Apple Inc. (AAPL) – The First Trillion Dollar Stock? by Ryan Barnes, Capital Cube
With the new iPhone released Sept. 19 (although good luck actually getting one in your hands), it seemed like a good time to sit back and take a forest-level view of the largest and most-widely held company on the planet.
The shockingly predictable pre-announcement run-up in the shares is behind us, and while I’d never try to out-duel the legion of “fanvestors” who will spend the next 3 months dart-boarding 2014 and December quarter sales, I am quite interested in assessing where Apple Inc. (NASDAQ:AAPL) shares could be trading 2-3 years from now. Because that’s the minimum time it will take to truly assess the earnings power of Apple as a result of its aggressive entry into wearables and digital payments. It will also take quite some time to see what kind of market share iPhones can achieve globally, now that they’re finally competing in the “phablet” zone that Android has been saturating in Apple’s absence.
Key Takeaways from the Product Announcements
Apple did what we fully expected by releasing an iPhone 6 with a larger screen. The odds-on favorite for the other product entry was a watch, and we got that too. I like the watch just fine, but it’s nearly impossible to even guess at its true market potential until third-party developers get some time to play around with the product and the software. The product won’t even be going out the door until next year, but when it does I’m sure it will move units.
Apple Pay was the only surprise – not the mere existence of it, but certainly the scope. The new plan to send payments via near field communications (NFC) between new model iPhone 6?s and retail merchants is certainly the biggest X factor in the announcement. How big could it get? How much money could it bring to Apple?
There are two aspects of Apple Pay that are worthy of a standing ovation by investors:
1) In putting together Apple Pay, Apple went out and did what would have been impossible for any other company to do – they went out and got Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) to play ball, i.e. got permission to piggyback on payments. They also gathered together all the major credit card providers, equating to over 80% of all transacted credit card volume in the U.S.
2) In terms of the revenue Apple will generate from this program, it’s less than pennies on the dollar – literally. The fee Apple will earn is reportedly just 15-25 basis points, or 15-25 cents per $100 transacted via Apple Pay. The main service provided will be the “tokenization” of individual transactions (VISA & Mastercard networks will still be routing the transactions).
The brilliant move is that Apple isn’t trying to make profits from Apple Pay – at least, not directly. They’re content to just break even on the endeavor, with the expectation that if it catches fire among consumers, it will drive more sales of iPhones and Apple Watches, as they are the only way inside the gate.
With all the bad, financially destructive news we’re hearing lately about the hacking of credit cards and other sensitive information, I think the combination of NFC, biometrics, and one-time use codes combine to form a powerful value proposition for consumers. There are already a lot of retailers committed to facilitating Apple Pay, and I expect this number to grow exponentially in the coming months.
Time to Buy, Sell, or Wait on Apple Inc. (AAPL)?
First off, chances are you already own Apple shares, whether you know it or not. If you own any broad market ETF or index fund, or any equity mutual funds, you’re already invested in Apple. The only real question is whether you want to add a stand-alone position.
Regardless of your personal views on the company, the stock, or its products, just consider for a moment how Apple looks to the institutional buyers of stocks, i.e. the Deep Pockets:
Growth managers love Apple because well, it’s still growing – and it has proven its ability to grow (EPS up over 30% per year compounded the past 5 years) and to sell its brand in nearly every international market. Now Apple has up and created brand new revenue streams via Apple Watch and Apple Pay. It’s got all the boilerplate things a growth stock investor wants, and with Apple you get them at less than 16x trailing earnings and 14.2x forward (2015) earnings. Heck, even if you took the single most pessimistic estimate of all 48 Apple analysts tracked by Reuters for 2015, you’d still get to just 16x forward earnings.
Apple hits all the pleasure sensors that value investors love too: they’ve recently instituted a dividend, and the not-too-shabby 1.85% yield requires less than a 20% payout of operating cash flow by Apple. They could double the dividend without breaking a sweat.
There’s over $100 billion on the balance sheet, and there’s another $50 billion-plus left in Apple’s $130 billion capital return program, set to be completed by year-end 2015. These all serve to make Apple shares look very appealing to investors along ever-so-many points in the risk/return spectrum.
Don’t Fall for the Revenue Head-Fake
Yes, Apple has been showing essentially flat revenues the past year, but that’s mostly attributable to a most recent iPhone cycle that missed the mark on screen size. I don’t use an iPhone myself, but I know several people who have been waiting around for this bigger screen. One of the most respected Apple analysts, Gene Munster over at Piper Jaffray, says that the first weekend’s pre-orders for iPhone 6 indicate upside to his already rosy unit forecasts for the December quarter. He now predicts that first-quarter sales will be 9% higher than consensus estimates – and EPS could be up to 12% higher than forecast – after Apple sold 10 million iPhone 6‘s in the first three days.
The First Trillion Dollar Stock?
The Law of Large Numbers is something a lot of analysts are throwing around lately when discussing Apple, and it’s a fair discussion to have – just so we can debunk it. The nickel version simply goes, “Apple is already a $600 billion cap company…how much bigger could it possibly get?”
The biggest issue we face here is psychological, not mathematical. A trillion dollar company just sounds freakish, like something unnatural. I swim