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When will Apple's share price reach $500?

Apple’s share price has recently hit a new all-time high, over $400 per share. As often happens there was no specific new information from the company to justify this increase. On the other hand there is usually no news to justify share price drops in Apple. In fact, the stock is up on what would be considered counter-indicative news: the resignation of a very important CEO.

But readers may recall that there is a measure of performance for Apple we can turn to that seems to show strong correlation to its stock price. It’s not income and it’s not growth in income but it’s the strength of the balance sheet.

I demonstrated this relationship last May with a post titled The market values Apple’s balance sheet, not its income statement.

It’s time to look at the data again to see if the relationship still holds. I added the data for Q2 and made some estimate about the cash position since July 25th (we will know this data with more accuracy when Q3 data is reported in a few weeks).

The slope of the line above has decreased slightly but a strong correlation can still be observed. The old r-squared was 0.94 and it is now 0.90. I included the formula for the y variable (share price) as a function of x (cash).

If you plug in $100 for x you get about $500 for y. So if this relationship continues[1], the answer to the question in the title would be “When the cash and cash equivalents reach $100 billion.”

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Note:

  1. Note that whether the relationship holds (which it very well may not) depends on a strong correlation and “strong” is not well defined. The correlation has weakened slightly in the last six months.
  • http://www.jancifra.eu Jan Cifra

    I believe this relationship would hold better if it weren’t for the recent market turmoils caused by the sovereign debt crisis in the EU and the political stalemate in the US. The market still values Apple’s cash generating operations but does show signs of uncertainty in regards to the overall economic situation that has deteriorated in the past 6 months significanlty.

    • http://www.asymco.com Horace Dediu

      But this chart has little to do with the cash generating potential. It is showing the relationship between cash already on hand and the stock price. In other words, the answer does not depend on income it only depends on what’s in the bank.

      • http://www.jancifra.eu Jan Cifra

        I understand your point. But you yourself have projected the cash increase from Q3 and estimated the stock price based on that. I bet people trading make a similar assumption. They are not buying the shares today for the cash on the balance sheet – they will get none of it as Apple does not pay a dividend. The cash on the balance sheet and the cash generation create an expectation of a higher price in the future and a potential return as such. Is that an incorrect interpretation of your chart?

      • http://www.asymco.com Horace Dediu

        You are right. I am only trying to be clear that the “when” in my forecast is not a function of time. I did extrapolate the near term (actually the near past) and will update the data in a few weeks but it is only to offer a set of data to today (last Friday to be precise) rather than ending the chart at data from July 25th.

        The underlying assumption is that Apple is valued according to its balance sheet. We have to see whether the premium that exists to cash (5x) will hold into the future. It has held through a remarkably long period of time.

        Factors which may affect that multiple may or may have something to do with cash generation but I suspect it may also have to do with lots of other random factors. Cash generation rate has fluctuated dramatically over the period since October 2008 and yet this relationship has held.

      • http://www.asymco.com Horace Dediu

        You are right. I am only trying to be clear that the “when” in my forecast is not a function of time. I did extrapolate the near term (actually the near past) and will update the data in a few weeks but it is only to offer a set of data to today (last Friday to be precise) rather than ending the chart at data from July 25th.

        The underlying assumption is that Apple is valued according to its balance sheet. We have to see whether the premium that exists to cash (5x) will hold into the future. It has held through a remarkably long period of time.

        Factors which may affect that multiple may or may have something to do with cash generation but I suspect it may also have to do with lots of other random factors. Cash generation rate has fluctuated dramatically over the period since October 2008 and yet this relationship has held.

      • http://profiles.google.com/marcosmalo Mark Mayer

        But the cash generation rate has consistently grown, has it not? If Apple remains profitable while its rate of growth flattens, it would still reach cash & equivalents of 100 Billion eventually (assuming it continues to pour its profits into its “fund”). Would we still see the correlation in your chart? Your hypothesis and chart are interesting, but I’m not clear on how useful it is. Regardless, I do appreciate the work you’re doing trying to figure out Apple’s stock performance and untangle the factors.

      • http://www.asymco.com Horace Dediu

        There is something in what I write here that should appear absurd. If I can demonstrate with high confidence that a rapidly growing company is valued according to its balance sheet (and not its income) then it becomes a “reductio at absurdum” proof that the company is not correctly valued. It’s one thing to say that it’s not valued according to regular measures of value. It’s quite another to demonstrate that it’s valued according to something that holds little value.

        There is where the value lies.

      • MOD

        I was never comfortable with paying a premium valuation just because the company is high-tech. The result was the internet bubble.

