Saturday, July 17, 2021

Fiscal 3Q 2021 Final Estimates

As of yesterday's close of $146.39, AAPL trades at a 25.1x multiple on my NTM EPS estimate (24.5x when excluding NTM net cash and dividends).

As the scorching growth period due to last year's covid closures-impacted compares and subsequent extraordinary shifts in technology needs starts subsiding over the current and next couple of quarters, and given the past several months to almost a year of the stock stagnating, the market is likely ready to reassess Apple's future growth expectations and assign a corresponding valuation multiple that reflects this growth potential.

I believe a long-term base case of 10% EPS growth is sustainable for at least 3-5 years after my mid-term 2-3y more brisk projection detailed below (which stands in contrast to most analysts turning skeptical on much growth or even expecting declines for the next couple of years or so), driven by mid-high single-digits revenue growth compounded with continued pace of buybacks around $100b per year (and likely increasing after 2026).

Confirmation of the sustainability of growth through new product announcements as well as already announced and visible roadmap resiliency (5G, Silicon, Services adoption) over the next year should easily justify a 25x multiple on forward-looking earnings, so the valuation projection shown at a 22x multiple still has room for upside revisions.


Detailed estimates:

3mo ending Jun21  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   72.9     -  1.00
My estimates       74.2  42.1  1.03 (16.78b shares)


3mo ending Sep21  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   81.0     -  1.12
Apple gde lo (e)   78.0  41.0  1.05*
Apple gde hi (e)   82.0  42.0  1.16*
My estimates       81.1  41.6  1.14 (16.63b shares)

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


12m ending Sep22  Rev$B  $EPS
----------------  -----  ----
Analysts consens  368.8  5.34
My estimates      403.5  6.02


Valuation
Timeframe  NTMfrom  $EPS  Y/Y  Mult  Val   $*   Div  Tot
---------  -------  ----  ---  ----  ---  ---  ----  ---
Trail Val  Jul2020  4.84  47%  17.0   82  4.2  0.84   87
Frwrd Val  Jul2021  5.83  20%  20.1  117  2.7  0.91  121
1y Target  Jul2022  6.68  15%  21.4  143  1.9  1.05  146
2y Value!  Jul2023  7.44  11%  21.8  163  1.1  1.27  165

*Cash per share balance net of debt and commercial paper

(click to enlarge)

F3Q21 Statements of Operations Revenues F3Q21e F3Q20 Y/Y% -------- ------ ------ ----- iPhone 33,591 26,418 +27.2 Mac 7,709 7,079 +8.9 iPad 8,044 6,582 +22.2 W/H/A 8,028 6,450 +24.5 -------- ------ ------ ----- Products 57,371 46,529 +23.3 Services 16,840 13,156 +28.0 -------- ------ ------ ----- Tot Revs 74,211 59,685 +24.3 Gross Margin Breakdown -------- ------ ------ ----- Products 19,352 13,836 +39.9 Services 11,865 8,844 +34.2 -------- ------ ------ ----- Tot GM 31,217 22,680 +37.6 -------- ------ ------ ----- Prod GM% 33.7% 29.7% +4.0 Svcs GM% 70.5% 67.2% +3.2 -------- ------ ------ ----- Tot GM% 42.1% 38.0% +4.1 Op Expns 11,219 9,589 +17.0 -------- ------ ------ ----- OpIncome 19,998 13,091 +52.8 Op Mrgn% 26.9% 21.9% +5.0 OIE 56 46 +21.1 -------- ------ ------ ----- Pre-Tax 20,054 13,137 +52.7 Tax Rate 14.0% 14.3% -0.3 Tax Prov 2,808 1,884 +49.0 -------- ------ ------ ----- Net Incm 17,247 11,253 +53.3 Net Mrg% 22.7% 19.3% +3.4 Dil Shrs 16,779 17,419 -3.7 -------- ------ ------ ----- EPS $1.03 $0.65 +59.1 Amounts in millions except EPS in dollars and ratios in %


7 comments:

David Emery said...

How do you view the potential headwinds from legislative actions, both in the US and the EU?

Anonymous said...

What accounts for your expectation of an increase in buyback after 2026? 🍎🚗?

Anonymous said...


Thank you. I always enjoy reading your quarterly.

Do you model the future buybacks lessening the share count (less the new shares for employee compensation)? It seems likely you are. It would be interesting to see that. I've not found that illustrated elsewhere. (It's probably in your charts but I'm not recognizing it.)

I agree 25x is reasonable. When I apply that to $6.68, I get close to the $$165./share a year sooner. Either way, nice.

1y Target Jul2022 6.68
$6.68 * 25 = $167

The increasing free cash-flow being generated makes their goal to zero net cash, well, challenging. It looks to soon be $2B/week/annualized, if it isn't already.

Thx.

Daniel Tello said...

David, I contemplate a modest slowdown in App Store growth sometime next year, as I think Apple might preempt any legislative action by lowering their cut to 15%, and perhaps free for any developer making less than $1m. In any case I don’t expect much byte out of all this legislative barking. But really, who knows, I could be wrong.

Daniel Tello said...

Anon #1, there are some incremental future tax liabilities related to the deemed repatriation tax of 2017, which amounted to $38b in total and gets paid in installments over 8y but on an increasing schedule ramping up the installments as follows: 8% the first 5y, then 15%, 20%, and 25% the last 3y respectively. This ramp up offsets some of the FCF growth from current levels, but once the payments are finished in 2025 it represents an extra several billions to deploy in capex needs, other investments, M&A, buybacks and/or dividends. Note the final installment amounts to $9.5b in 2025.

Daniel Tello said...

Anon#2, yes the continued buybacks will definitely keep reducing the shares outstanding, but of course it depends at what price would the market let Apple get away with. Assuming the FV price path shown in the chart (gray line between blue and orange areas), I’m modeling around $500b spent over the next 5y which retires almost 3b shares, but the shares count comes down by about 2.4b, or about 14% of the current 16.7b. This is not evident from the chart, other than realizing that the slope or growth in EPS and thus modeled FV price path must be steeper than the slope/growth in net income or market cap, but then these aren’t shown in the chart so you’re correct about the effect not illustrated here or elsewhere. In any case, the effect is baked into the steeper path shown than what it would otherwise be without buybacks.

Right on about 6.68 and 167, I might be close to it by this time next year (when I go to 25x) if things don’t go of the rails by then (as many wary analysts now expect).

Correct, if the FCF keeps growing as expected and net cash target of zero is credible, no matter how challenging or pushed down the road, then there’s no way around rising capex, investments, buybacks, and dividends. It’s just math. Please note the last year unique combination of unprecedented crisis and uncertainty, which justifiably must have made management more cash-conservative than usual, with the ensuing extraordinary adoption of tech’s essential tools to cope with the new environment driving huge yet unexpected cash generation, and to find the net cash position at the same level as a year ago, rather than making us doubt of their net cash zero commitment should be seen as testament to their steadfast willingness to not lose any ground on this sweet, sweet battle for long term shareholders.

David Emery said...

Daniel, thanks for your responses (to me and the Anonymous brothers :-) )