After reflecting upon Apple’s tremendous success, we now believe Apple shares are worth $240 today. Apple is poised to enter and in our view dominate two new categories (the television next year and the automobile by 2020) with a combined addressable market of $2.2 trillion, a view investors don’t appear to factor into their valuation at all. We believe this may lead to a de facto short squeeze, as underweight actively managed mutual funds and hedge funds correct their misguided positions. To arrive at the value of $240 per share, we forecast FY2016 EPS of $12.00 (excluding net interest income), apply a P/E multiple of 18x, and then add $24.44 of net cash per share. Considering our forecast for 30% EPS growth in FY 2017 and our belief Apple will soon enter two new markets (Television and the Automobile) with a combined addressable market size of $2.2 trillion, we think a multiple of 18x is a very conservative premium to that of the overall market. Considering the massive scope of its growth opportunities and track record of dominating new categories, we actually think 18x will ultimately prove to be too conservative, especially since we view the market in general as having much lower growth prospects.
Here are just some of Icann's assumptions:
● iPhone – after our estimate of 43% revenue growth in FY 2015, we forecast modest revenue growth in FY 2016 of just 2.3%, followed by moderate revenue growth of 6.7% in FY 2017, all driven by volume growth amidst flat average selling prices over the three year period paced by switchers, new middle class users, ecosystem strength, and innovation
● iPad – after disappointing revenue growth of negative 21.5% in FY 2015 as cannibalization from the larger screen iPhone and customers utilizing existing older models for longer than we expected impacted results, we forecast Apple is at an inflection point and expect the introduction of a new larger screen iPad in conjunction with its push into television, penetration into the enterprise, maturation of the replacement cycle, new middle class users, ecosystem strength, and innovation to drive strong performance with revenue growth of 27.7% in FY 2016 and 14.2% in FY 2017.
● Mac – in a declining PC industry, we expect Mac to continue its market share gain and support our forecast for its strong performance of 7.3% revenue growth in FY 2015, followed by 3.6% in FY 2016, and 4.6% in FY 2017 on flat average selling prices over the three year period of $1,230.
● Apple Watch – after the recent release in the 2nd half of FY 2015, we expect the Apple Watch to gain traction and be a success in the market leading our forecasts of 10 million units during the 2nd half of FY 2015 at $600 average selling prices including the extra bands many consumers will order. Throughout FY 2016 we expect the Apple Watch to gain further traction and a second generation Apple Watch to be released sometime in 2nd half of FY 2016. We expect improvements in both the number and quality of Apps along with adding sensors and functionality in later generations of the Apple Watch to evolve the Apple Watch into a must have accessory over time for iPhone owners. We forecast revenues of $6 billion in FY 2015, $22.5 billion in FY 2016, and $45 billion in FY 2017.
● Apple Television Set – after many years of rumors as part of Apple’s push into television and as we referenced previously, we expect in FY 2016 Apple will sell 55” and 65” ultra high definition television sets. We forecast revenues of $15 billion in FY 2016 and $37.5 billion in FY 2017 on 10 million and 25 million units respectively with average selling prices of $1,500.
iTunes, Software, & Services – as part of Apple’s move into television, we expect the introduction of a “skinny bundle” of pay-tv channels (partnered with various media companies) and video content sold through iTunes, along with a Beats Music subscription service and App Store sales give us comfort in our forecasts of growth over the next three years of 6% in FY 2015, 10% in FY 2016, and 15% in FY 2017. Not to mention HomeKit and HealthKit which for now we expect to not be monetized but simply enhance the overall ecosystem.
● Accessories and iPod – as part of Apple’s move into television, we expect the introduction of an updated Apple TV microconsole (which will continue to service the massive install base of televisions offered by other OEMs), along with improvements to Beats headphones to drive growth far in excess of the decline in iPod which at our forecast $1.1 billion of revenues in FY2015 is largely irrelevant to Apple financially
● Apple Pay – after an insignificant financial contribution in FY 2015 we expect Apple Pay to gain acceptance at more retailers and for Apple to expand the service internationally. Our forecasts for revenues (also equivalent to gross margins as the variable costs are de minimis) are $263 million in FY 2015, $1.2 billion in FY 2016, and $3.3 billion in FY 2017.
"Apple has clearly demonstrated a track record of excellence and success when entering new categories. We expect this to continue with the Apple Watch, the television, and the car, and the world will look back on today’s undervaluation as a fascinating example of market inefficiency (and likewise on our valuation at 18x earnings per share as conservative)."
To read the full and very lengthy letter, hit the link below...