Tuesday, January 21, 2020

Fiscal 1Q 2020 Final Estimates

As of Friday's close of $318.73, AAPL is trading at a 22.0x multiple on my next-twelve-months EPS estimate (20.5x when excluding NTM net cash and dividends).

What's a fair multiple? I've dealt with this question several times before, so not going to dwell too much on justifying this move. I just wrote 6 long paragraphs on how P/E multiples are convenient but unreliable, a popular but widely misunderstood oversimplification of proper valuation theory, how multiples do relate to DCF modeling, its pitfalls (both PE and DCF), how I've tracked their empirical usefulness over the years, and on and on piling it with thick layers of much dull and dubious import. So I deleted all that (you're welcome).

My model's trailing multiple is up to 12x by now, and revised to aim for 18x over next 2-3 years (was going for 15x over 3-5y). So it goes higher faster. This remains relatively conservative (and likely rises too slow compared to market swiftness in rerating AAPL) given broad market forward multiples still higher: S&P 500 at 18.7, Tech 22, Cons. Staples 20, Cons. Disc. 22.3 (but beware all these are multi-decade highs). And peer mega tera cap tech still much higher.

Looking at the valuation chart below, clearly the projection path gets a bit compressed and thin and weird after the quick expansion comes to a screeching halt in two years, but leaves me some time to continue raising the target (I will never revise the trailing multiple as those are carved in stone) to 20x or more if Apple brings on the growth to justify it over the next couple of years.

I'll have to work something out next time for the top mini-chart stock changes scale as AAPL's gone off it. I've projected the stock stalling around $330 for a year or so until fundamentals catch up with the rerated valuation (i.e. P stable as E rises so fwd P/E falls back from 20 to 18). That's now shown in the chart with the last orange circle and $330 value decoupled from the 1y target ($299) and now aiming at the fwd 2y value (new row in valuation table!) at $329. I kind of hate how this gradual shift is making the model look slow to adjust, but doing a single-quarter step change just breaks everything and looks terrible in the chart.

In the very long term, when Apple truly matures and stops growing, I might have to go back to 10-15x, and that projected curve shape will inevitably go limp. This is objectively not the case for several years, though the market could decide as soon as this year or next that it believes so, and Apple would be "priced to doom" once again. Or a broad market correction —perhaps triggered by the ominous-looking US political environment— could bring it down, as it always does. We'll have to wait and see.

I've raised my estimates significantly for W/H/A due to much stronger than expected Watch and AirPods last couple of quarters suggesting meaningfully faster adoption by users over next few years, and a new wearable form factor longer term. Also boosted Services growth slightly on better visibility for Arcade and ATV+ new revenue streams, initially offset in part by hardware deferral during promotion.

I'm again expecting strong guidance for 2Q revenue and particularly gross margin next week, mostly driven by mix, lower component costs, and slight FX tailwinds. Buybacks estimated at $18-19b spent last quarter and $16-17b in 2Q, with $40-45b left in program by March. For cap return update in April I estimate ~$60b additionally authorized (to $100b+ but expect would use just $60-65b of that by March 2021 unless market offers some discount on AAPL) and 13% dividend raise to 87 cents paid quarterly.

Finally, I just want to say congrats to all AAPL longs who've stuck with it despite all the baseless FUD and ridiculous mudslinging through all these years. Well done!

Detailed estimates:

3mo ending Dec19  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   88.4     -  4.54
Apple guide low    85.5  37.5  4.25*
Apple guide high   89.5  38.5  4.66*
My estimates       89.2  38.3  4.64 (4.45b shares)

3mo ending Mar20  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   62.4     -  2.82
Apple gde lo (e)   62.0  38.0  2.79*
Apple gde hi (e)   64.0  39.0  3.03*
My estimates       63.9  39.0  3.05 (4.39b shares)

*EPS guidance ranges derived from other figures provided
 by Apple and diluted shares outstanding estimated by me

12m ending Sep20  Rev$B   $EPS
----------------  -----  -----
Analysts consens  276.3  13.14
My estimates      281.3  13.76

Timeframe  NTMfrom   $EPS  Y/Y  Mult  Val  $*   Div  Tot
---------  -------  -----  ---  ----  ---  --  ----  ---
Trail Val  Jan2019  12.31   1%  12.0  148  22  3.04  172
 Fair Val  Jan2020  14.48  18%  15.0  217  18  3.38  238
1y Target  Jan2021  16.10  11%  17.4  280  15  3.84  299
2y Value!  Jan2022  17.41   8%  17.9  312  13  4.32  329

