To The Moon

Apple stock has finally awakened ahead of fiscal second quarter earnings, and some investors may be dreaming bigger. For example, could AAPL price double within the next three years?

Apple stockhas finally breached the $130 level, after spending nearly two months below it – and shares still seem to have some fuel to burn. Why not dream bigger, and project where the stock could be in, say, three years?

Today, the Apple Maven does some back-of-the-envelope calculations to explain how financial performance and valuation multiples can possibly combine to send AAPL to $250 by 2024, for a respectable annualized return of about 25%.

Figure 1: Apple Park in Cupertino, California.

First piece of the puzzle: valuation

There are several different ways to estimate how much a stock may be worth in the future. In this case, I will keep things simple, and use the traditional price-to-earnings, or P/E ratio methodology.

P/E is a simple metric that contains two pieces: stock price in the numerator, and earnings per share (EPS) in the denominator. Simple algebra suggests that the future price of a stock can be calculated by multiplying an assumed P/E multiple by actual or estimated EPS.

The graph below shows that Apple’s trailing P/E (that is, the valuation multiple derived using past earnings figures) has pulled back from the second half 2020 highs of around 40 times. The bad news is that, even at the current 36 times, the figure is much higher than it has historically been, on average.

Figure 2: Apple's Price/Earnings.

There are good reasons why Apple now trades at a much higher P/E multiple than it did in the past. A few of them include:

• Future growth opportunities have expanded with the 5G upgrade cycle, the expansion of the services portfolio, the rebirth of the Mac and iPad segments,and even the rumored Apple Car
• Apple’s financial performance is less dependent on one single product category – the iPhone – than it was in the mid 2010s
• Services, with its higher margins and more predictable revenue inflow, have become a much more important piece of the business
• Interest rates have come down to the closest that they have ever been to zero, which is a tailwind to valuation multiples

That said, I find it unrealistic to project an increase in Apple stock price based primarily on valuation multiple expansion. I believe that a sustainable trailing P/E of around 35 times is about as high as one should reasonably expect to see in the next few years.

Second piece of the puzzle: earnings

Valuation multiples do not tell the whole story, however. Apple stock can also rise on future financial performance, especially if the results beat current expectations.

According to our friends at Seeking Alpha, analysts currently project 2024 earnings per share to land at $5.38. For reference, Apple’s fiscal 2020 earnings reached $3.28.

Now, let’s travel in time to September 2024, roughly three years from now, at the end of Apple’s fiscal year. At that moment, Apple stock should be worth about $190 per share, given two assumptions:

1. The company meets current EPS expectations for fiscal 2024
2. The P/E multiple stays close to current levels, at 35 times

Therefore, for Apple stock price to double in three years primarily on the back of financial performance, the Cupertino company needs to deliver EPS of over $7. That is: rather than growing earnings at an expected annual pace of about 13%, Apple needs to pick up the pace and offer 22% instead.

This is quite a tall order, in my view. Three-year growth in earnings at these levels has not happened since the very early days of the iPhone and iPad, two revolutionary product categories that Apple essentially invented.

Therefore, for Apple stock to get to $250 in three years without valuation multiples climbing to levels never seen before, any (or a combination of) the following would probably need to happen to send EPS through the roof:

• An outstanding 5G super cycle that supports iPhone sales increase comparable to early 2010s levels, when the product category was still in the middle of its growth life cycle;
• A sizable, game-changing product launch that adds revenues where none currently exist. The most likely candidates would be augmented or virtual realitywearable devices,or the Apple Car;
• Aggressive monetization of Apple’s user base, primarily through service offerings and cross-selling of wearable and complementary products. In the case of services, segment revenues would somehow need to double in three years or less,rather than the expected five.
• Acceleration in the share repurchase efforts. Lately, Apple has been retiring its stock at a pace of 5% to 6% per year. I estimate that doubling this rate would be enough to boost EPS to where it needs to be.