Apple shares hit record levels

With shares up over 25% since late October and 46% from a May 2016 low of $91.50, it's hard to blame any Apple (AAPL) investors looking to take profits. That's particularly true given the severity of past selloffs, and how much markets in general have rallied. But while a lot of the easy money may have been made, still-low multiples and a pair of catalysts could fuel further gains.
Apple jumped to new 52-week highs two weeks ago after beating December quarter estimates on the back of strong iPhone 7-Plus sales and (to a lesser extent) rebounding Mac sales. Shares have added to their gains since then; they closed up just under 1% on Monday to $133.29 after Goldman analyst Simona Jankowski hiked her price target by $17 to $150, citing optimism about this year's much-rumored iPhone 8 launch.
Nonetheless, Apple is still slightly below an April 2015 intra-day peak of $134.54, and shares still only trade for about 13 times a fiscal 2018 (ends in September 2018) consensus EPS estimate of $10.08. If one backs out the $169 billion in net cash Apple has on its balance sheet, shares go for about 10 times next year's expected earnings.
Either way, Apple isn't granted the kind of valuation premium given to many other big consumer brands with strong customer loyalty and pricing power. For example, Nike (NKE) , Coca-Cola (KO) and Whole Foods (WFM) each trade for 21 times next year's consensus EPS estimate, while Starbucks (SBUX) trades for 23 times its forward estimate. It should be noted that none of these companies, including Apple, are currently posting double-digit sales growth.
More than Apple's fellow tech giants, such consumer names might best represent Apple's peer group from a valuation standpoint, given the power of its brand, its very high hardware loyalty rates and its steadily-improving ability to monetize a huge installed base via services revenue streams. This last strength might not be appreciated well enough, given Apple's services revenue rose 18% last quarter to $7.2 billion and its installed base is said by the company to still be growing at a double-digit clip.
Perhaps concerns that iPhone sales are vulnerable to share loss and price pressure from cheaper Android phones have depressed Apple's multiples. But save for some Chinese pressure caused by local brands, Apple's December quarter results, in which the company reported a 5% annual iPhone sales increase and a $695 iPhone ASP, did a good job of refuting this thesis.
And given what's been reported about the iPhone 8 to date, its reception could make current analyst estimates look conservative. On average, Apple's sales are expected to rise just 3% in the December quarter to $78.4 billion, with iPhone sales rising 5% to $54.4 billion. Apple's revenue growth is expected to be a healthier 7.6% for the whole of fiscal 2018, but that's partly because sales are forecast to drop in this year's June and September quarters due to soft iPhone 7 demand ahead of the iPhone 8 launch.
Supply constraints might limit how many iPhone 8 units Apple can sell this year, and lead a large proportion of this fall's iPhone shipments to include iPhone 7S units delivering more incremental improvements. But with the iPhone 8 rumored to feature a 5.8-inch curved OLED display, an advanced wireless charging solution and 3D sensors that could be paired with a dual-lens camera (such as the one found on the iPhone 7-Plus) to enable advanced augmented reality applications, odds are good that sales will be brisk for those units it does ship. That's particularly true for iPhone 6 owners who have held off on buying an iPhone 7 in the name of waiting for an iPhone with bigger improvements.
In addition to the iPhone 8, President Trump's proposal for an offshore cash tax holiday featuring a 10% one-time repatriation tax is a catalyst that might not be fully priced in yet. With $230 billion of the $246 billion in cash Apple held at the end of December located overseas, and the current repatriation tax rate at 35%, Apple's offshore cash might be discounted by as much as $11 per share (though a little less somewhat less in practice) relative to what it would be worth if only a 10% tax rate was applied to it. And this excludes any positive reaction markets might give to the use of some of that cash for new buybacks and/or a special dividend
Of course, the iPhone 8's reported feature set and the potential for a tax holiday are both pretty well-known at this point. But that doesn't necessarily mean that markets have fully priced in their impact, or for that matter the earnings stability that Apple's brand, customer loyalty and services streams appear set to provide. Apple's current valuation arguably acts as proof.

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