Could Apple's Stock Double?

I know I'm stepping into the lion's den by looking at Apple (Nasdaq: AAPL  ) . It's a stock that tends to get people excited almost regardless of what you say about it.

But the stock has been an absolute monster over the past decade, it's a favorite of our Motley Fool Stock Advisor newsletter service, and it's a stock that The Motley Fool owns after my fellow Fool Eric Bleeker gave it the nod during our "11 O'Clock Stock" series last year. So if nothing else, it's a tough stock to ignore.

Here's the real question, though: Are there still significant gains possible for investors jumping in today? Let's take a closer look.

Earnings expectations
As I outlined in a previous article, a good way to get a baseline for growth expectations is to check on what Wall Street analysts expect and how fast the company has actually grown in the past.

 

Annual Growth Rate

Analysts' estimates 21.8%
10-year historical 52.4%
5-year historical 60.4%
3-year historical 63%
Last 12 months 77.9%

Source: Capital IQ, a division of Standard & Poor's. Historical growth based on earnings per share.

There are no two ways about it -- those historical numbers show absolutely unbelievable growth. That historical growth also includes the drag from the company's share growth as its share count grew 32% over the past decade. And though the analysts' numbers point to a growth slowdown, 22% annual growth for a company Apple's size is still very impressive.

Now comes the tougher part: How fast do we actually believe Apple can grow? This is a really tricky question, particularly when we consider the short history of MP3 players, smartphones, and tablet computers. Yet when I consider the incredible traction and momentum of those product categories, not to mention the dominance of the Apple brand in those categories, I have trouble dismissing the analysts' growth estimates as optimistically high. In fact, I'm inclined to think that Apple could actually exceed that target.

For my baseline growth expectation, I basically agreed with analysts and used a 20% annual rate. For my upside case, I assumed that Apple cleared the 20% hurdle and managed 25% annual growth.

Thinking about a downside case, I wanted to make sure I was prepared for fairly disappointing results. In the world of tech and consumer electronics, the winds of change can cause abrupt shifts -- consider the experience of Sony or Research In Motion (Nasdaq: RIMM  ) . With that in mind, I cranked annual growth all the way down to 7% for the downside case.

Pinning down valuation
Valuations are a moving target that can be tough to predict, but, as with growth above, using a range of values can give us a view of our potential returns without requiring a Miss Cleo-type prescience.

In creating our range, a good place to start is where the stock is trading right now and what its historical trading range has been. Right now, Apple's stock trades at just less than 17 times trailing earnings per share and a bit more than 13 forward earnings per share. Over the past five years, the stock's trading range has brought its trailing earnings multiple as high as 55 and as low as 15.

For broader context, we can also look at how similar companies trade.

Company

Industry

Trailing P/E

Estimated Growth

Microsoft Software 10.2 12%
Hewlett-Packard (NYSE: HPQ  ) Diversified technology hardware 10.2 9.2%
Dell (Nasdaq: DELL  ) Computers 11.4 6%
Research In Motion Cell phones 7.4 15.6%
Nokia (NYSE: NOK  ) Cell phones and other communication equipment 12.6 3.2%
Google Internet services 19.7 17.6%

Source: Capital IQ, a division of Standard & Poor's.

Most investors will recognize this group as a bunch of Apple's competitors. And, by the same token, most investors will understand that Apple should garner a higher multiple than most of these companies, because it's been roundly kicking their butts and growing much faster. That is, with the notable exception of Google. And, interestingly, Google actually trades at a higher multiple than Apple with lower expected growth.

Taking all of this together, I think we're relatively safe using a multiple slightly lower than current -- say, 16 -- for our base case. For the upside case, I could easily see investors paying 20 times earnings for Apple's stock. On the downside, I plugged in 11 -- right in the same neighborhood of the non-Googles above.

Dividends and share count
Our final stop is to consider how much we'll get paid through dividends and whether changes in share count will affect our bottom line.

