Apple made a new high this week, which got the investment community to talk again about when it could break the $1 trillion barrier. While there isn’t much significance to achieving this, it is very impressive. Currently, it would only take the stock to increase 6.1% to hit $203.45 and $1 trillion if you use the basic share count, or just 5.2% or $201.66 if you were to use the estimated diluted shares.
However, if it doesn’t get there by the end of July or early August when Apple releases its June quarter 10-Q the number of shares outstanding will be lower. This means the stock price will have to be higher to hit the magic number.
Basic vs. Diluted shares
Apple has the largest market cap of any company at $942.2 billion. Most financial sites are using 4,915,138,000 shares, which is the number that was issued and outstanding (or what is called basic shares) as of April 20, 2018, per the company’s 10-Q filing, and Friday’s closing price of $191.70. This number of shares is 109.8 million fewer than the number of basic shares that Apple reported at the end of its March quarter or 5,024,877,000.
The basic share count does not take into account the number of shares that are vested in the company’s stock option or restricted stock programs. These 43.6 million shares would increase the share count to 4,958,754,000 shares (or diluted shares) and give the company a $950.6 billion market cap or 0.9% greater than it was on Friday.
Apple has $110.4 billion to spend on buybacks
Apple added $100 billion to its buyback program on May 1 when it announced its March quarter financial results making for a total of $110.4 billion. Depending on how fast and at what price the company pays for its shares will determine how many shares are outstanding and at what price the shares need to be to create a $1 trillion market cap.
There are a couple of options and assumptions to use when determining what the share count is for the $1 trillion calculation after Apple uses the $110.4 billion. The first is what share price will the company pay. For this exercise, I’m using $210 since I believe it should increase over the unknown timeframe that Apple has to spend the money. This equates to 530.5 million shares being repurchased.
The next step is to determine how many shares and what type (basic or diluted) to use to calculate $1 trillion. The starting number of shares is the 5,024,877,000 basic shares at the end of the March quarter since this is the amount before any of the $110.4 billion was spent.
Using basic shares:
- Start with 5.024,877,000 shares
- Subtract 530,476,190 shares
- Ending with 4,494,400,810 shares
- Stock price of $222.50 to hit $1 trillion
Using diluted shares:
- Start with 5,068,493,000 shares
- Subtract 530,476,190 shares
- Ending with 4,538,016,810 shares
- Stock price of $220.36 to hit $1 trillion (a bit more than $2 less)
As you can see from the calculations it could take a stock price of $222.50 to hit $1 trillion after the stock buybacks occur using the basic share count.
What happens to Apple’s EPS and PE multiple
Apple gets some credit for having excess cash but it probably is “worth” more to the stock when it is used to buy back shares. However, when it uses cash to buy back shares it decreases the amount of interest it can earn on the cash.
In fiscal 2017 the company generated a 1.99% return on its cash and investments and 2.11% and 2.14% in its fiscal 2018 first and second quarters, respectively. Using a 2.25% return, assuming interest rates increase, Apple will have $2.25 billion less in pre-tax income. After applying a 14.5% tax rate and the 4.54 billion in diluted shares, this is a $0.47 negative EPS impact. This would decrease the average fiscal 2019 EPS estimate from $13.25 to $12.78.
Offsetting the interest income impact is the lower share count on EPS. Using a 10.6% decrease in the company’s share count should increase the adjusted EPS estimate from $12.78 to $14.13.
At a $222.50 stock price, its PE multiple would now be 15.8x. The PE multiple could creep back up since Apple’s EPS should exhibit growth due to the buybacks, but there should also be some offset due to having a much lower net cash balance.