        If you define a floor for Apple, as a multiple of its cash (or a book value), that is fine. It makes it a safe investment (like a bond you once said).

        This is not necessarily absurd.

        Perhaps the “regular measures” of tech companies is changing. Perhaps tech is becoming part of the landscape and it does not make sense to attribute them a higher valuation than to other companies that were already part of the landscape (ie Coca-Cola).

        Yes, Apple is growing quickly, but a skeptic would want to see that promised profit deposited in the bank first, before buying its stock. How many claims were made of fast growth during the internet bubble? That is where the “absurd” lies. Once burned, twice shy.

      • Davel

        Apple has grown quite nicely for 10 years. How much of a track record do you require? Comparing Apple to the dot com period is absurd. Not to be harsh, but Apple is growing income and revenue at astounding rates. It is more impressive considering how big the company is.

        How do you compare Apple to fly by night companies that have growing revenue from a small baseline and no profits?

      • http://www.asymco.com Horace Dediu

        This is not about being technology. It’s that future cash flows discounted to the present are a function of the rate at which they grow not a function of how much cash has accrued in the past. As it stands today future cash flows are completely irrelevant when considering what Apple is worth. (Or to put it more precisely, growth in those future cash flows are assumed to be negligible). It’s all about optimism vs. despondency. An optimist looks at growth and is hopeful. A pessimist looks at cash and thinks there will not much more. Apple is seen as the latter more than the former.

      • MOD

        To Davel:

        I do not need a “track record”. For what purpose? Apple just displaced Exxon Mobil as the largest public company in the US. Exxon’s PE is 9.6 and it pays 2.7% dividend yield.

        Apple’s PE is 15, so it is fairly valued when compared to its peers. Who else would you like to compare it to?

        Microsoft PE is 9.5.
        Berkshire PE is 14.4
        Oracle PE is 18
        GE PE is 12.4

        What if Apple’s sales double and its profit doubles? Then its share price will double. How much more do you want? Should it’s shares triple instead?

  • russell

    Apple’s earnings, and the side-of-affect of it’s ever expanding balance sheet , will continue to pull this thing forward, all the while its P/E will be kicking and screaming as its follows up the rear. Wall Street isn’t rewarding(higher P/E) them for anything, but they they aren’t punishing(lower P/E) them for good behavior, either.

    Horace, your chart above holds more weight that any of the conspiracy theory stuff i’ve heard in the last 36months from other sources. Sometimes humans have a hardtime accepting the obvious, especailly when the answer isn’t complex.

    • Sacto Joe

      I concur. It’s really quite simple. Apple, as many others have said, is a huge company that’s acting like a very successful startup. Investors have a really hard time believing that a company that’s the largest company in the world by market cap is able to grow at the rate indicated by Horace’s graph. They are behind the curve, literally. Normally, a startup would be given a much higher P/E with the expectation that the shifting paradigm they were taking advantage of would “lock in” future profits. But in Apple’s case, they appear to be having a very hard time either calculating those future potential profits or believing their calculations.

      My own seat of the pants guess has been that Apple stock price will grow about 50% a year. On the basis of this, I moved the majority of my (tiny) portfolio over to Apple a few years back. Since then, I’ve watched Apple carefully for any sign of a slackening in earnings growrh. Apart from the expectable slowdown at the beginning of the Great Recession, I am gratified to say that I haven’t seen it.

      • Anonymous

        I think the reason for the disconnect is that most investors do not understand that Apple is not just the design leader, they are also the technology leader. Most people assume that there is a pretty device that is not very smart, and a technologically sophisticated device that is not very pretty. They are not even considering that the Mac or iPhone is by far the best technical choice because it is so obviously the pretty choice. And they assume that HP or Microsoft can copy pretty more easily than Apple can copy what they think is more sophisticated technology.

        But if you are a technical person, you understand that Apple has a dynasty here, because it would take 10-15 years for anyone else to catch up to OS X. If you know that over 90% of Silicon Valley engineers use Macs, you know that Macs are not just a pretty face. Android has been going full time since 2003, and they only just started using the GPU in version 3. Their display subsystem is akin to the original Mac or Windows XP, not Mac OS X or Vista. Windows still has DOS bugs (e.g. drive letters and mapping) and cannot securely be attached to the Internet.

        That is why, even now, I still see people choosing their first Apple product after they see that product in the wild, after they have seen it demonstrate some functionality that they realize they need. It is still very much a club that people join one by one. You sort of have the wool pulled from your eyes when you see the technology demonstrated.

