Earnings Per Share

Three months ago Apple provided the following guidance:

As we move ahead into the June quarter,[…] We expect revenue to be between $51.5 billion and $53.5 billion. We expect gross margin to be between 38% and 38.5%. We expect OpEx to be between $7.7 billion and $7.8 billion. We expect OI&E to be about $400 million. And we expect our tax rate to be about 14.5%.

If we aim for a revenue figure close to the upper end of the range ($53.2 billion) and insert all the other figures (split the difference for OpEx) then then the company’s fiscal third quarter looks as follows:

Revenues: $53.2b
iPhone (units): 43.2 million
iPad (units): 11.6 million
Mac (units): 4.3 million
Services ($): 9.5 billion
Other products ($): 3.5 billion
Gross margin (%): 38.6%

EPS ($): $2.26

This last figure, the earnings per share, is the most speculative because it depends on another guidance that Apple gave: a new $100 billion share repurchase authorization and the fact that it has no time frame. For context, as of end of March the company had completed over $275 billion of its previous $300 billion capital return program and $10 billion remained for share re-purchases in the June quarter. It’s unclear how much of the new authorization will be spent in the quarter.

That spending could indicate the share count but there are issues with this calculation as well. The $2.26 EPS I forecast is based on the assumption that the the same number of shares will be retired as in the previous quarter (about 89 million shares.) However the company spent $23.5 billion on repurchases of 137 million Apple shares through open market transactions (for an average price or $171.53, in-line with the quarter’s trading average).

So why is the number of shares purchased (137 million) so different from the change in shares used to compute earnings per share (89 million)? I actually don’t know.

The question of how many shares are available to calculating EPS is perhaps the last mystery in what is otherwise a very predictable business. The revenue growth and implied iPhone growth are pretty transparent. Incidentally, the EPS I’m forecasting is equivalent to growth of 35.8% y/y. The share price is trading at multiples about half of this growth rate so it’s no wonder the company is spending most of the cash on re-purchases.

How quickly the $100 billion re-purchasing authorization will be used is another question. The effect in concentration of value per share could be profound as shown in the graph above which will have further implications on the “cash zero” direction for the company.



  • Les_S

    So how much longer before they have scooped up all shares and can forgo all of the silliness of being a public company? Do they really have an incentive to remain a public company?

    • Accent_Sweden

      I asked this question once, and Horace pointed out that who would own the company privately? Management? Employees?. No, the market will press the price per share up as shares decrease and less people would be willing to sell. The profits will be increasingly used for dividends and the share price will increase accordingly.

      • Space Gorilla

        I was just pondering this. At some point the share price should become more sensible and I would think dividends would then increase dramatically. A long AAPL strategy seems so obvious. I suppose it is to our benefit that so many people do not understand why Apple succeeds. My investment in Apple a little more than ten years ago is going to provide an incredible return in another decade, just as it already has over the past decade. It boggles my mind that so many pundits didn’t see this success coming and still argue Apple is doomed. It’s also nice that Apple products provide me so much value and use. Win win scenarios are always good.

      • Childermass

        I could not agree more.

    • claimchowder

      A company cannot go private without agreement from all shareholders. And a company’s ability to hold its own shares is severely limited, which is why those shares are usually retired (destroyed).
      Even if Apple bought all the shares in the world, they would get MINE only for the price of AAPL’s whole market cap, plus a bonus. And I’m probably not the only one who thinks that way.

      • Les_S

        The question was posed somewhat with provocation in mind. What prompted my question is the trajectory that Apple is currently at with regard to retiring shares. The inflection is quite dramatic. So I suppose a more sober question is at which point would they start to ease buybacks and transition (I suppose) to heftier dividends?

      • Sacto_Joe

        My guess? Between 5 and 10 years out.

      • Space Gorilla

        10 years out would be perfect timing for me re: much larger dividends. Not to mention how much the value of my AAPL investment will have increased by then as well. It’s going to be a sweet next ten years, even with conservative estimates going forward.

      • Harry Sterling

        When you talk about hefty dividends, what kind of numbers are you talking about. Do you mean a continuation of 9-16% per year that we have seen or something more

      • Sacto_Joe

        If we guess 8 years, and a 10% dividend hike per year, dividends will increase from $2.92/share per year to about $6.25/share per year. I figure the float will be down around 3 billion shares. I figure net income will be up around $75 billion/year. For 3 B shares, that comes out to a dividend payout of $18.75 B/year. That’s only 25% of the hypothetical net income. Increasing the dividend to 75% of net income would mean about (6.25×3=) $18.75/share per year, or $18,750 per every 1,000 shares. Less tax, of course.

        People can plug in their own guesses and get their own figures.

