Apple (NASDAQ:AAPL) stock has had a great run over the past five years, thanks to robust sales of new iPhones and iPads. However, even after its historic 300% rally, there's still plenty to love about Apple. Its strong iPhone 6 launch fueled a 16% year-over-year jump in iPhone unit sales last quarter. As if that wasn't enough, Apple is poised to lock in new health care customers with HealthKit, enter the smart home market with HomeKit, and revolutionize mobile payments with Apple Pay. Next year, Apple Watch very well could turn smartwatches from niche gadgets into mainstream ones.
But with bullish analysts now claiming that Apple can soar as high as $150 (Morgan Stanley), investors might be wondering if the stock is getting a little overheated. Let's take a look at three key numbers that Apple investors should think carefully about.
18: Apple's P/E
Apple's trailing P/E of 18 initially looks cheap compared to Google's P/E of 28 (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft's (NASDAQ:MSFT) P/E of 19. Yet Apple's P/E also hovers near its three-year high.
Moreover, Apple's 5-year PEG ratio -- which we get by dividing the P/E by its 5-year expected EPS growth rate -- is currently at 1.3, according to S&P Capital IQ Data.. A PEG of 1 is often considered to be a fair trade-off between cost and growth values. A PEG ratio less than one hints at stronger bottom line growth, while a ratio higher than one indicates slower earnings growth ahead. Google also has a 5-year PEG of 1.3, while Microsoft's ratio comes in at 2.8.
Therefore, both Apple's P/E and PEG ratios suggest that the stock still isn't as cheap as its seems.
$1 trillion: Apple's new target valuation
Apple, the most valuable company in the world, now has a market cap of nearly $700 billion. Many analysts are now discussing whether or not it can reach $1 trillion, which would lift its stock price to nearly $170 per share.
Assuming a P/E of 18, Apple's would need to post annual net income of $55.5 billion, or $9.47 per share, to reach a $1 trillion valuation. That would be a 40.5% increase from the $39.5 billion, or $6.49 per share, in net income it reported in fiscal 2014. By comparison, Apple's net income only rose 6.7% YOY in 2014 and fell 11.3% in 2013.
Apple would also need to sell a lot of iPhones in 2015 to return to sustainable double-digit net income growth. JPMorgan analyst Rod Hall claims that Apple could sell 235 million iPhones next year. That bullish projection, which calls for 39% YOY growth, makes little sense based on past sales -- global sales of iPhone units rose 13% in 2013 and 20% in 2012. Meanwhile, IDC reports that Apple's global market share fell from 14.4% to 11.7% between the third quarters of 2012 and 2014.
The other half of the puzzle is the Apple Watch, which Apple hopes will diversify its top line away from iPhones, which accounted for 56% of its revenue last quarter.
60 million: The projected number of Apple Watches sold
Morgan Stanley's Katy Huberty believes that Apple can sell 30 million to 60 million Apple Watches within the first year.
Let's take a look at how many smartwatches have been sold so far. Between last October and this May, NPD reported that nearly half a million smartwatches were sold in the U.S., generating $96 million in combined revenue. Samsung (NASDAQOTH:SSNLF) accounted for 78% of that market, while Pebble claimed 18%. In the first quarter of 2014, Strategy Analytics reported that Samsung controlled 70% of the global market with over half a million shipments per quarter.
Assuming that Samsung ships 2 million units per year to control 70% of the market, it seems too optimistic to assume that Apple can sell 30 million to 60 million units within the first year. To reach 60 million, roughly one out of three iPhone owners (who bought 169 million iPhones in fiscal 2014) would have to buy one. Unfortunately, a recent RBC Capital Markets survey revealed that only 11% of respondents planned to buy an Apple Watch.
11% of 169 million would be 18.6 million -- a respectable figure, but one that could still disappoint overly bullish analysts.
Should you worry?
Apple investors shouldn't sell their stock based on these numbers alone. However, they should be aware that the stock's upside potential is getting limited, and expectations for iPhone and Apple Watch sales are running quite high. If Apple fails to meet those expectations, the stock could tumble.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.