After a year of tremendous growth where Apple’s (AAPL) revenue is expected to increase more than 27% year-over-year, the company is expected to experience a major slowdown in 2016, and moving forward for that matter.
With about $233 billion in 12-month revenue, the day where Apple’s growth diminished was eventually going to come, and with AAPL stock trading at just 7.8 times next year’s earnings minus cash, it seems that investors have already taken this slowed growth into account, and then some.
Therefore, is AAPL stock dead money?
And will it ever reach $200 a share?
AAPL Stock Is Just Too Cheap
First off, even if AAPL’s revenue and profits were maxed after this year, and there was essentially no upside growth remaining, AAPL stock would still be cheap. AAPL stock is significantly cheaper than the 15 and 9 times next year’s earnings multiple of technology giants Microsoft (MSFT) and IBM (IBM).
MSFT is a company that lacks growth whereas IBM is a company whose business is declining fast. At the very least, AAPL stock is worth the same multiple as an inferior MSFT. If AAPL stock carried the same multiple as MSFT stock, it would trade well over $200 per share, a price that would seem more appropriate given its superior growth to MSFT.
As a result, this suggests that AAPL stock is extremely undervalued and could trade to $200 based solely on multiple appreciation.
AAPL Stock Buybacks will Create Gains
With that said, AAPL spends more on buybacks than any other company in the world.
In 2014 AAPL spent $45 billion on buybacks. Then, in the first quarter of this year, it spent $7 billion, and then $10 billion in the second quarter.
Furthermore, AAPL recently increased the size of its buyback program from $90 billion to $140 billion, and after previous buybacks, there is still about $78 billion to spend. And because AAPL is so cash rich, having more than $200 billion in cash on its balance sheet, chances are that AAPL’s buyback allowance will only rise, and that means a higher stock price.
Since June of 2013, AAPL stock has increased 79%. Meanwhile, its market capitalization has increased by only 53.5%. That near 25% difference is the effect of buybacks, an illustration of how a decline in shares outstanding multiplied by the same stock price equals a lower market capitalization.
For example, if AAPL were to spend $78 billion on buybacks at an average price of $130 over the next two years, it would reduce its share count by approximately 600 million. That would reduce AAPL’s shares outstanding to 5.1 billion. Therefore, if AAPL stock reached $200, its market capitalization would be approximately $1 trillion, a 54% increase over its current market capitalization, or a price-to-next-year’s-earnings ratio of 12 minus cash.
Meanwhile, to reach $200 from today’s price, AAPL stock would trade higher by nearly 75%. However, because AAPL is buying back stock so vigorously, and is cheap, it would still trade at a far lower earnings multiple relative to IBM and MSFT.
Given this fact, a $200 price for AAPL stock is more than likely, maybe even inevitable, despite slowed growth.
In other words, AAPL stock is still a great investment opportunity, with expectations for slowed growth more than baked into the AAPL stock price.
As of this writing, Brian Nichols owns shares of Apple.