      • Harry Sterling

        $18.75 certainly would be considered hefty

      • klahanas

        There is someone here who daydreams something very similar, except this person wants to hold the last share.

        Not sure that’s a good thing for the person or Apple. Something about “holding the bag” about it. 🙂

      • Childermass

        Nice thought but not how it works. Check the listings rules. You will get the chance to sell at the offer price, once. After that you get dividends only and no real market for your stock. And why would they pay dividends when there is no Wall St to appease?
        If Apple is intent on going private then the question is not whether you should sell, but when you should sell.
        Having said that going private is a tough route. Pretty soon the buy back logic will cease as the share price is ramped by the buy backs. The straight lines on Dediu’s graphs will be curves.
        So, when will that be? Clever people on this blog say 5 to 10 years. Hard to argue with that as it is, in Wall St time, forever to never.
        I’ll buy never. With that much cash, and a realistic p/e, Apple can transform into: a bank, a fund manager, a media empire, an automotive pioneer, a charity, a chaebol, a country, something else I am too limited to see. Maybe all of those. And, of course, none.
        And then there is: what will Warren do?

      • claimchowder

        Thanks for enlightening us about the listing rules, it’s actually good to know. Do you happen to also know the required share quota for the buyer to unlist the company? In return I give you the answer to your dividend question: the owners of the now private company may still need some personal cash flow, so that’s a motivation for paying dividends.

    • Sacto_Joe

      I forget whether I mentioned this on this thread, but the reality is that Apple knows full well that AAPL is horribly undervalued, which is why they’re buying back such huge quantities of their own stock. There literally isn’t a better value out there!

      By the same token, Apple will only start shifting, from most of it’s money being returned to shareholders in buybacks to some balance of dividend increases or the buying up other complimentary companies, when the valuation becomes “fair”.

      I used to think that a fair valuation would be a P/E ratio of about 20. But when I see the kind of sky-high valuations being handed to other companies these days, I find that far too low.

      But it’s not up to me to determine “fair value”; it’s up to Apple. We’ll know what they consider a fair valuation when they finally turn down the spigot on buybacks and turn up the spigots on dividends and acquisitions.

      So to answer Les_S’s question, I don’t think that Apple has any interest in ever taking itself private. I think instead they will eventually just turn up the spigot on dividends big-time.

      With any luck at all, we’ll still be holding enough AAPL to be substantially rewarded by that future unending river of gold….

      • klahanas

        I have no skin in this game, or even anything other than glancing knowledge, but I do know it’s gambling. I have no reason to wish harm to your portfolio, I hope you’re correct for yourself.

        How do you know it’s undervalued? How can you be sure?
        When I hear investors speak, it’s all bulls and bears, but its still herds no matter what.

        There is a trade war brewing with China. Is that good for Apple? How about AAPL? It’s a playing field where perception is reality, and gets rewarded or punished accordingly.

      • Sacto_Joe

        I like your sense of caution, especially when it concerns things you may not have full knowledge of.

        All stocks are a gamble, but so is any investment you can name. There are gradients of gambling, though.

        I must also tell you that, IMHO, today’s market is more of a casino than it has ever been. Again IMHO, many stocks have been going up on sheer momentum far beyond a solid valuation. Recently, Facebook (FB) has shown exactly how dangerous that can be.

        But there are also companies with solid fundamentals, like Apple. You can get an idea of how the price for a stock compares to it’s basic fundamentals by dividing their net income for the last year by the stock count, yielding an up-to-date EPS (earnings per share) figure. Dividing that into it’s price gives you an up-to-date P/E (EPS per Price) figure. The higher the fundamentals and the lower the P/E, the better, from a stock purchasing point of view. It’s still a gamble, but it’s an educated gamble.

        (What are “fundamentals”? Well, that’s the hard part, where you have to do your homework. For Apple, as I’ve explained above, it’s pretty obvious. Very strong net income, very loyal customer base, etcetera.)

        Regarding the Trump Trade War, here again you have to look past the obvious at the fundamentals. The reality is that China has built up a lot of decent-paying jobs off of Apple’s success. Their government will walk very carefully before damaging that part of the relationship. But Apple is also selling a lot of iPhones into China. It’s no secret that the Chinese government would prefer it’s people buy Chinese smartphones. The problem is, Apple products are highly desirable in China, and already have a good-sized segment there. Again, Apple users are loyal to Apple. People have called it a “sticky” ecosystem, or a “walled garden”, but the reality is that users that enter the Apple system tend to stay.

        It’s possible that, in the present (manufactured, IMHO) us-vs-them environment, the Chinese government may wish to associate Apple with the Trump administration. But that’s a hard sell. My guess is that there will only be a measured impact, at least at this stage. We’ll know more in a couple of days, after Apple’s upcoming earnings report, since Apple will tell us what sales in China looked like last quarter.

