This got me to thinking again about how high Apple is valued these days. With a share price at $123.28 Apple has a market capitalization of $710.22 billion. In theory, the market capitalization represents the present value of all of Apple’s future earnings. It’s kind of like a lottery winner deciding to take the lump sum payout versus getting checks for the next twenty years. Apple’s “market cap” is the lump sum payout of all their future profits. The stock price is simply the full market cap divided by outstanding shares of stock.
But very few people will actually discuss what their assumptions about the future are. Regardless of whether you think the stock is over or undervalued, you really don’t want everyone else to know. If you think the stock is undervalued, you keep it quiet so that you can accumulate more before the price goes up. If you think it’s overvalued, you hope no one else comes to the same conclusion so that the price doesn’t drop before you can sell.
I’ve run some quick calculations on Apple’s stock price and come to some interesting conclusions. At a $710 billion market cap, Apple in the next twenty years would need to average annual net sales of $411 billion per year for total twenty year net sales of $8.2 trillion. If the iPhone stayed at 70% of the mix that would be roughly 103 million iPhones per quarter. For the financial wonks out there, I’m assuming an annual cost of capital of 10% and that Apple can maintain at least a 20% net income margin.
In Apple’s most recent fiscal year of 2014, they generated total revenue of $182.8 billion. So they need to increase their average annual revenue by 125% in order to justify the current stock price. This 125% increase is already built into Friday’s $123.28 price so for Apple’s stock to go up from where it is now, they have to build on top of the $8.2 trillion of net sales over the next twenty years that this represents. Anything less, and the stock price will fall.
All I can do is identify the breakeven points, it’s up to the investors and managers to predict future performance. Can Apple do it? Are these reasonable assumptions? If I could answer questions like that I’d be sitting on a beach building sand castles.