Apple Revenue Growth: Why AAPL Will Surpass $500 Per Share

Within the next three years Apple's share price will surpass $500 and the company's market cap will reach $500 billion or one-half trillion dollars. There's a simple axiom that underlies Apple's continuing success:

Apple doesn't sell products and services. Apple creates customer relationships that sell the company's products and services.

One of the challenges confronting journalists and analysts following the company is a misunderstanding of Apple's global presence. Often Apple is viewed as a company with separate product lines that are assembled quarterly for financial reports. The fact is on a revenue basis Apple is the world's leader in mobile digital devices. Further, Apple's revenue share of the global PC market is far greater than the underlying market share data suggests.

Because Apple's revenue is sourced from global sales of products, focusing on one operating region such as the US will lead to a distorted view of the company's growth potential and the prospects for further share price appreciation. 

As I posted in late April, 51% of Apple's revenue in the March quarter was sourced from operating segments exclusive of the Americas and Apple's global chain of retail stores. Additionally, 46% of Mac unit sales were sourced from these international regions. While the Mac maintains single-digit market share in the US, the company's global revenue footprint continues to expand. In the March quarter about 28% of Apple's revenue came from Mac sales. In unit sales comparisons, the Mac is now dwarfed by the iPhone and will soon be surpassed in unit sales on a quarterly basis by the Apple iPad. Even in its introductory quarter the Apple iPad will surpass the Mac in unit sales performance. 

In evaluating Apple's revenue and earnings performance and in forecasting the company's revenue and earnings potential over the next three years one must consider the product sales halo effect of these economically interdependent products. In a rough look at the product revenue ratios the Mac is equal to the sales of two iPhone or two Apple iPads. 

A customer who purchases a Mac from the experience of using an iPhone or an Apple iPad has tripled Apple's revenue from that one customer relationship. Conversely a Mac owner who purchases an iPhone or Apple iPad has increased Apple's revenue from the customer relationship by roughly 50%. This revenue yield ratio does not include recurring revenue sources such as app, music, movie or book sales, etc. through the iTunes franchise. 

Although Mac sales continue to grow at an impressive pace (33% unit sales gain in the March quarter), the Mac's percentage contribution to Apple's revenue and earnings as a percentage of the totals has been reduced by rising sales of iPhones. This should not diminish the market's understanding of the Mac's importance to Apple. Quite the contrary, it should illuminate the market's understanding of Apple's growing global revenue presence. 

In the March quarter Apple's retail store operations contributed about 12.5% of the company's revenue for the quarter. This seemingly low percentage contribution to revenue from the retail stores is due to the percentage of sales of iPhones globally through contracted partners. Again, the success of the retail store chain is masked by Apple's expanding global revenue footprint. Yet the retail stores provide a vital service in the launch of the Apple iPad. 

Evaluating each product line or revenue segment outside of its interdependent relationship with other product lines or revenue segments will invariably lead to an underassessment of Apple's revenue and earnings growth potential. 

Apple doesn't need commanding unit market share in each of its product segments to fuel revenue and earnings growth. Apple needs to continue creating customer relationships while increasing the yield per existing customer relationship through the sales of products and services. It's the customer relationships that grow the company not the isolated sales of product units. Disassembled and viewed individually, each product line or revenue segment would not appear to justify today's almost $250 billion market cap let alone reveal the potential for a doubling of the share price over the next three years.

For the six-month period ended in March Apple grew revenue by about 40% and earnings per share by 63%. The Apple iPad alone may add 20% to the June quarter's revenue growth. The halo effect of the iPad on Mac sales may increase  the iPad's influence on revenue even more. 

Apple's calendar year 2010 retail store openings will add to unit sales in all product segments while boosting the prospects for Mac and iPad sales in particular. Apple's growing retail store presence in Europe will assist in maintaing strong Mac unit sales gains in the region. 

I reiterate my updated 12-month share price targets and expect AAPL to reach $500 per share within the next three years. The current pace of revenue and earnings growth in light of the release of the Apple iPad should remain unabated for at least the next 12 months supporting further advances in the value of the shares. 

Robert Paul Leitao