Daniel Ernst from Hudson Square Research is making a name for himself with a $500 price target (prev. $300) for Apple (NASDAQ:AAPL) this morning.SUMMARY
- Driven by a comprehensive deep dive into Apple’s expanding addressable market, we are increasing our target price from $300 to $500.
- With the launch of the iPhone, the App Store, the iPad, and the relaunch of Apple TV, we estimate Apple’s total addressable market for hardware, content, and services expanded from roughly $400B to $1.5T
- We note over the last five years, Apple’s revenues have grown by a factor of 4.5x and earnings have risen nearly 10x.
- We expect Apple to report a very strong FY4Q10 after the market close on October 18. We expect upside to our bellow consensus estimates for revenue of $18.2B, up 49% Y/Y and EPS of $3.82 up 38% Y/Y.
- Our DCF driven $500 price target equates to 24.2x our revised FY11 EPS estimate, plus a projected FY11 cash balance of $71.6 per share.
BLUE SKY OPPORTUNITY With the launch of the iPhone, the App Store, the iPad, and the re-launch of Apple TV, we estimate Apple’s total addressable market for hardware, content, and services expanded from roughly $400B to $1.5T. Apple’s Mac share has doubled over the last five years and we believe could double again. In a little over 3 years Apple has captured less than 3% of the mobile phone market by units, but by revenue Apple holds a ~14% share. The iPad is off to a strong start, and the product greatly expands Apple’s addressable market for content distribution. While the new Apple TV and iAD are still in the very early stages, we believe the opportunity is very strong.
EXPECT STRONG QUARTER We expect upside to our bellow consensus estimates for revenue of $18.2B, up 49% Y/Y and EPS of $3.82 up 38% Y/Y. Our channel checks throughout the quarter, particularly in our summer iPad survey (8.23.10) and back to school surveys (9.13.10) showed very strong demand for Apple products. We forecast Mac sales rose 28% Y/Y to 3.9M and iPod sales down 2% Y/Y to 10M units, offset by a lift in ASPs. We see likely upside to our 9.5M up 29% Y/Y iPod forecast, and our 4.5M unit iPad forecasts. Given the late start we see little contribution from Apple TV.
RAISING ESTIMATES While we expect upside to our forecasts in the quarter we are leaving our estimates unchanged and await results on Monday. That said, driven by our bottoms up opportunity assessment, we are increasing our FY11 revenue estimate from $71.9B to $77.3B, and our EPS forecast from $16.67 to $17.67. VALUATION Our DCF driven $500 price target equates to 24.2x our revised FY11 EPS estimate, plus a projected FY11 cash balance of $71.6 per share. While direct peers trade at 13x, we note the broader consumer tech spaces trades at 25x. Key risks include the uncertainty of demand for consumer discretionary products, competition, pricing pressure and a potential management transition.
Notablecalls: Needless to say, $500 is the new Street High target for Apple. Rocket fuel.
Would not be surprised to see $310 or higher today.
Apple doesn't move based on analyst upgrades. In the past it usually drops on a high analyst upgrade. At this point in time, upgrading Apple stock is useless because it trails so far behind most estimates. Investors don't even concern themselves about Apple upgrades anymore.
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