Is double-digit revenue growth a thing of the past for Apple (AAPL 0.83%)? Based on Apple's weak stock performance since September 2012, the market seems to believe that's the case. The question, then, for any Apple investor is simple: Do opportunities still exist for the company to jump-start its revenue growth?
Revenue growth: Apple vs. Google
In its first-quarter 2014 earnings, Apple showed 6% year-over-year revenue growth on sales of $58 billion. In comparable quarters, revenue growth came in at 18% and 73%, first quarter 2013 and first quarter 2012, respectively. Google (GOOGL -0.15%), in comparison, posted revenue growth of 22% in its most recent period.
As revenue growth declines, investors are less willing to pay a premium for a company's stock. A stock's P/E ratio measures its premium, or the multiple being paid for future earnings.
Over the July 2012-July 2013 period, Apple's P/E declined by one-third. While the stock's P/E has recovered somewhat at 13.2, it remains exceedingly low relative to the P/E average of 18.1 for stocks that make up the S&P average. A P/E of 18.1 would have Apple stock trading above $700.
The divergence in P/E for Google and Apple over time (graph below) is a stark demonstration of investor confidence in each company's revenue growth prospects. For perspective, a P/E of 31.8 would have Apple stock trading above $1,200.
In 2014, investors must determine what opportunities, if any, could significantly increase revenue growth for Apple. The chart below shows current sources of revenue and growth for the company.
Column 1-4 shows quarterly revenue over the 2013 fiscal year-column 5 the the annual total. Column 6 the first quarter 2014 growth rates by region and product line. Column 7 is incremental revenue for 2014 based on growth rates (column 6). The last column calculates how much the additional revenue would impact 2014 revenues.
Example: In FY 2013, Apple's Greater China revenue was $25.4 billion. A growth rate of 29% leads to $7.4 billion in incremental revenue for Apple's in 2014-an overall increase of 4.3% in total annual level.
The green rows are the regions and product lines currently showing double digit revenue growth-the type of growth the street is looking for in a tech stock. Yet, the green columns also present Apple's current revenue challenge: The company's fastest growing regions (China, Japan) and product lines (Mac, Software/Services) are currently not large enough to push total company revenue growth into double digits. If growth rates don't change the company would see 2014 revenue growth in the range of 6.4%-7%. (The difference in the growth rates between tables is due to the rounding errors caused by a region vs. product line comparison.)
The question for long-term investors becomes, do opportunities exist for Apple to drive revenue growth back into double-digits? The China Mobile iPhone distribution agreement, the anticipated release of a large-screen iPhone (iPhone 6), and wearable technology (iWatch) are three possible catalysts for company growth.
The next analysis is an effort to quantify revenue growth for each of the three initiatives across, what are hopefully, reasonable sales ranges.
China Mobile iPhone sales begin impacting Apple's sales for the first time this quarter. Analyst estimates of the impact of China Mobile vary widely; estimates for additional iPhone sales ranged from 5 million-39 million. However, China Mobile's recent earnings announcement placed iPhones sales at 1 million in the first 28 days of availability.
Based on China Mobile's first month of sales data, a range of 8 million-15 million additional iPhone sales seems reasonable. Using revenue of $608 per phone, the FY 2013 iPhone average selling price, provides revenue ranging from $4.9 billion-$9.1 billion. The additional revenue lifts the 2014 growth estimate of 6.4% into a range between 9.2%-11.7%.
Large-screen smartphones now make up a significant share of the smartphone market. Computerworld estimates "phablets" now account for 22% of all smartphones shipped. BlueFin Research Partners, in a recent Barron's article, estimated a large-screen iPhone could boost 2014 iPhone sales as much as 16%, or 24 million units.
Hypothetical increases in iPhones sales range from 14 million-24 million units and a $608 ASP would provide revenue of $8.5 billion-$14.6 billion and put annual revenue growth between 11.4%-15%.
Morgan Stanley analyst Katy Hubert estimates that an Apple iWatch could generate as much as $17.5 billion in its first year. Given the high level of uncertainty for a new category, and the bullishness of Hubert's estimate -- $17.5 billion is $5.5 billion higher than iPad sales in its launch year -- a more conservative revenue range seems appropriate. $7.5 billion-$12.5 billion in iWatch sales would boost Apple growth rates to 10.8%-13.7%.
Current growth rates for Apple's fastest-growing products and regions will not take the company's growth back to double digits. Without increased growth, there is significant risk that Apple will continue trading at a discounted P/E. China Mobile sales alone may not be enough to drive Apple revenue growth rates back to double-digits. The introduction of a larger-screen iPhone and an iWatch are likely to move company revenue growth back into the double-digits. Extended delays in the introduction of a wearable or a large screen iPhone would likely result in weak performance by Apple stock through 2014.