Over the past month, shares of AAPL are up 21% to $179.50. If the stock reaches $186, it will be the first company to cross the $3 trillion valuation milestone. Hitting this mark will be a catalyst for investor debate on how high can Apple’s valuation go. My view is grounded in the same logic I used when Apple crossed the $1 trillion and $2 trillion valuation thresholds, rooted in the simple truth that investing is about predicting what’s next. I believe Apple’s best days are yet to come, based on the current business and future business Apple will likely add.
The case for $250
Previously I had made a case for shares of AAPL to reach $200 in 2022. I now believe that target is too conservative. My current thinking is that in 2022 investor euphoria will emerge in anticipation for two new product categories (metaverse and autonomy) that should increase the multiple on AAPL. Given the size of the new addressable markets investors will consider, I see an increased multiple to 35x as reasonable. Adding in my belief that in FY23 Apple will earn $7, yields a $250 share price, about 38% higher than current levels.
Taking a step back, what got us here
Apple’s valuation has climbed recently despite what remains a more difficult supply environment because it’s a company investors can sleep well at night owning. There are four reasons for this comfort;
- Apple generates close to $60B annually in cash.
- Has a product line up that is gaining share from the accelerated digital transformation.
- Operates a high-margin, steady-growth services business that has largely defended itself from the long anticipated threat of greater regulation.
- New product categories will likely be announced over the next five years. It’s becoming more clear that next year Apple will show a prototype of its mixed reality headset in 2022, and is working toward releasing a fully autonomous car in about five years.
The surprising part, I believe the company’s valuation is still attractive at 26x 2023 earnings, and see fair value at 35x. Based on my estimates, this compares to Meta’s 19x, Google’s 23x, Netflix’s 38x and Amazon’s 57x.
The rising multiple
The formula is time tested when it comes to investing in Apple. Anticipation for new products with large addressable markets stirs up investor euphoria which leads to shares of AAPL trading at a higher earnings multiple. In the case of the two new product categories, I caution that one should be thought of as having a high potential of becoming a reality and the second remains a wildcard.
- The metaverse. I believe there is a high likelihood Apple eventually has a family of products addressing the opportunity and we should see a prototype in 2022. AR or MR glasses are a logical Apple contribution to the metaverse where we will play and work in a more immersive digital worlds. Over the next several years the metaverse will largely be experienced in 2D, like it is today with Roblox and Zoom. Down the road, I agree with Zuckerberg that hardware will power more 3D presence, pitting Meta vs. Apple in a race to build affordable and comfortable headsets to experience the metaverse.
- Autonomy. I want to caution, there’s a wide gap between an internal ambition and a product that is in the market. Apple is working on a car, and it’s unclear if it will see the light of day. I believe there’s greater than a 50% chance Apple eventually comes out with a car, and it’s likely more than 5 years away. I caution pricing in the potential too early. It’s still five plus years away. That said, fast forwarding to the impact to the business. If you assume Apple can capture 10% of the auto market, they have just under 20% of the phone market today, at $60k per car, equals $540B annual revenue business. In 2022, Apple’s total revenue is $380B. Auto stands by the metaverse, AR, and MR as Apple’s biggest opportunities not fully reflected in shares, even with what I believe is a $200B increase in Apple’s market cap since the Apple car rumors gained credibility late in November. Auto could be worth $2 trillion plus to Apple’s market cap long term.