My main concern with share count is that I'll end up with a company that has a history of significant dilution. That's far from ideal, because big share issuances cut the portion of the profits that each share receives. We've already touched on this above, and while dilution is a concern with Apple, I'm assuming that it's baked into the earnings-growth estimates.

On the dividend front, we don't have any work to do, because Apple doesn't pay a dividend and has roundly rejected the idea of initiating one.

The verdict, please!
The end result of all of this is the returns we can expect under the various scenarios. Here's what my three scenarios would look like.

Scenario

Annual Earnings-Per-Share Growth

Earnings Multiple

Annual Dividend Growth

Expected Annual Returns

Upside 25% 20 0% 29.8%
Mid-case 20% 16 0% 19.2%
Downside 7% 11 0% (1.4%)

Source: author's calculations.

Let's now go back to that question that we started with: Can Apple's stock double? The answer seems to be a pretty clear "Yes!" Under the mid-case scenario, the stock would more than double in five years, while with the upside case the stock would more than triple.

However, as the downside case suggests, I think there could be a pretty wide band of outcomes for Apple. An abrupt change in consumer taste or a killer new product suite from a competitor could lead to a very disappointing outcome. What does this mean? It means that Apple is a higher-risk investment than, say, Procter & Gamble and not ideal for investors who like high levels of reliability and predictability (not to mention dividends). Or, to put it another way, I wouldn't consider Apple a Buffett stock.

Of course, the future is an ever-changing picture, so you need to keep on top of what's going on at Apple to see which set of numbers the company and stock are able to live up to. And you can do just that by adding Apple to your Foolish watchlist.

Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers choice. Apple is a Motley Fool Stock Advisor selection. Procter & Gamble is a Motley Fool Income Investor selection. Motley Fool Options has recommended a bull call spread position on Apple and a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Alpha Newsletter Account, LLC, owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Microsoft but has no financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (20) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2011, at 12:29 PM, Henry3Dogg wrote:

    However, the analysts have substantially under predicted for Apple, every quarter, for ever.

    Your upside growth is less than half of the lowest of Apples 12 month, 3 year, 5 year or 10 year growth rates.

    Going from 10 year to 5 to 3 to 12 months, Apple's growth is increasing, not dropping off. The 12 month figure is over 3 times your upside case.

    Apple's growth will need to drop of a cliff in order to only meet your upside prediction.

    Apple have just sold more iPhones in it's Jan-Mar quarter (it's slow quarter), than it sold in the preceding (Oct-Dec) quarter which is always it's best quarter.

    It's becoming clear that Apple still have ~85% of the tablet market in real sales, despite exaggerated claims by competitors, late last year, and seems in no danger of losing it's lead any time soon.

    Total (not phone specific), iOS shipments are still keeping pace with Android and the value of iOS app sales is still nearly 20x those of Android.

    Apples average selling price, and margin for iPhones is still increasing, and now the margin for iPad is very attractive thanks to iPad 2.

    Mac is the fastest growing part of the traditional PC market and is increasingly gaining traction in markets were it has had little presence.

    Apple is clearly about to get very serious about the cloud, although in what form we don't yet know.

    After much nashing of teeth, even Apples subscription model is gaining traction.

    There is absolutely no sign whatsoever of Apple's growth falling off a cliff.

    All things can change, but your upside case is probably at best a downside case.

  • Report this Comment On May 07, 2011, at 12:57 PM, Davewrite wrote:

    the numbers are silly

    historical 5 year is 60.4%

    last 12 months is 77.9%

    so growth is ACCELERATING

    but analysts and this analysts project FUTURE to FALL to 20+% (i.e to just one third and in contrary to the UPWARD trend)

    RIM which is collapsing is projected to be 15.6 and Apple blasting on all cylinders just a tad higher at 21.8 ???

    makes no sense.

    a company whose every major line is selling like crazy is projected to DROP from current near 80% growth to 21.8% do analysts foresee Apple to be destroyed by PLAGUE or NUCLEAR WAR??