        So you’re right that “perception is reality”. But Apple has worked long and hard to establish a positive perception in China. That won’t easily be changed.

      • I think we can look to AAPL and Apple’s performance during the financial crisis for reasonable guidance into what might/might not occur as a result of trade wars.

  • Gregg Thurman

    I haven’t done the math but it seems to me that the difference in calculated shares bought back (Spend divided by average share price) and actual share reduction is caused by granted shares that matured between earnings reports

  • Sacto_Joe

    “So why is the number of shares purchased (137 million) so different from the change in shares used to compute earnings per share (89 million)?”

    Well, first off, Apple reports “diluted, averaged” share counts to calculate earnings per share (EPS) on a quarterly basis. Second, EPS is usually calculated for 4 quarters. Thus, EPS as used, for example, in calculating P/E(PS) is often calculated by summing Apple’s last 4 quarter’s reported EPS numbers and dividing that it into the price.

    But there’s a problem with that methodology when it comes to AAPL, since Apple is buying huge amounts of stock back each quarter. To get the “real” EPS number, I add up the last 4 quarter’s net income, then divide that by the latest stock count. It yields an EPS that is often substantially higher than generally reported.

    That is why you see a P/E ratio on Yahoo Finance (as of right now) of 18.76, but a P/E ratio on Google Finance of 17.95. Google seems to have “fixed” this issue in it’s latest iteration, while Yahoo lags behind.

    BTW, if we use the “actual” number for shares of AAPL out there after the last earnings report, we come up with about 4.915 billion shares. BUT. Apple has been buying up shares over the last three months, so the actual number of shares in circulation is definitely much lower at this moment, probably down around 4.8 billion shares. The net income over 4 quarters has also ballooned, possibly to as much as $55 B year over year. Which makes this moment’s Apple EPS possibly equal to about (55/4.8=) 11.4, and it’s P/E, at a closing price of $194.82 (a new all time high!) equal to (194.82/11.4=) 17.1.

    Which is absurdly low for a company with over $100 billion in net cash and churning out another $55 billion/year in net income.

    Which is why it makes so much sense for Apple to be buying back tons of it’s horribly undervalued stock in the first place.


    Long ago, Horace made the observation that investors were giving zero value to Apple’s cash. That may be starting to change, but after years of ignoring the elephant in the room, it’s going to take a long, long time before the price of AAPL catches up to the reality of AAPL’s true value.

    • Mel Gross

      The cash is going to play into this less and less, as Apple has stated that they want to be “cash neutral”.

      • Sacto_Joe

        You’re right, Mel. And yet – they are continually generating over $50 billion in cash each year. My guess is that Apple is about to report their float has been reduced to 4.8 billion shares. So at a minimum, that represents $10.42/share in net income each and every year. That number is almost certainly going to continue growing. They presently give shareholders $2.92/share in dividends, which means something like 70% of that $50 billion, or $35 billion, will still be available for buybacks each and every year going forward. Assuming a $1 trillion valuation, that’s 3.5% of their stock they can buy back each year – after they’ve gone to cash neutral.

        More to the point, spending all that excess cash now when it’s stock is still valued at appreciably less than a P/E of 20 means Apple gets more bang per buck than if it spends it later. That reduces the float even more, which in turn increases the net income per share, which gives them even more cash to spend on buybacks…well, you see how this works. It’s a virtuous circle benefitting long term holders of AAPL whether the price of AAPL goes up or not.

  • Mordechai

    The low P/E ratio provides me with the comfort to continue holding far too high a concentration (per traditional portfolio theory) of my holdings in Apple. Every time I consider diversifying I remind myself that (a) nothing has changed in terms of Apple’s ability to execute and (b) my shares are underpriced.

    • Sacto_Joe

      Another aspect is that, if you’d bought and held your shares just before Apple started their buybacks in 2012, then you would have seen your percentage ownership of Apple increase substantially. We can calculate that increase by using the number Horace gives above for peak float of 6.637 B shares. I think Apple’s float is now down around 4.8 B shares (my estimate for what we’ll learn next week).

      If you owned 50% of Apple, you would have owned 3.3185 B shares. At 4.8 B total shares, you would now own (3.3185/4.8=) 69% of Apple. That is, the share of AAPL you held since buybacks began in 2012 has increased in ownership of Apple by (19/50=) 38%. You similarly can calculate that, for any percentage ownership of Apple in 2012, the amount of ownership of Apple today has similarly increased by 38%.

      And when Apple drops to 3.3185 B shares, you’ll own 100% more of Apple, since the share count will have dropped exactly in half.