      • Gschwinn

        Ten to 15 years to catch up to OSX? That’s silly. Technology is moving MUCH faster than that.

      • Kizedek

        Tech may be, but bureaucracy isn’t. Apple continuously moves its OS(s) along at a pace that keeps step with technology, so they can take advantage of tech advances and help shape them.

        Everyone else has bolted advances on to their legacy systems ad hoc. MS could take 10 or 15 years to catch up with OS X, because they simply have made no plans to start doing what it is going to take, and they have been doing everything else at a snail’s pace.

        When it takes them three, four, five years to slap lipstick on the pig, and then do the same thing all over again when no-one likes it, one can well imagine that it might take 12 years for them to start from scratch as Apple did with OS X — IF they ever start. IF they pulled the trigger TODAY, and had the ability to plan and execute like Apple, than, OK, 7 years? 8? 10?

        But OS X is from NeXT which Jobs started soon after leaving Apple in, what, ’85, ’86. Then he came back in, what, ’96 or ’97? OS X wasn’t really ready until about 2001. So, that’s what, 12 years in development and 10 years in use? During that time Apple hasn’t ceased a rapid pace of development — they switch processors, they scale the OS, they rework it so it is 64-bit from the ground up, etc.

        It seems companies are not thinking about or working on a real, advanced commercial OS anymore. They seem to have completely given up the idea. You have new web-based frameworks (PHP, Ruby, etc.), but who works better with the web than Apple? Anything else of interest that comes along, who tries it out and perfects it? Apple. For example, I think they know what they want in a file-structure and they are working on that in the background.

        So, in the context of Operating Systems… yep, 15 years?

      • Anonymous

        MS did take the time to completely rewrite, they did it back in the early 90s when Apple was flailing around with Taligent.

        Windows NT was a completely different code-base to WIndows 3.1.

        There are many things that one can say about Windows that are not complementary. But there aren’t any fundamental problems in their framework that would take a full re-write to resolve – any more than there are with OS-X or with Linux.

      • Kizedek

        Oh? Perhaps they did take some time to have another run at an OS. My question is if they did what it takes; are they all set for the future, can they patch the old cracks forever?

        from http://www.windowsitpro.com:
        “In August 1988, Bill Gates hired Cutler. One of Cutler’s conditions for moving to Microsoft was that he could bring around 20 former Digital employees with him, including several Prism hardware engineers. Microsoft readily met this demand­the company knew hiring an OS architect of Cutler’s stature was a coup, and few engineers had Cutler’s track record. In addition, Gates felt that Microsoft’s long-term future depended on the development of a new OS that would rival UNIX.

        Microsoft’s internal project name for the new OS was OS/2 NT, because Microsoft’s intention was for the new OS to succeed OS/2 yet retain the OS/2 API as its primary interface. The success of Windows 3.0 in April 1990 altered Microsoft’s thinking and its relationship with IBM. Six weeks after Microsoft released Windows 3.0, Microsoft renamed OS/2 NT as Windows NT, and designated the Win32 API (a 32-bit evolution of Windows 3.0′s 16-bit API) NT’s official API. Gates decided that compatibility with the 16-bit Windows API and the ability to run Windows 3.x applications unmodified were NT’s paramount goals, in addition to support for portions of the DOS, OS/2, and POSIX APIs. From 1990 to NT’s public release in August 1993, Cutler’s team was in a mad dash to complete NT, and the project grew to involve more than 200 engineers and testers.”

      • Anonymous

        Much as OS-X has only recently with Lion fully thrown away the old OS compatibility, MS only completely cleared out 16bit with Vista, which is one reason why it took so long, broke so many things and was so generally ill received.

        Honestly I can’t believe I’m defending MS, because I do not enjoy developing for their platform, but the idea that it’s some creaking antiquity at the tech-stack level, or that Apple is super advanced in all areas, is just wrong.

        I suggest you read John Siracusa on the subject.

        http://arstechnica.com/apple/news/2010/06/copland-2010-revisited.ars

      • Kizedek

        OK, points taken. Look forward to seeing what they come up with when it is ready next year.

      • http://twitter.com/alanthonyc alanthonyc

        In addition the the two things you mention (design and tech), there is a third very important thing that even a lot of Apple fans miss.

        Apple is an operational leader. From my view outside of the organization, their supply chain and logistics operations make a lot of other companies look medieval in efficiency.

        Their ability to produce high quality products in mass quantities for speedy distribution is taken for granted. I don’t think it would take Microsoft 10 years to catch up to OSX, but it’s going to take at least that long for anyone to build up their operations to Apple’s standards.