    No wonder NOT ONE of the 50 or so pro analysts who follow apple even got close to estimating Apple's EPS last quarter. Apple was over $6 share, some guess it would be under $5!

  • Report this Comment On May 07, 2011, at 1:30 PM, lukascranac wrote:

    I agree on doubling the stock price. However you should have looked at the multiple history as well.

    Multiple has been going down rapidly as earnings were going up rapidly. In two to three years the high multiple has shrunk from 50 to 23. today we are witnessing a record low multiple below 17!!!

    So I would expect multiple to contract further down towards 11-13 while growth will stay high as the mobile computing market expands like crazy.

    I guess multiple contracts due to the size of market cap.

    Instead of chickening out on the growth rate - like most analysts do - you should have looked at the multiple to arrive to a conservative/safe valuation.

  • Report this Comment On May 07, 2011, at 1:31 PM, ConstableOdo wrote:

    Double? Hardly. This stock is very weak. Two decent quarters and the stock has barely moved. Apple is disrupting both the PC and smartphone market, it has so much reserve cash and the retail stores bring in more business than nearly any retail outlet per size. Despite all this, no investors are buying Apple stock. The stock must be only up a few percent for the entire year while stocks like Amazon, Netflix, VMWare, Intuitive Surgical are making their investors cash heavy. Apple is stealing business and revenue from so many companies and yet Apple stock doesn't move at all. It's like the money Apple makes goes into a black hole and investors never see returns.

    For the past six months or so, Apple is doing absolutely nothing for investors while hoarding cash for itself. I understand why they're doing it, but Apple is making nothing attractive for new investors.

    Do I think that Apple can nearly double revenue in a few years? Yes. But to double the stock price is very unlikely. That's not Apple's fault, but the hedge funds and institutions are manipulating Apple stock so it doesn't move at all. No good. Apple shareholders are going to be screwed from here on in.

  • Report this Comment On May 07, 2011, at 1:36 PM, websterphreaky wrote:

    OH more analyst BS! And the Apple HACK analysts have OVER predicted Apple for ever .... why? Cause I'll bet they are paid off too.

    AAPL CAN'T even get past $350 since it crashed from a high of $364.90 back in March! It has been on a 6 flags extreme roller-coaster rider, more down than up since that crash! Just last week, it went up $3 on the day, only yo close the day at MINUS .03 on the day (Friday)!!

    Get real, sales are being exaggerated, Macs are NOT selling that well, neither is the iFAD (hence the barrage of iFAD adverts) and Android OWNS +50% of the smart phone market to CrApple's iOS at >25% per Neilsen Research study in April 30.

    In fact this whole story is just another Apple Hack piece trying to stir up a buying frenzy by the clueless individual buyer, while the mainstay Wall Street buyers are avoiding AAPL like the plague except for a quick buck in (1) Day Trading.

    How about Fool.com stop being an Apple Pimp??? It's pretty transparent and tiring.

  • Report this Comment On May 07, 2011, at 2:07 PM, dstb wrote:

    It can double and it WILL double.

  • Report this Comment On May 07, 2011, at 2:17 PM, dstb wrote:

    I've got to respond to websterphreaky because the post is almost too moronic for words.

    "OH more analyst BS! And the Apple HACK analysts have OVER predicted Apple for ever ...."

    Really? Why is it that Apple always BEATS analysts estimates each and every quarter.

    "AAPL CAN'T even get past $350 since it crashed from a high of $364.90 back in March!"

    You call $365 to $350 a crash?! Are you joking? That is a "blip" in a long term upward trend.

    "Get real, sales are being exaggerated, Macs are NOT selling that well, neither is the iFAD (hence the barrage of iFAD adverts)"

    Translation: Apple is lying outright about their sales? Meanwhile everyone I know has some sort of Apple product. Including myself as I just bought a Mac for the first time as I got tired of my crappy PCs crashing.

