137 million||$52,896 million||15.6%|
|Gross margin||$23,422 million||$20,591 million||13.7%|
|EPS – diluted||$2.73||$2.10||30.0%|
|Operating cash flow||$43,423 million||$39,804 million||9.1%|
Apple’s results were mixed compared with analysts’ expectations, which called for $61.19 billion in revenue and $2.69 in EPS, and while this would likely have caused weakness in its stock, but two other announcements by the company helped bolster positive sentiment; it announced a 15.9% increase to its quarterly dividend to $0.73 per share, and it announced that its Board of Directors approved a $100 billion share repurchase authorization, which would begin upon completion of its $210 billion share repurchase program in the third quarter. Lastly, Apple provided its outlook on the third quarter, projecting revenue in the range of $51.5 billion–$53.5 billion, which satisfied the consensus estimate of $51.72 billion at the time.
Dolla Dolla Bills Yo
Apple ended the second quarter with $267,226 million in cash, cash equivalents, and marketable securities, which it could use to acquire a handful of S&P 500 companies, but its most notable acquisitions over the last few years are the $3 billion purchase of Beats Electronics, the maker of Beats by Dre., in mid-2014 and its $400 million acquisition of Shazam, the song identification app, in late 2017.
Even though it could acquire a couple big companies to accelerate growth, which analysts love to speculate on, Apple seems committed to returning cash to shareholders in the boring way – share repurchases and dividend increases. In its second-quarter release, Apple proudly noted that its capital return program, which began in August 2012, had returned $275 billion to shareholders through March 2018, and that it “will continue to review each element of the capital return program regularly and plan to provide an update on the program on an annual basis.”
I think it’s safe to say that Apple’s streak of annual dividend increases will continue for the foreseeable future, and that it will continue to repurchase its shares, but that doesn’t get me excited.
Valuing its divisions
It’s not easy to put a value on a company, but we can try to by placing an appropriate multiple on the sales of each of Apple’s primary divisions – hardware and services, and the revenue numbers we will use are from its trailing-12-month period ended March 31, 2018:
|Category||Q3 2017||Q4 2017||Q1 2018||Q2 2018||TTM|
|iPhone||$24,846 million||$28,846 million||$61,576 million||$38,032 million||$153,300 million|
|Mac||$5,592 million||$7,170 million||$6,895 million||$5,848 million||$25,505 million|
|iPad||$4,969 million||$4,831 million||$5,862 million||$4,113 million||$19,775 million|
|iPhone, Mac, iPad revenue||$35,407 million||$40,847 million||$74,333 million||$47,993 million||$198,580 million|
|Other hardware||$2,735 million||$3,231 million||$5,489 million||$3,954 million||$15,409 million|
|Total hardware revenue||$38,142 million||$44,078 million||$79,822 million||$51,947 million||$213,989 million|
|Total services revenue||$7,266 million||$8,501 million||$8,471 million||$9,190 million||$33,428 million|
|Consolidated revenue||$45,408 million||$52,579 million||$88,293 million||$61,137 million||$247,417 million|
Division by division
Valuing the company piece by piece on a revenue basis will be met with a lot of disagreement. But here goes:
iPhone, Mac and iPad: These represent the bulk of the revenue. And here we are only giving it a 1x multiple. Why so low? I know Apple seems pretty enmeshed in daily life with the iPhone, But so did Nokia (NOK), Motorola, and Blackberry (Dell anyone?). The reality is that unless major innovation takes place, these products are ultimately generic hardware. Why doesn’t Apple dominate China? Because the technology to make a handset is just not that advance and copy-able at this point. I know 1x seems low, but that is what history tells us eventually happens.
Other Hardware: AirPods, iWatches, and HomePods we would actually give a higher multiple of 2.5x because they are younger and potentially higher growth – so we give this a 2.5 multiple (maybe a little generous).
Total Hardware Value: $237,103 million.
Services: These gems, which include the App Store, Apple Pay, and AppleCare, deserve a significantly higher multiple than the other divisions. We are giving this division a high 5x multiple for the high growth and stickiness.
Total Services Value: $167,140 million
Operating Value: $404,243 million.
Don’t forget the cash: Now, we have to add in the aforementioned cash and cash equivalents of $267,232 million, which we will give a very generous multiple of 1.5, which assumes we get a multiplier on the cash from acquisitions, higher dividends etc.
Total Trailing Twelve Month Value:$805,082 million.
Then we add the growth in the next 12 months of 7.5% on the topline and get a value of $865,463 million.
One Treeeeellion Dollars (in your best Dr. Evil voice)
So, could Apple really be worth $1 trillion? Sure. You could absolutely argue with my multiples for each business. And the growth could be higher (or lower), or you could be looking out 5 years. We just think, right here, right now, $1 trillion seems a bit high. And our fair value is only 6% lower than the current price.