AAPL @ $300 Per Share Explained

I've had a number of questions on the Apple Finance Board concerning my $300 per share 12-month price target for AAPL. I published the target in October and expect on or before the end of October 2010 for AAPL to surpass that price.

Below is a simplification of my reasoning and why $300 per share is moderate price target and not an aggressive target as some might think. 

AAPL currently trades at a trailing 12-month price-earnings multiple of over 34 times GAAP earnings. That's as of today's closing price of $214.01. This p/e multiple might give some investors reason to pause and consider Apple's rate of continuing growth and the prospect for further share price appreciation. While Apple continues to grow, maintaining a p/e multiple of over 34 times trailing earnings would be a challenge because future revenue and earnings growth would be expected to moderate to a more sustainable long-term pace.

But the current p/e multiple is based on GAAP earnings which includes deferred revenue recognition on iPhone unit sales. Using Apple's non-GAAP numbers as published in the quarterly earnings releases indicates a much different earnings outcome. For the fiscal year ended in September and including all iPhone revenue in the quarters in which the sales were made, Apple's net profit was about $8.750 billion, not the $5.72 billion with iPhone revenue and earnings deferred. Using the end of fiscal year count of fully diluted shares, Apple's earnings per share works out to $9.56, not the $6.25 reported under GAAP. 

Using the non-GAAP or "adjusted" earnings of $9.56 per share, AAPL currently trades at a multiple of about 22.39 times trailing 12-month earnings and below the current pace of organic "adjusted" revenue and earnings growth. This p/e multiple is about one-third lower than the p/e based on GAAP results.

By the end of this fiscal year Apple must adopt a different revenue recognition model for the iPhone based on the changes in accounting rules the company actively advocated to have adopted. Following adoption of the news rules virtually all iPhone revenue will be reported under GAAP in the quarters in which the revenue activity occurred. To make historical comparisons accurate, I expect Apple to restate financial reports for the past three years, increasing reported revenue and earnings in line with the company's "adjusted" or previously non-GAAP results for those years.

I've published preliminary FY 2010 revenue estimates that suggest Apple could grow "adjusted" revenue by 40% over FY 2009 based in large part on a doubling or more than doubling of iPhone unit sales. For the sake of discussion, we'll assume "adjusted" earnings this fiscal year grow at a rate of 35% pending the change in accounting method for the iPhone. Applying 35% eps growth to last fiscal year's $9.56 yields an eps for the year of about $12.91 per share. Applying a moderate p/e multiple of 25 (less than the rate of trailing revenue and earnings growth) would price the shares at about $323. Using today's modest p/e multiple of 22.39 on "adjusted" earnings would value the shares at $289.

This is an oversimplification of the justification for my $300 price target first published in October. I will provide a revised 12-month price target following the release of 1st fiscal quarter results later this month.