    "In fact this whole story is just another Apple Hack piece trying to stir up a buying frenzy by the clueless individual buyer, while the mainstay Wall Street buyers are avoiding AAPL like the plague except for a quick buck in (1) Day Trading."

    MF analysts are generally the furthest from being "hacks" but if you'd buy a few books and educate yourself on long term investing and stock valuation you'd find out how great an investment in Apple shares would be. Hey..maybe you'd even make a little money and lose some of that bitterness!

  • Report this Comment On May 07, 2011, at 2:27 PM, infektu wrote:

    @Davewrite

    "RIM which is collapsing is projected to be 15.6 and Apple blasting on all cylinders just a tad higher at 21.8 ???"

    That alone shows you how to take the media sensational (and undocumented) titles.

    The numbers might in the end be a bit off (I wouldn't be surprised if Apple would grow 30-40% while RIM 20-25%, that is using each company's guidance), however, RIM is far from "colapsing" and Apple can not double each year, as some people that missed the 2007 boat might like.

  • Report this Comment On May 07, 2011, at 8:14 PM, beetlebug62 wrote:

    Your analysis hinges on future expectations of growth:

    "For my baseline growth expectation, I basically agreed with analysts and used a 20% annual rate. For my upside case, I assumed that Apple cleared the 20% hurdle and managed 25% annual growth."

    This needs more detailing. The question is why 20%? Look at the businesses Apple is in. Over 60% of its revenues are coming from smartphones and tablets. Those two businesses are growing around 100% right now as well as going forward the next few years. Suggesting that Apple's growth is going to be 20%, means that Apple is going to be growing slower than the markets it is currently leading in innovation. Does this make any sense?

    I think analysts are just afraid to say what the numbers are really saying because it seems too incredible. Of course, Apple can double. Earnings will drive it there in the next couple years.

  • Report this Comment On May 07, 2011, at 11:42 PM, Manlobbi wrote:

    I am amazed at the poor quality of the comments here.

  • Report this Comment On May 07, 2011, at 11:53 PM, carla01j wrote:

    Websterphreaky, do you recall any event that occurred around the time of your so called "crash" in Apple's stock price? Let me remind you. Does the rebalancing of the NASDAQ 100 ring a bell? Apple stock had appreciated so much more than the other 99 stocks that its weighting had to be cut. So EFTs and mutual funds that mirrored the index had to sell off some of their Apple stock. The "crash" was caused by hedge funds trying to beat them to the punch. Once we are past the rebalancing, Apple's earnings will again propel the stock price higher. And you'll look even more "phoolish" than you do now.

    -- posted from my iFad 2

  • Report this Comment On May 08, 2011, at 11:10 AM, xmmj wrote:

    @ beetlebug2

    "I think analysts are just afraid to say what the numbers are really saying because it seems too incredible"

    You hit the nail on the head!

  • Report this Comment On May 08, 2011, at 11:59 AM, xmmj wrote:

    The question is not WILL it double, but rather WHEN it will double. Even your rather conservative growth estimates have it doubling.

    But let's look at this again.

    Growth rates, like everything else, have a cycle. When a company comes up with a brand new or significantly superior product, growth rate escalates until it reaches some peak, and then it subsides. Apple is currently riding the crest of two great innovations - iPhone and iPad. Assuming their growth rates follow roughly that of the iPod, then they will continue growth before leveling off: iPhone 3-6 years, iPad 5-8 years.

    If we assume that Apple will continue to innovate, but the era of the radical new products is over, then we can expect a gradual leveling of of the growth rate. Also, we DO have to take into account that it cannot go on at 80% growth forever. So let's try a reasonable growth-rate decline.

