Consumer technology giant Apple (NASDAQ:AAPL) recently reported blowout third-quarter numbers, and those number sent AAPL stock briefly above $207.04 — making Apple the first publically traded company to trade above $1 trillion.
Following AAPL’s stock big pop to $200+, former hedge fund manager and CNBC personality Jim Cramer teased the idea of a $300 price tag for the stock. He said that if the company was valued as a consumer products company, then AAPL stock would command a hefty multiple that would easily hit $300 per share.
Is this true? Absolutely.
It is no secret that AAPL stock is one of the more cheaply valued names in the stock market. It is cheap because of low growth. But, there are plenty of other high-moat, cash-heavy names out there with low growth but huge brand awareness that trade at much bigger multiples.
AAPL stock fits that description. This is a high-moat, cash-heavy name with low growth and huge brand awareness. Other stocks that fit that description trade around 20X to 25X forward earnings. AAPL stock trades at just 17X forward earnings.
Thus, if you adjust AAPL stock’s multiple to be in line with similar companies, then a $300 price tag makes sense.
Here’s a deeper look.
Apple Looks a Lot Like These Companies
From where I sit, there are three parts to Apple. Those three parts are:
- A stable, traditional hardware business with mild growth prospects through price hikes (iPhones, iPads, and Macs).
- A growth, new hardware business with healthy growth prospects through rising product adoption rates (Apple Watch, Apple TV, etc).
- A hyper-growth subscription business that is built into the fabric of the mobile ecosystem (Apple Music, Apple Pay, App Store, etc).
On the traditional hardware side, Apple looks a lot like Nike (NYSE:NKE), Starbucks (NASDAQ:SBUX), Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD). All of those aforementioned companies sell consumer products. They are mature companies with low growth prospects. But, they have high brand awareness and dominate their respective part of the consumer goods market. Nike is king of athletic retail. Starbucks is king of coffee retail. Coca-Cola is king of beverage and snacks. McDonald’s is king of fast food.
By the same token, Apple is the king of smartphones and tablets.
All those stocks (NKE, SBUX, KO, and MCD) trade between 20X and 25X forward earnings. Thus, this part of Apple should be valued in that 20X to 25X range.
On the new hardware side, Apple is experiencing big growth in new markets like wearables, headphones, smart home, and connected tech. That means this company is jumping into the same waters as wearables maker Garmin (NASDAQ:GRMN) and red-hot headphone company Turtle Beach (NASDAQ:HEAR).
Given healthy growth rates and broad exposure to secular growth markets, both GRMN and HEAR stock trade around 20X forward earnings. Thus, it isn’t unreasonable to give Apple’s new hardware business at least a 20X forward multiple.
On the subscription side, Apple is running of series of software subscription services that are growing at a 30%-plus rate. That sounds an awful lot like Netflix (NASDAQ:NFLX), Spotify (NYSE:SPOT), and Amazon (NASDAQ:AMZN). Those stocks trade at triple-digit forward multiples.
Another way of looking at Apple’s Services business is by looking at its necessity. Because iPhones are everywhere and because these Services are built into every iPhone, Apple’s Services business is built into the fabric of the mobile ecosystem. This likens the business to Google (NASDAQ:GOOG), which is built into the fabric of the internet ecosystem.
GOOG stock trades above 20X forward earnings. Thus, this part of Apple easily warrants a forward multiple above 20.
How Apple Stock Gets to $300
All of Apple’s closest comps trade between 20X and 25X forward earnings. Thus, it is reasonable to assume that an appropriate valuation for AAPL stock is somewhere in that 20X to 25X range.
Solid third-quarter numbers and a healthy fourth-quarter guide reveal a company underscored by healthy revenue growth and positive margin drivers. The traditional hardware business is stabilizing, with lower units being offset by higher prices. The new hardware business is ramping, thanks to Apple Watch, Beats and AirPods. The subscription business, too, remains on fire. The last part is important because Apple’s subscription business is higher margin, so red-hot growth there pulls the entire company’s margin profile higher.
Thus, I think Apple is a company that can grow revenues by roughly 5% per year after this year. I also think operating margins can scale to 30% over the next several years thanks to growth in Apple’s Services segment.
Under those assumptions, I see Apple netting $20 in earnings per share in fiscal 2023. A 22.5X forward multiple on that implies a fiscal 2022-end price target of $450. Discounted back by 10% per year, that equates to a fiscal 2018-end price target for AAPL stock of nearly $310.
Bottom Line on AAPL Stock
If AAPL stock were valued like similar companies, it could easily cross above $300 this year. But I don’t think that will happen. Instead, AAPL stock will likely continue to trade around the market-average 16X forward multiple.
Even then, AAPL stock is still a buy here. A 16X forward multiple on projected fiscal 2023 earnings per share of $20 implies a fiscal 2022-end price target of $320. Discounted back by 10% per year, that equates to a fiscal 2018-end price target for AAPL stock of nearly $220.
Either way, AAPL stock is a solid long-term holding.
As of this writing, Luke Lango was long AAPL, SBUX, MCD, HEAR, AMZN and GOOG stock.
