Tuesday, April 03, 2012

Apple (NASDAQ:AAPL): Why We Believe Apple Will Be The World's First Trillion Dollar Company - Piper Jaffray

Piper Jaffray's Gene Munster is throwing the shorts a curve ball this morning by upping his price target to $910 (prev. $718) saying Apple (NASDAQ:AAPL) is likely to be the world's first trillion dollar company.

- This is the new Street high price target.

Munster believes shares of AAPL will reach $1,000 in CY14, which would imply a roughly 1 trillion dollar market cap, the first in history. While some investors believe the biggest issue for AAPL to get to $1,000 is the market cap along with excessive investor exuberance, which Munster addresses in this note, he believes the real story is earnings growth. Fundamentally, he believes shares can reach $1,000 based on his belief Apple will continue to win in global mobile devices. As a result, Munster remains confident in his $80.18 CY15 estimate. A 12x multiple (stock's current out year EPS multiple) on his CY15 EPS of $80.18 yields $960; however, this excludes an Apple Television, which the analyst believes could add more than $4 in EPS (5%) by CY15, which would yield over a $1,000 share price (12 * ~$84).

Here are some of the more interesting excerpts from the note:

It's All About Apple Continuing To Win In Global Mobile Devices. Outside of the market cap logic outlined above, we believe the fundamental driver to Apple reaching a $1,000 share price is the company's continued success in the global mobile device markets, which we believe will drive consistent EPS growth. For CY12, we expect $44.76 in EPS, 27% y/y growth. For CY15, we expect $80.18, 23% y/y. The most important market is the smartphone market, where we estimate Apple had 19% share last year, which we expect to go to 33% in CY15, with ASP's going from ~$580 in CY11 to an estimated ~$435 in CY15. Moving forward, we believe the smarpthone market is boiling down to essentially two players at scale: Apple and Samsung. While a wild card is a Chinese manufacturer (Huawei/ ZTE for example) becoming a larger player, we believe Apple and Samsung will be market share winners over the next few years. To better target the 80% of global smart phone users that are pre-paid, we believe Apple will continue on its current progression of selling older iPhone models at lower prices. And we expect this strategy to yield a $200 entry-level iPhone by December of CY15. Given our belief that the smartphone markets will exceed 1 billion units in 2015, we believe this creates a significant market opportunity for Apple. The details for our expectations on overall mobile device growth for Apple are below.


Why Excessive Investor Exuberance Should Not Be A Concern; Valuation Is Low. As of yesterday, there are 54 analysts covering Apple, of which 47 have either a Strong Buy or a Buy, 5 with a hold, and 2 have an underperform or a sell (Yahoo Finance), with the discussion of a $1,000 share price nothing new to the Apple story. As further evidence of the exuberance, countless funds have made special provisions to own positions in Apple above the funds' guidelines. The bear case is that once something fundamental breaks in the Apple story, these funds will lower their Apple exposure to normalized levels and shares will drop. The reason we are not concerned about this risk is we believe valuation is low relative to Apple's expected growth, which should give support to shares. Despite the law of large numbers, we believe the opportunity in mobile devices (iPhone and iPad) are big enough for Apple will grow earnings by 20% plus over the next three years, while our price target is based on a 12x earnings multiple. The bottom line, while it seems virtually every investor (professional and retail) and analyst has something positive to say about Apple, the multiple on shares does not suggest there is excessive investor exuberance.


Where Will The Next $400 Billion In Market Cap Come From? We believe there will be enough value over the next two plus years for Apple to add another $400 billion in market cap from a combination of growth in dollars invested in tech and continued shift from major Apple competitors. First, we believe dollars invested in US technology companies will increase ~5% y/y on average for the next three years (CY12-CY14). By comparison, dollars invested in US tech companies were up 9% y/y in 2011. Therefore, the tech sector will add ~$390 billion in market cap through 2014. We assume Apple could capture half of this market cap (from 85% in the 4 years prior). Second, the companies we consider to be the 10 most relevant competitors to Apple (Samsung, HTC, RIMM, NOK, SNE, DELL, HP, MSFT, INTC, GOOG) represent nearly $1 trillion in market cap today. We believe 20% of that value, or ~$200 billion could shift to Apple through 2014. Thus there is potential for Apple to repeat history and add another $400 billion to its market cap. At a $1,000 share price (roughly $1 trillion in market cap) Apple would represent 26% of the total US tech market cap from 17% today.


What Could Go Wrong? Innovation Slows. The key risk to the Apple story is pace of innovation. While we have not seen anything to make us believe innovation will slow, it is the fundamental barrier that stands between shares at $600 and at $1,000. Apple has won the ecosystem and interface war, and must continue to innovate around its leadership position to grow the business. Going forward, consumer interest in owning future Apple products is a key metric to measuring Apple’s pace of innovation. Our survey work last fall suggested 94% of existing iPhone owners in the US expect their next phone will be an iPhone.

Notablecalls: Note the Morgan Stanley $960 was their Bull case, not the actual PT. Gene now has the Street high price target. The shorts that overstayed the Wedge call are going to be covering now, I suspect.

A mere 3% move would put AAPL to $636.

(FWIW, I still think Wedge is right. But it is what it is. Munster trumps Wedge here).

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