    So let us assume that 2011 is the peak of Apple's growth rate (in terms of EPS) but that it continues almost its current rate for the rest of the year. Last calendar year Apple earned almost $18, and lets say the yoy is 70% for the whole year - down just a bit from this Q. Let us then assume that the growth rate for the next 5 years declines as follows (to be conservative I always round cents DOWN:

    year -- % -- EPS

    2010: ----:: 18

    2011: 70 :: 30

    2012: 50 :: 45

    2013: 40 :: 63

    2014: 32 :: 83

    2015: 25 :: 103

    2016: 20 :: 120

    --------------------

    While this projection is hardly conservative, neither is it particularly aggressive. It shows a reasonable, yet fairly steep, decay rate that takes into account the fact that Apple still is not keeping up with demand for the iPad, and just barely with the iPhone. It does not take into account any new products that might add to the growth rate, nor any possibility of a recovering global economy. (Of course, it equally ignores the possibility of a further economic recession.)

    That said, this model shows Apple not doubling in the next 5 years, but more than quadrupling!

  • Report this Comment On May 08, 2011, at 12:03 PM, xmmj wrote:

    Please note that I am using calendar years above - not fiscal years.

  • Report this Comment On May 08, 2011, at 2:07 PM, 0taojones wrote:

    all you fools are missing the biggest point about the whole situation .

    accounting rules do not allow apple to count a phone sale as final until it is delivered . this means the cash can not be counted as profit until the phones 2 year contract with at&t is filled .

    with phone and pad sales increasing exponentially and a 2 year lag in accounting how can you not have the stock at least double. Short sellers will foster arguments about percentage of market share comparing android and apple when android is just being licensed to a bunch of low margin cell phone makers as if apples hardware precent lack of royalties for the OS and share of contract fees don't count. I am loving that it is trading in a predictable range i am buying and selling making money and when it breaks that 360 celling this fool is riding the thermals all the way up

  • Report this Comment On May 08, 2011, at 2:23 PM, baldheadeddork wrote:

    @0taujones - I'm pretty sure you're wrong about how iPhone sales are recorded. Apple sells iPhones to AT&T and Verizon (and international carriers) in a manufacturer/retailer arrangement. That means that sales are recorded when AT&T/Verizon receive the order, the same as Mac sales through Best Buy are counted when the company takes delivery, not when the units are sold at retail.

    For iPhone sales through Apple Stores it might be different, depending on how Apple has structured the relationship between the main company and the retail division. Apple could count the retail stores as part of the same group as the manufacturing/wholesale divisions, and if they do then sales are not recorded until it leaves the store. But most companies that have in-house retailing usually separate the divisions. If Apple does this, sales to Apple Store locations are counted the same as sales to BB or AT&T.

    But in practical terms, it's a moot point either way. Both manufacturers/wholesalers and retailers keep as little inventory as possible. The difference between a sale being logged when a retailer takes delivery and its bought by a retail customer should be a matter of a few days at most.

  • Report this Comment On May 10, 2011, at 10:05 AM, FutureMonkey wrote:

    @Matt, you called it in your first sentence. "I know I'm stepping into the lion's den by looking at Apple (Nasdaq: AAPL ) . It's a stock that tends to get people excited almost regardless of what you say about it."

    The bears are are calling for AAPL - $100 in 2 years, which would mean P/E of 4.8 assuming 0% growth and probably a delisting from the NASDAQ since AAPL is one of the most widely held companies in index funds. The bulls are calling for a 4-bagger in 5 years - a 1400Billion market cap, which would mean earning in the neigbhorhood of 80-100B per year or about 30-35% compounded annual growth in earnings and the same P/E as today or some combination between earnings growth and P/E expansion.