      • Mordechai

        While you’re right about an individuals percentage ownership having increased I think that is already subsumed in the price per share. Reducing shares drives EPS up (all else being equal) so therefore price goes up to keep P/E constant, or alternatively, P/E drifts down (but not as much as EPS goes up) which reduces shareholder risk.

        This assumes of course that you believe that Apples ability to generate a consistent and growing earnings stream is unlikely to change which I do. I’ll go along with Horace and Warren – Apple has a strong and growing consumer franchise and there’s no reason to believe that the earnings spigot is in any danger for the next few years.

      • Sacto_Joe

        Not quite. Adding up the numbers, AAPL needs to be at a +20 P/E, and that’s assuming it started just before the buybacks at about $60/ share. It’s about to be in the low 17’s after earnings due to year over year quarterly EPS growth.

        But even that valuation assumes AAPL was correctly valued back then. IMHO, in today’s market, AAPL should be valued substantially higher than 20.

      • Mordechai

        So because of P/E ratio compression, Apple is in fact a safer, less risky proposition to own now. Some of the return due to buybacks comes from price appreciation, some comes from risk reduction. I agree that Apple is not correctly valued – my view is that eventually as Apple continues buybacks it should approach a more appropriate P/E. Meanwhile, I’m happy to hold it.

      • Sacto_Joe

        Well put!

      • Mordechai

        And even happier after today’s earnings call.

        Another $20B of shares taken off the table. Record EPS growth for the quarter as a factor of organic growth and share reduction and, to top it off, a 15% dividend increase.

        I can live with this.

      • Sacto_Joe

        Well, I pretty much nailed the share count at 4.8 billion, but I underestimated the net income for the quarter by $1 billion. Here’s the info:

        Net income year over year:
        $10.714 B
        $20.065 B
        $13.822 B
        $11.519 B
        Total – $56.120 B

        Share count is down to 4.80

        “Real” EPS is (56.12/4.8=) $11.69. At a well-deserved P/E of 20, that’s $233.80/share.

        Keep buying, Apple. The share price is WAY undervalued!

  • Sacto_Joe

    I thought I’d drop in Horace’s predictions for Apple Q3 fy ’18 versus the actual results:

    Revenue – $53.2 B vs actual $53.27 B
    iPhone units – 43.2 M vs 41.3 M
    iPad units -11.6 M vs 11.55 M
    Mac units – 4.3 M vs 3.72 M
    Services – $9.5 B vs $9.55 B
    Other products – $3.5 B vs $3.74 B
    Gross margin – 38.6% vs 38.3%
    EPS (qtr) – $2.26/share vs $2.34/share

    Horace also came in 4th in Philip Elmer-DeWitt’s analyst smackdown and was the only analysts to win top honors in two separate categories. Extremely impressive, and more so since Horace isn’t a professionally paid analyst! Well done, Horace!

    But something is bothering me. At the moment, the market seems to be rewarding Apple for it’s remarkable achievement this fiscal year. But is it? I say “seems to be” because Apple’s actual valuation, as measured by the P/E ratio, is surprisingly low at the moment. Per Google Finance, it’s 17.98. Per Yahoo Finance, it’s 18.76. Neither of these is particularly stellar.

    The argument has been made that Apple no longer rates a high P/E because it no longer has “high growth”. But there’s a difference between a “high P/E” and a P/E of 18. Also, what a P/E is measuring is the relationship between Price and Earnings Per Share. If it is measuring EPS’s relationship to price, then surely the important quantity isn’t simply “growth”, but earnings growth. A high P/E is essentially a “bet” that earnings will grow higher. In essence, it’s a bet that the company will “grow” into the high P/E.

    For whatever reason, the market doesn’t want to bet that Apple’s earnings will continue to grow – even though they have from year to year.

    fy ’14 – $39,510,000
    fy ’15 – $45,687,000
    fy ’16 – $48,351,000
    fy ’17 – $53,394,000

    Just as importantly, Apple has used it’s incredible cash flow to concurrently reduce the stock float, which juices these earnings by shrinking the share count.

    This undervaluing of Apple is not new, but has been in place since the big drop in valuation during the Great Recession. My question is – what will it take to end it?

    • berult

      Apple, the trillion dollars operative, sees its idealistic agency, its mission statehood, running…gunning antipodean to our currency’s northern star.

      By the sheer bacchanale of its rationale, it manages to hold its own, counter-currency galore.

      What, for our sake, would it take for Apple to ‘go-to-market’ a polar inversion of ‘selfeïde’ magnitude?

      Wheels. Wheels of space. Wheels of time. All augmented to the space-time vernacular frequencies. Wheels of roving ‘opportune’.