*Cash per share balance net of debt and commercial paper

(click to enlarge)

F1Q20 Statements of Operations

Revenues  F1Q20e   F1Q19   Y/Y%
--------  ------  ------  -----
iPhone    53,035  51,982   +2.0
Mac        7,344   7,416   -1.0
iPad       6,537   6,729   -2.8
W/H/A      9,596   7,308  +31.3
--------  ------  ------  -----
Products  76,512  73,435   +4.2
Services  12,729  10,875  +17.1
--------  ------  ------  -----
Tot Revs  89,241  84,310   +5.8

Gross Margin Breakdown
--------  ------  ------  -----
Products  25,835  25,197   +2.5
Services   8,327   6,834  +21.8
--------  ------  ------  -----
Tot GM    34,162  32,031   +6.7
--------  ------  ------  -----
Prod GM%   33.8%   34.3%   -0.5
Svcs GM%   65.4%   62.8%   +2.6
--------  ------  ------  -----
Tot GM%    38.3%   38.0%   +0.3

Op Expns   9,651  8,685   +11.1
--------  ------  ------  -----
OpIncome  24,511  23,346   +5.0
Op Mrgn%   27.5%   27.7%   -0.2

OIE          215     560  -61.5
--------  ------  ------  -----
Pre-Tax   24,726  23,906   +3.4

Tax Rate   16.5%   16.5%   +0.0
Tax Prov   4,080   3,941   +3.5
--------  ------  ------  -----
Net Incm  20,646  19,965   +3.4
Net Mrg%   23.1%   23.7%   -0.5

Dil Shrs   4,451   4,773   -6.8
--------  ------  ------  -----
EPS        $4.64   $4.18  +10.9

Amounts in millions except EPS in dollars and ratios in %


Anonymous said...

Speaking as one person who went long after reading your analyses circa 2009, my thanks go back to you for giving me — and us — the confidence to stick with it.

Daniel Tello said...

Glad it worked out! Cheers!

Matt said...

"Finally, I just want to say congrats to all AAPL longs who've stuck with it"

Hang on, let me help you pat your back. Don't want you to hurt your typing appendages. :-)

My turn. I started buying Apple about the time they started opening Genius Bars. I had been a Mac user for over a decade by then (DTP & then *nix SA) and it occurred to me after visiting a shiny new Genius Bar with a defective PowerBook display driver, that there was finally a computer place that was making it easier for people to own and user their computers. I think I had read Peter Lynch by then and decided that since Apple treated me so well, that had to bode well for the company.

On 2000-11-03, I purchased 40 shares of AAPL @ $22.13 (not split adjusted). Nothing significant happened (with AAPL) for a couple years. When the price dipped I picked up another 100 shares in 2002 at $14.95. Then iTunes and the iPod. Then iLife and iWork. Apple was in the business of shedding the friction of owning technology. In March of 2004, I congratulated myself for selling all my AAPL at $26 for a tidy profit. I had hoped to buy them back at $15. Oops. In December I relented and bought back 150 shares at $67. The long run smoothed out the errors and lapses in faith and judgement. After a 2:1 and 7:1 split, those shares now worth a very nice house nearly anywhere.

Daniel Tello said...

Great story Matt, thanks for sharing. Nice job getting back on the train early on. Cheers!🥂

Anonymous said...

Another happy, thankful (and somewhat rich :) reader of your blog wants to say "thank you" for writing serious analyses over the years that kept me from selling my AAPL shares. Those last few months were what we all were waiting for, for such a long time. Thank you Apple, but thank you Daniel even more, because without your blog, I wouldn't have been able to enjoy this monster wave.

Daniel Tello said...

Wow, thanks for those very kind words! I've only been a tiny voice in a sea of loudmouthed naysayers with very few exceptions (a hugely influencing "evangelizer" of this Big Wave that first comes to mind is @asymco's Horace Dediu towering above just a few serious contenders like Cybart, Ritchie, DED and PED) so you should also credit and thank yourself for filtering all the noise and letting the few right voices come through, even if at times it felt we were being drowned. Yes, we've all been extremely lucky to have seen it from early on, but it also took discerning and a bit of courage. Congrats and thank you for listening.

Anonymous said...

Well done Daniel. Thanks for your help. Now up over $12 M. Thanks