    I'm more modest in my goals as an investor. I don't need AAPL to the moon. My goal is 12-15% CAGR on my equities investments over 5-8 years (that would put me up there with the some of best investors in history). With that in mind what is the probability of AAPL delivering vs downside risk. To get to the market thumping 15% CAGR for 5 years AAPLs earnings can grow below 20% a year and P/E can contract to 14. To get a disappointing but still steady 10% CAGR I can risk a 20% miss on analysts estimated earnings growth (about 16%) and a P/E contraction to 12.5. I'd say the downside is near worst case scenario for AAPL and I'm still earning 10% a year on my investment. AAPL seems like a fairly safe place to invest based on current market valuations and 20% miss on estimated earnings growth and a dour Mr. Market pricing AAPL for terminal growth.

    Possible risks are major class action lawsuit or a government anti-trust case, a yet undreamed of technologic advance that AAPL fails to anticipate, global depression, deflation of the dollar, or perhaps the zombie apocolypse. Possible upside surprise, if Apple can monetize iTunes and App store more successfully than they have to date.

    I am most curious to know what the professional Fools think about the cash flow potential is of subscriptions, iTunes store, and App store are since they don't make much of a blip relative to hardware sales in current revenue stream.

  • Report this Comment On May 11, 2011, at 1:19 PM, ikkyu2 wrote:

    So what you're saying is that AAPL is priced right now for 8% growth, but is actually experiencing 80% growth.

    That jibes with my numbers. Maybe it's time for me to buy more. My cost basis dates back to 1981, so it's not like the idea of buying AAPL is foreign to me! It's always been a good move.

  • Report this Comment On May 11, 2011, at 2:47 PM, muddlinthrough wrote:

    Can Apple double?

    Sure. It's priced in USD, which are rapidly going Zimbabwaen.

    And, for all of you fan boys (and girls), 4 little words: Death of Steve Jobs.

    All empires fall. The long ramble about 'China-Cathay' doesn't mean much...20 years from now, civil unrest will take out China as 400 million men go bride-hunting. Survey says, 'fail.'

    How many US kids will learn anything 'buildable?' The factories comment *is* dead-on. If you want to see where the US is going, look at England today.

    Hm. Growth without immigration, net-negative. Overburdened social contracts that are unsustainable.

    APPL at $600 by 2020. Sure. Why not $1200?

  • Report this Comment On May 11, 2011, at 11:33 PM, muddlinthrough wrote:

    @xmmi,

    That's a great model. Just a couple of 'nits' to pick:

    1) it's a competition-free model. You have no 'cannabilization' factored in from Android, etc.

    2) What do you think the total market is? The iPod was much cheaper, and replaced pretty much all 'standard' musical devices: those cassette players were still coming in 'standard' on low-end cars in 2001, remember? Also, people paid incredibly for convenience.

    Your model assumes that iPad/iPhones will continue to grow sight-unseen until everyone has one. Sorry, but I think a better 'must have' prototype is the Motorola Razor. At a certain point, MacAir's or whatever will be replaced by a larger tablet device, except for those diehards who still insist on composing really LARGE text messages and have to have a tactile keyboard. Those Macs may replace PCs, may not.

    WinTel/Linux boxes are still shipping 400M-plus units. To sustain that growth you're predicting, Apple will have to become *the* PC replacement, as well as *the* smartphone & tablet supplier.

    I don't imagine that will happen. People are too contrarian, Apple will have to avoid a lot of 'Tower of Babel' problems. At some point, there's one of those critical flaws that pops up and upsets the *ahem* apple cart, time and time again in human history. Usually, about the time people start thinking, 'this is perfect, this can never end.'

    A commodity product producer that doesn't provide anything intrinsically required to human need quadrupling to gain another 75% on top of its current valuation? One can comprehend XOM being the 'most valueable company in the world,' as oil is the lifeblood of the 20th and 21st centuries, from plastic to the asphalt roads to the cars that burn petrol. But Apple, becoming twice as valuable, on the strength of 'cool' and 'convenience?' I imagine, not having lived in that time, that the Dutch once felt the exact same way about the beauty of tulips.

    Really?

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