Fiscal 4Q 2012 Final Estimates [Updated 10/24]

[10/24 UPDATE: In light of information revealed during the October 23 event and, to a lesser extent, widely reported PC industry weakness, I'm revising iPad and Mac estimates for Q4. I now estimate 4m fewer iPads and 0.5m fewer Macs (mainly inventory drawdowns) results in about $3b less revenue and $0.80 lower EPS. Gross margin percent goes up about 70 bps due to mix. I'll be posting a detailed revision later today (here).]

As of Tuesday's closing price of $661.31, AAPL is trading at a 10.1 multiple on my forward EPS estimate (8.1x ex-cash). Valuation remains attractive despite the 9.1% increase in share price and downward revenue/EPS estimate revisions for FY13 of 8.7/10.4% over the last 3 months.

Detailed estimates below:

3mo ending Sep-2012   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         34,000     7.65
Analysts consensus     36,270     8.88
Deagol estimates       39,136    10.48

What is Apple Worth? Part 1: Regarding Large Numbers

A Big Lottery

“Peter tosses a coin and continues to do so until it should land "heads" when it comes to the ground. He agrees to give Paul one ducat if he gets "heads" on the very first throw, two ducats if he gets it on the second, four if on the third, eight if on the fourth, and so on, so that with each additional throw the number of ducats he must pay is doubled. Suppose we seek to determine the value of Paul's expectation.”

This is how Daniel Bernoulli rephrased a problem nagging a tight circle of mathematicians almost 300 years ago. The issue is that, if you go by the mathematical expected value of the winnings you end up with an infinite value for the lottery: you have 1/2 probability of winning one ducat on the first throw, 1/4 probability of winning two ducats in 2 throws (which adds another 1/2 to the expected value), 1/8 probability of winning 4 ducats in 3 throws (adding another 1/2), and so on adding 1/2 a ducat in value an infinite number of times.

The expected value suggests that a player should be willing to pay any amount asked for a chance to play this lottery. Yet, in real life no one in their right sense would pay more than a few ducats to play this, perhaps somewhere around 5 ducats. Why is it that the mathematical expected value doesn’t reflect the real value placed by real players on this lottery?

Fiscal 3Q 2012 Final Estimates

As of Friday's closing price of $605.88, AAPL is trading at a 8.9 multiple on my forward EPS estimate (7.0x ex-cash). For guidance and forward-looking valuation I'm assuming an iPhone launch in September (which paradoxically is the conservative view for the long term). This implies about 6m units shifted into this fiscal year instead of next, and affects the replacement cycle timing well into 2014. Still, I'm including estimates for the October launch scenario below so you can pick your own.

Detailed estimates below:

3mo ending Jun-2012   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         34,000     8.68
Analysts consensus     37,370    10.34
Deagol estimates       40,641    12.16

Fiscal 2Q 2012 Final Estimates

At today's closing price of $628.44, AAPL is trading at a 10.4 multiple on my forward EPS (8.5x ex-cash).

The valuation metrics provided below are intended to track the market price of the shares at the given timeframes, and thus exclude any dividend paid up to that point in time because the dividend is subtracted from the cash balance, as it should. However, because my underlying theory is that shares should be (roughly) valued on a forward-one-year basis, to compensate for this one needs to add back into the value the next 12-months worth of dividends.

For example, the current fair value is based on 10 times the EPS estimate of $60.39 for the next 12 months which gives $604, plus the estimated cash balance at the end of the next 12 months of $165/sh (which already excludes any dividends paid over that period), and adding back the $8 worth of dividends paid over the next 12 months which a buyer today would in fact be entitled to, resulting in a $777 fair value. The one-year target is computed similarly given the annual EPS, dividends and cash balance for the 12 months ending 2 years from now.

I consider the "trailing" metric relevant for the past 3 to next 3 months, the "fair value" metric relevant for roughly the next 3 to 9 months, and the "1yr target" metric relevant for roughly the next 12-18 months. Of course this is all my own subjective/empirical sense.

Mobile Apple: The Limits to Growth (Part 3)

Even the largest avalanche is triggered by small things.

Vernor Vinge

It is better to err on the side of daring than the side of caution.

Alvin Toffler

(here's Part 1 and Part 2 of this series)

Mac: A Recap

In the previous part of this series, I left with a chart of the Mac unit sales over the last few years, contrasting those units sold into the existing installed base as replacement Macs, and those representing new users adopting the Mac platform. I'll begin this post with a similar chart, this time spanning a few more years back, and smoothing out the quarterly data through the use of a trailing 4-quarters window to compute the values charted. Also, I've included a couple years worth of estimates into the future (period denoted in gray) after a reader's request. Check it out (click to enlarge).

It's clear from this chart that the slow 5-year life cycle of traditional PCs, combined with the practically unlimited potential for expansion into the billion-and-a-half units within the overall PC installed base, precludes us from modeling any significant slowdown in the rate of adoption for Macs within the next few years. Perhaps only after a significant slowdown in wider PC adoption (currently at over 100m new users per year), and when Mac adoption surpasses 50% share of those new-to-PCs users (currently around 11%), one might consider an inflection in the incremental adoption of Macs (explore the charts on the previous posts to contextualize these two opposing trends).