      • Anonymous

        It may not even be possible for a non-integrated OEM to build up their operations to Apple levels, because they’ll always be forced to play the segmentation game – and have a lot of SKUs to match up against their competitors’ large population of SKUs.

        This article from Ars Tech goes into detail on it – it’s long but well worth the read.

        http://arstechnica.com/hardware/news/2011/09/ultrabook-intels-300-million-plan-to-beat-apple-at-its-own-game.ars

        The problem is that the PC industry, particularly the large OEMs, just aren’t set up to produce this kind of machine. The PC industry is built around an idea of almost infinite variation: different Wi-Fi adaptors, different Ethernet chipsets, different GPUs, different USB3 controllers. This variety is then reflected in the systems available from manufacturers—and more importantly, it’s reflected in the way the systems are actually built.

  • Anonymous

    Actually Horace, there is another possibly better relationship which is that AAPL has, since early 2009 been astonishingly linear with time.

    Unlike the graph that you show, which has a distinct elbow around the $300 mark, this relationship seems to be holding up pretty well, and has a very rough value of $100 per year. So $500 should be hit in Oct 2012.

    • Sacto Joe

      For 2009, Apple went up about $100. For 2010, it went up about $150. 2011 isn’t over yet. If it hits $500 this year (up $200), tthen hat would indicate a non-linear curve is more appropriate. And considering the non-linear growth in Apple’s earnings, that only makes sense.

      • Anonymous

        Oct 2008 – $96
        Oct 2009 – $185
        Oct 2010 – $280
        Oct 2011 – $400

        This is far far more linear than the correlation with cash.

        http://ycharts.com/companies/AAPL/price#zoom=&startDate=9/26/2008&endDate=9/26/2011

      • Sacto Joe

        You’re being somewhat disingenuous to include the 2008 data. That was the depths of the Great Bush Recession. A year previously it was at $200/share. That whole first year could be considered an anomaly, as stocks like Apple recovered from a tremendously oversold position. And in addition, Apple’s most growth-intensive quarters are its 4th and 1st quarters. Let’s see what they do to Apple’s stock price before jumping to conclusions.

      • Anonymous

        I’m taking the exact same time frame as horace is, so no – I’m not being disingenuous, and besides I’m just talking about a correlation. Easy enough to see that Horace is using the same time period because Apple hit $25Billion in cash in October 2008
        (see for instance http://investor.apple.com/secfiling.cfm?filingID=1193125-08-224958&CIK=320193 )

        Since that time Horace says, Apple’s share price has been linear with Cash Equivalents, but a cursory glance reveals it was linear until $55BN, then there was an abrupt kink, then it was linear again at a lower gradient.

        With time the gradient is very constant.

      • jawbroken

        Since your assertion is that it is “far far more linear” why don’t you plot the same data (weekly closing price) vs time over the same time scale and show that the r-squared is “far far” closer to 1.

  • Anonymous

    Would it be possible to redo the chart so that the color of the small circles would fade from one color (oldest) to another (newest)? That would give insight to potential temporal trends.

    • http://www.asymco.com Horace Dediu

      Cash has been increasing with time so time is a good proxy for the X-axis. You can see the history here: http://www.asymco.com/2011/07/20/a-princely-sum/

      • Anonymous

        Ah, of course, how stupid of me. But one thing I don’t understand is how you have so many data points? Much more than quarterly earnings results would provide.

      • Anonymous

        The answer was naturally in your older article:

        “In the chart below I show the weekly closing price of the shares and the corresponding value of the interpolated cash (and marketable securities) per share over the last two and a half years.”

        So I take it’s ERs + linear interpolation.

      • http://www.asymco.com Horace Dediu

        Exactly. Earnings report plus linear interpolation on weekly (Friday) closing prices. I should have mentioned it again in this post.

      • MOD

        That graph (cash vs time) is exponential whereas this is linear. Something is not to scale here. Putting the two together the answer would be in 1-2 quarters from now.

  • http://www.facebook.com/profile.php?id=644846198 Ron Smith

    Assume the relationship stays relatively stable and that Apple’s cash and marketable securities

  • http://www.facebook.com/profile.php?id=644846198 Ron Smith

    That got truncated via user error :), assume that Apple’s cash + marketable securities increase by x amount by the end of Q3, 2012, apply the formula and the result is a share price that I am afraid to mention :)

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  • Ian Ollmann

    I intuitively expect the price to grow relative to cash flow, not total cash on hand. Investors are seeking to pay for return on investment. Cash on hand is an annoyance, because you’ve got to spend more to get those earnings.

