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Vitaliy Katselnelson, is CEO of invest management firm IMA, a value investor and author. Here is his thoughts on Apple.

Apple stock is currently sitting at around $185. In 2018-2020, it made approximately $3 in earnings, but then the pandemic hit and its earnings doubled to $6.

Its revenues went from $274 billion in 2020 to $394 billion in 2022, an increase of $120 billion. However, this is where things get tricky. Part of the increase in sales and profitability can be explained by other, non-temporary factors, such as Apple increasing its global market share in smartphones and growing services which come with much higher margins than hardware.

If $6 per share is its new earnings power, then it is trading at 30x earnings, which is very expensive. Best case, you'll make little money over the next decade; more likely you'll lose money. This sounds a lot like the state of the US stock market.

However, figuring out Apple's true earnings power is difficult. Did the pandemic borrow some of Apple's future sales? People bought laptops because they were going to work from home, iPads because their kids needed a separate device to watch Netflix while their schools were closed, and they upgraded their phones because they were bored and had extra cash. Part of Apple's $6 earnings power has been inflated by the pandemic. None of these items are perishable and thus borrowed from future sales. However, market share gains and increases in service revenues are likely to be sustainable future profit drivers. Once you go Apple, you don't go back.

In the past, Apple used share buybacks to grow its earnings. It still generates ample cash flows, but at the current high valuation, it is difficult for buybacks to have a meaningful impact on the share count.

Apple's new earnings power is likely to be greater than $3 but likely less than $6. If Apple's earnings are $4.50, then you have a stock that is trading at 40 times earnings. I can almost promise you, with a big emphasis on 'almost,' that if Apple's earnings over the next year or two end up being $4.50 or less, it will not be a $185 stock. I am in a small minority with this thinking; analysts' estimates are increasing from $6 to the right, higher.

Apple needs to earn approximately $12 per share to justify its current price (I am assigning a 15 price-to-earnings to this high-quality but mature business). In other words, its earnings need to almost triple. It either must raise prices by a lot, take a lot more market share or convince every current iPhone owner to own three or four iPhones (and keep replacing all of them every couple years).

Let me tell you where this analysis could be incorrect. If Apple releases their Apple Car ' autos being one of the largest industries in the world ' or Vision Pro becomes a huge success, bigger than the iPhone (which would be incredibly hard to do).

https://vitaliy.substack.com/p/what-is-the-value-o...

Some real groundbreaking analysis there...

I think that was from a blackberry owner.

I think Apple is expensive for sure. Question is where will the growth come from? India. Continued share gains from Android users. Services. Health.

Spatial won't be material for a while if ever.

I don't think a car is coming. Apple is going for expanded CarPlay integration.

I'm sitting in it with a cost basis of around $18 a share. Well ahead of Warren.

I think of selling but then I suck my thumb as usual.

Some real groundbreaking analysis there...

It isn't groundbreaking, but this particular bit is a chunk of reasoning that is seen all too rarely:

Apple needs to earn approximately $12 per share to justify its current price (I am assigning a 15 price-to-earnings to this high-quality but mature business). In other words, its earnings need to almost triple.

In a sense, yes, Apple will presumably someday settle into a normal valuation multiple somewhere around that level, since nothing grows faster than the economy forever.
So yes, either the steady-state (real) earnings per share triple by then, or lower (real) prices than current ones can be expected when the valuation multiples inevitably fall to the teens.
This is simple arithmetic which escapes a remarkable number of otherwise rational people.

In the case of Apple I don't think a tripling in earnings per share is impossible.
It may take quite a while, though, especially if it relies too much on share count shrinkage.

Personally, I cap the value Berkshire's Apple position at 21 times earnings when counting my chickens. (earnings adjusted by eyeball when they seem unusually high or low)
That's probably not the correct number, but it gives a better sense of stable progress than the market price does, and it's not insane.
It's an above-average business that deserves an above-average valuation level. It's hard to say what that premium might be, but I have to pick something.
In effect, the current Apple price around $190 includes about $60 I'm not willing to count on.
If they were making $8 a share on trend right now, there would only be about $21 of market price that I'd be unwilling to count on.
I prefer a valuation metric which roughly tracks the progress of the business over time, not the progress of Mr Market's moods.

Jim

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