Can Apple Inc. (AAPL) Really Hit the Trillion-Dollar Mark?

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AAPL - Can Apple Inc. (AAPL) Really Hit the Trillion-Dollar Mark?

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Apple Inc. (NASDAQ:AAPL) stock has reaped more than 30% gains for the year-to-date. It’s a fantastic year for the Cupertino, California-based tech giant … but the year isn’t up yet, and AAPL stock is beginning to slow.

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Specifically, for the past few weeks, Apple has run up against resistance in the mid-$150 range. After making headlines for reaching $800 billion in market capitalization — which eventually spurred analyst Amit Daryanani to project Apple as a $1 trillion company by 2019 — AAPL shares have simply hovered.

So, how’s that trillion-dollar hope looking now?

Cash Is King

Apple continues to transition from a hardware/software company to a practical consumer staple that commands premium pricing and fierce loyalty among a diverse user base. User base growth, though, is tenuous. While there have been modest market share gains domestically and in Europe, Apple is struggling in China against the likes of Xiaomi and other low-cost operators, so meaningful gains will have to be sought elsewhere.

Despite competition in the hardware space being as brutal as ever, AAPL still generates prodigious amounts of cash and valuation looks fair by most measures, especially when compared to FANG tech peers Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), and Alphabet Inc (NASDAQ:GOOGL).

With tax reform still very much on Washington’s priority list, no conversation about Apple can skirt its hefty cash balance, the vast majority of which sits offshore. The headlines focus on the $250 billion war chest, but the more accurate figure is net cash of $172.2 billion (backing out long-term debt). Using a diluted share count from the second quarter filing, we get to $33 per share before taxes. With regards to the repatriation tax rate, CEO Tim Cook has indicated that 6.5%-10% is a reasonable range to assume.

So if we’re evaluating AAPL stock, we have to ask how much value to attribute to the stockpile. Does it deserve some sort of multiple? I’m hesitant to assign a premium, as everything depends on the extent to which management actually deploys that cash, and whether it does so in a meaningful way that grows the business (a new product line,or M&A).

Apple still remains committed to returning capital to shareholders via its excellent cash flow, though, intending to spend a cumulative total of $300 billion by the end of March 2019.

“We generated strong operating cash flow of $12.5 billion and returned over $10 billion to our investors in the March quarter,” said Luca Maestri, Apple’s CFO. “Given the strength of our business and our confidence in our future, we are happy to announce another $50 billion increase to our capital return program today.”

Financial engineering to reduce share count isn’t exactly exciting, but it remains an effective technique in supporting share price.

What Should Apple Do With All That Money?

If one wanted to upwardly re-rate AAPL stock, management would need to make big, disruptive innovations. Incremental updates to the look and backend of iPhones and iPads just isn’t going to cut it.

Certainly, there is more R&D being plowed into the wearables category, booked under Other Products. Here, the possibilities seem endless … but that’s almost the problem. With mixed feelings on the iWatch, investors seem optimistic on prospects, but Apple hasn’t delivered anything groundbreaking. Despite talk of record sales over the holiday period, there are only estimates as to actual unit and volume sales figures. None of which, given the larger division’s figures, appears to be truly significant compared to Services and, of course, the iPhone.

It’s passably stylish, but until AAPL can realize the Watch’s true potential — as the a person’s health monitor — and prove its usefulness, it won’t be a game changer. The second-generation Apple Watch is something to keep an eye on. Some have indicated it’ll become just as important from a revenue standpoint as the iPad. I am less convinced.

But then, there’s the M&A standpoint.

Much of the speculation around Apple making a buyout has concerned Netflix, Inc. (NASDAQ:NFLX). AAPL has the dry gunpowder, Netflix is affordable and such a transaction would immediately make Apple a player in the media space.

On top of the existing ecosystem, the most compelling argument for the deal, IP value aside, would be Apple’s ability to bundle content with hardware to drive product sales.

It’s attractive.

Smartphone Headwinds

From Mary Meeker’s unfailingly thorough Internet Trends Report, we know that global smartphone growth is slowing. Against this backdrop, Android continues to make gains at iOS’s expense. iOS phones sell at roughly three times Android phones — for better or for worse. It’s nice for margins, but it’s also exorbitant in India (on a GDP/capita basis) and in China, where strong local competitors like Xiaomi and Huawei produce cheaper products that aren’t necessarily less sleek.

Meanwhile, iPhone sales for the first half of FY2017 comprised 67% of total net sales.

It’s not clear to me what management has in mind if iOS unit volumes do start to decline meaningfully. However, even then, AAPL will still be able to generate huge amounts of cash, supported by a strong Services and an Other Products division filled with potential.

Bottom Line on AAPL Stock

It is unquestionable that Apple is uniquely positioned to leverage its expertise in hardware, software, and services to maintain a highly profitable ecosystem that keeps customer satisfaction high.

Forward FY2018 EPS of $10 seems reachable, implying a ~15x multiple for the $150/share range. But at this stage, barring inorganic M&A, I don’t see how AAPL will be able to drive another $200 billion in market cap to hit that trillion-dollar mark over the next year.

And again, even with a buyout, the market would have to value whatever Apple buys at more than the potential of simply having the cash.

Whatever you’re doing now, keep doing it. If you’re already in Apple shares, you’ll collect a 1.6% yield, which isn’t much, but it’s something. If you’re not already long AAPL, that yield isn’t enough incentive to wait by jumping in — just stay out.

For now, wait for a clearer picture on the repatriation tax situation comes forward, how management plans to allocate its capital, or any evidence that the new iPhone really will set the world on fire.

As of this writing, Luce Emerson did hold a position AAPL.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/can-apple-inc-aapl-really-hit-the-trillion-dollar-mark/.

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