    This chart probably only looks linear now because relative to the cash flow, not much time has elapsed. As more water flows under the bridge, I expect this to flatten out. A linear prognosticative trend line is likely not valid here.

    • http://www.asymco.com Horace Dediu

      You and I and all expect price to grow relative to what we’re paying for. Alas, it seems not to be the case. For the time being you can buy Apple for 5x its Cash.

  • Ian Ollmann

    I intuitively expect the price to grow relative to cash flow, not total cash on hand. Investors are seeking to pay for return on investment. Cash on hand is an annoyance, because you’ve got to spend more to get those earnings.

    This chart probably only looks linear now because relative to the cash flow, not much time has elapsed. As more water flows under the bridge, I expect this to flatten out. A linear prognosticative trend line is likely not valid here.

  • Westechm

    Apple is doing great. Their cash is increasing.

    Apple is doing great. Their stock price is going up.

    Of course.

    Is there a correlation? Of course.

    Does the increase in stock price caused by the increase in cash? No.

    Both are caused by Apple’s great performance.

    • http://www.asymco.com Horace Dediu

      Right. Correlation is not causation. What is also true is that there is far weaker correlation between earnings growth and price.

      • Sacto Joe

        That’s the point that people seem to be missing. What’s driving the disconnect between earnings growth and price growth? There is a shaky correlation to cash, and as EduardoPellegrino states some correlation between Apple stock price and time over the last couple of years. but neither of these explains the growing disconnect between earnings and stock price as illustrated by the shrinking P/E ratio. Some say that all similar companies are seeing their P/E ratios shrink, but what other similar company is growing earnings like Apple is? No, there’s something else going on here. And short of any other credible rationale, I go back to a lack of comprehension by investors in the paradigm-shattering nature of Apple’s re-ascendancy. The little also-ran that everybody had dismissed is very much back in the race, and people simply can’t believe their eyes….

      • Westechm

        Possibly the part we are missing is the psychology of the market. There is a part of the analysts and the media who don’t understand how well Apple runs its business and are constantly waiting for them to fail. They want to be first to catch the news and make a name for themselves. Their constant harping seeds distrust which, of course makes investors wary. I don’t know how to measure this or how important it is. If I am right, the nay sayers may eventually be burned often enough to back off and perhaps even reverse position.

        What we need is some kind of sentiment or confidence index (a survey?) to rate how strongly people feel about the future of a company.

      • http://www.asymco.com Horace Dediu

        Case in point: An analyst initiated coverage today on Apple with a “Buy” rating and $495 target price and assumes that the iPhone will grow at 27% next year. Not only is that less than half the growth of the smartphone market overall but that’s about one fifth of the growth Apple has been able to achieve for the iPhone over a four year period into a market that is still less than 25% penetrated.

        This discounting of Apple’s growth by a factor of 2 to 5 has been going on for as long as I’ve been following the company.

  • Westechm

    Line 5 should read:

    IS the increase in stock price caused by the increase in cash? No.

  • Ryan Quattlebaum

    Something I’d like to see would be a graph of the residuals from that best-fit line. It looks like there might be some trend there, which is suggests that there is another influence to the share price. It might be worthwhile to investigate things that showed significant changes at the same times as the inflection points in the residuals.

  • IBuyer

    This charts is more reflective of FCF growth. If they started to pay a dividend or acquire a large company this would no longer hold.

    Btw, it would be interesting to look at the bear case values if we go into a global recession.

    Great work!

  • Anonymous

    Graham’s famous quote: “In the short run the market is a voting machine. In the long run it’s a weighing machine.” seems true in the case of AAPL here. Investors are somehow valuing the stock by its weight (the balance sheet), instead of vote (expectation to future growth). I think it is partly because of the overhanging question about Jobs’ health (now more or less cleared), and partly the question of sustaining such high growth rate given Apple’s size. The result is that investors are reluctant to give AAPL a premium unless they see the earning. I think we’ll continue to see the P/E crunch to AAPL and the stock price lag behind the actual growth of the company, until there is nothing more to crunch. Then we will see the stock price to catch up, if Apple is still growing at that time.

  • Nine Yarder

    Apple stock could be becoming an actual currency. Which has more financial discipline and growth prospects, the USA, EU, or Apple? If this is becoming the case, the stock should establish a lower price support level which will increase in proportion to the cash level.

  • Anonymous

    Out of curiousity Horace, did you try any other regression against that data? Logarithmic for example?

    • http://www.asymco.com Horace Dediu

      I was confident enough with an R-squared figure of 0.9 to 0.94 that I felt the fit to be good enough with linearity.

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