Friday, July 24, 2020

Fiscal 3Q 2020 Should Be Last Without My Detailed Guesses

At the current price of $369.77, AAPL is trading at a 24.1x multiple on my FY21 EPS estimate (23.1x when excluding FY21 net cash and dividends).

Once again I don't feel comfortable publishing my detailed guesses for last quarter's numbers and product revenue breakdown. Hopefully I'll be able to share these details for the next report, as I expect Apple to resume providing quarterly guidance next week.

On valuation, I've extended the projected multiple expansion, now going to 20x (was 18x) over the next 2-3 years. The significant increase in buybacks since 2018 is one of the most important (though seldom discussed) drivers of the valuation expansion. However, after the next couple of years the cash balance will reach within $50b of the stated goal of being "net cash neutral over time" which means the buyback pace will need to slow down a bit to remain sustainable, due to cash flows slightly restrained by potentially higher taxes and some additional tax liabilities coming due in 2023-26.

The only way to maintain the current buyback pace would be through significantly faster growth of cash from operations than I'm currently projecting for the next few years. Additionally, given the current stock price, buybacks can no longer achieve the same hugely impactful leverage effect as when the stock was significantly undervalued, often at half-priced discounts. So a multiple stabilizing around 20x for the foreseeable future seems appropriate for free cash flow growth slowing into the mid-single-digits after the next 2-3 years.

Here's just a few specific estimates I can share:

3mo ending Jun20  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   51.8     -  2.03
My estimates          -  38.7     - (4.34b shares)