Apple At $1000 Isn't Crazy

By Nikhil Shamapant - March 5, 2012 | Tickers: AAPL, CTSH, MCRS, NTAP | 0 Comments

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So right now, Apple Inc (NASDAQ: AAPL) is at $544.93, 56% higher than it was 1 year ago at $350 per share. If it can go up 56% at these high share prices, why can't this growth continue? The law of big numbers will shred growth? Outrageous valuations will knock it down? Let's dig in to figure out in what scenario Apple could be worth a $1000 share price.

Right now, assuming today's earnings are sustainable (which with growth like we've been seeing, is extremely likely), a price of $1000 would yield a P/E of 28.57. To get a good picture for what a P/E of 28.57 really looks like in the technology market, let's compare this to other companies that currently have been judged to deserve such a valuation. In the chart below, I list the the top four companies at or around Apple's valuation by Earnings growth rates.

Source: Google Finance Screener--P/E: 25-30, 5 year Net Income Growth rate above 5%, Technology Sector

 *Assuming a $1000 share price.

It is interesting to compare these companies' valuations to their past business history.  Based on prior performance alone, Apple has double the highest Net Income growth of a comparable P/E company, and has higher returns on equity than any of them. The contrast here suggests that either the market is completely misvaluing Cognizant Technology Solutions, Dynasil, NetApp, and MICROS Systems, or  the market is undervaluing Apple, which according to these companies, more than merits a valuation over $1000 per share.

Of course, this method of figuring out what Apple would need to look like to merit a $1000 valuation is flawed. First of all, the P/E ratio should be measured relative to expected future growth rates, not past growth rates. Second, because Apple has so much extra cash that will clearly not be reinvested in the business, we should use an ex-cash P/E multiple for the valuation. To get ex-cash multiples, I am trying to estimate the cash that will not be used by the company to pay off debt. I also have to include receivables(discounted by 25% to represent conservative risk estimates). Therefore, I will use (Cash+(Receivables*.75)-Current Liabilities) to represent the Cash that the company should be willing to redistribute to shareholders. I will also assume that all future investments in company earnings growth and attempts to pay down long term debt will be funded by the company's operating cash flows. This should be reasonable since every company has a return on equity above 8% and has grown net income by an average of above 15% for the last five years.

*Finviz.com

** Assuming a $1000 share price. Also, in Apple's case I also include Long Term Investments in cash, but I discount them at 35% because most of them are in offshore accounts and will incur a 35% repatriation tax if they are moved to the US. For more details see this article.

It is a bit disconcerting to see the list above. First of all, Apple ex-cash isn't as cheap as I expected, especially compared to other consistent tech earners ex-cash. Perhaps more importantly, there isn't anything that sticks out as apart from the group on this list, at least quantitatively. All the companies have P/E's between 23-27 ex-cash and 25-30 with cash, and they all (apart from Dynasil, which I couldn't find expectations for) are expected to grow earnings by 15%-18% in the next 5 years. With today's market valuation, it seems that Apple fits right in with the other companies...

Wait! Forgot that this all assumes Apple has hit $1000? Ironically, at $1000 share price, Apple wouldn't even be the most expensive company on the list by P/E, and its expected future growth rate is the highest of the 6 companies with a P/E between 25-30. Looking at this, it really isn't too hard to picture a $1000 Apple, implying a 932B market cap, so what would it take to reach the magic Trillion dollar market cap? $1072 per share...It's not as far away as it looks.

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