Apple Is the Cornerstone of a New Digital Transformation
To some, the move in shares of AAPL over the past four months (+85%) may appear unsustainable. While there will undoubtedly be price fluctuations in the near term, we believe there is 50%+ upside to AAPL shares over the next two to four years. In the last five months, we’ve realized five years of tech adoption across our economy and society. The COVID-19 pandemic has helped usher in a new digital transformation marked by accelerating adoption of various technologies.
Apple is the cornerstone of this transformation. The company has paved a unique growth path with a combination of hardware, software, and services that its competitors cannot match. At the most basic level, our reliance on the company will continue to grow in the years to come.
The case for AAPL at $200
What may seem even more out of touch with reality is the case that Apple’s market cap can exceed $3.5 trillion in the next two to four years. The magnitude of that number is mind-numbing, with no historical precedent. There is also no historical precedent for the scale of tech adoption that is currently underway, nor a precedent for the reach and popularity of Apple’s products. While the velocity of this adoption may subside with an effective vaccine or better treatments, the transformation is underway nonetheless.
Applying a 35x multiple to our 2022 Apple EPS estimates of $5.50, which is about 17% above the Street, yields a share price of about $200. Apple has not traded at a 35x forward EPS multiple since the glory days of the iPod when the overall business was growing greater than 35%. While we expect revenue growth over the next several years will be closer to 10%, the underlying reliance the world will have on Apple products justifies, in our view, a multiple well above revenue and earnings growth rates.
Fortunately, there are precedents related to this low growth high multiple dynamic. Companies that are woven into the fabric of our lives — companies like Coca Cola and Clorox — see normalized growth rates in the high single digits but trade at 23x to 27x next year’s earnings. Over the next few years, we believe Apple will gain a place alongside these critical companies in the minds of investors with revenue growth in the low teens and a forward EPS multiple in the mid-30s.
Apple’s best days are still ahead
Apple’s hardware, software, and services are foundational to this new digital transformation, which is accelerating. These highly integrated offerings will allow the company to capitalize on a multi-year 5G upgrade cycle, to increase the effectiveness and adoption of healthcare-enabled wearables, to pioneer the next generation of computing with augmented reality, and to leverage its AI expertise in new software and new services.
This may sound like buzzword bingo, but we believe it is a realistic assessment that Apple’s best days are still ahead.