Going by the numbers, we can safely presume two things about Apple (Nasdaq: AAPL ) right now:
- The stock is priced for very little growth. My own estimates say just 6% annualized improvement in free cash flow over the next five years, followed by just 3% yearly growth thereafter, in perpetuity.
- Virtually none of that growth includes Apple TV. The Mac maker doesn't specify sales of its set-top boxes. While the iTunes Store is on track to be an $8 billion business, only a portion of sales is attributable to movie and TV downloads. Apps and music also account for a fair or even majority portion. Overall, the business accounted for just 5.5% of revenue in the latest quarter.
Admittedly, 5.5% isn't much of Apple's pie. But is it really fair to value the Apple TV business at zero? That's the only reasonable conclusion I can draw when the current price presumes the combination of iPhone, iPad, and Mac businesses -- arguably the greatest combined growth machine in Silicon Valley history -- will never again produce double-digit cash flow gains.
But that's crazy. Not only do I believe Apple is cheap on the strength of its current businesses, but I also believe the Mac maker could be one of the biggest benefactors of efforts to remake the television.
What's the TV disruption worth? Answering that question requires defining what role Apple would play. I see the iEmpire as a content distributor with the potential to destabilize the major incumbents of the cable television industry. Here's a closer look at who's at risk, what they collect in terms of revenue, and the values Mr. Market assigns to their efforts:
Current Market Cap
|Cablevision Systems (NYSE: CVC )||$3.41 billion||$6.70 billion|
|Charter Communications||$6.79 billion||$7.26 billion|
|Comcast (Nasdaq: CMCSA )||$79.21 billion||$58.59 billion|
|DirecTV (NYSE: DTV )||$32.25 billion||$27.95 billion|
|DISH Network (Nasdaq: DISH )||$13.87 billion||$14.41 billion|
|TOTAL||$135.53 billion||$114.91 billion|
Sources: Yahoo! Finance, S&P Capital IQ.
Say Apple claims just 25% of the available revenue as consumers shift to Apple TV's more attractive on-demand model. That's roughly $29 billion in new sales, or about half the size the iPhone business is today.
We don't know what multiple investors would assign to a more comprehensive Apple TV -- we're projecting, after all -- but companywide the market is pricing each dollar of Apple sales at $3.75. Here, that same multiple would value Apple TV at about $108 billion.
With Apple TV representing just a fraction of Apple's upside, the stock still appears to have considerable upside. In our recent premium research report, our senior technology analyst lays out exactly why he thinks Apple still has room to run, so grab your copy today. Want to look beyond Apple? We understand. Our top pick for 2012 has bested the market so far this year. If you want to find out exactly why this stock looks like a real winner, get the full report, which is available for a limited time.