How many iPhones will Apple have to sell next year, to justify a $5 bump upward in its stock price?
22.9 million, says a small number-crunching shop, operating mostly out of Mumbai.
That sounds like a lot. Last year, Apple sold 11.4 million iPhones, only about half as many as Transparent Value says will be needed to get to the target price.
But the company figures there's a 79.8% chance that Apple's management -- with or without Steve Jobs -- will deliver.
At least that's what its Apple versus Apple comparisons of past performance tell it about its future performance.
Transparent Value has spent the last six years figuring out just how many widgets any company has to sell, to support any given stock price, says chief executive Armen Arus. And after operating largely in test mode for all that time, it is readying a set of three mutual funds to offer that are based largely on its basic premise: That it can calculate with a high level of accuracy what the past says about the future.
Its trademark measurement is the Required Business Performance needed to achieve a given stock price.
If it can figure out how many iPhones, iPods, desktop computers and portable computers Apple is likely to sell in the next three years and the margins it is likely to achieve, then it can discount the cash generated back to the present, divide by the number of shares outstanding and make an educated guess on the likelihood of a given price being achieved.
In Apple's case, getting to $124.42, from Wednesday's close of $119.49, will mean not just selling 22.9 million iPhones next year, but 30.9 million the year after that and $36.7 million three years from now.
iPods? 49,513, 52,886 and 55,678. That, by contrast to the iPhones, seems eminently doable. In the last 12 months, Apple sold 55.8 million iPods.
Desktop Macs? 2.9 million, 3.0 million and 3.3 million, compared to 3.4 million in the year just gone by.
Portable Macs? 6.6 million, 7.0 million and 7.4 million, compared to 6.4 million in the year ended in March.
In all this, all the information Transparent Value compares is data going back to 1995 on the company's performance in managing its business. The most weight goes to the last four quarters, but its calculations also depend largely on how well the company has been able to manage quarter over quarter improvements in the past. Apple versus Apple.
Can you see how it's done? Not yet. And maybe not at all. Transparent Value, despite its name, is not opening the kimono on how it comes to its business performance conclusions.
But you will have a chance to bet on its principles and its algorithms when the company, with a 100-person analyst and technical staff in India and another 5 or 10 business folks in New York, launches those three mutual funds.
The funds are based on the beta concept: If a stock's price is likely to have more volatility than the market in general, it is considered to have a beta of more than one. And if there's more risk, there's supposed to be a greater return.
So stocks with a high probability of having a high beta are bull stocks. Low betas are bears. And level betas are stable stocks. Which is how Transparent Value is picking the 100 stocks that will go into its bull, stable and bear funds.
Using its apples versus apples comparisons of recent and historic performance. So far, it's done 70,000 discounted cash flow models to come up with values for companies in the S&P 500 and the Wilshire 750. And its Required Business Performance measure is now the basis for a series of stock indices from Dow Jones (the Dow Jones RBP Indexes).
But, once again, Transparent Value doesn't tell you which stocks are in those indices or how they got there.
When it comes to valuing Apple or any stock, it doesn't necessarily help a business model to be that transparent.
Too bad: Apples versus apples comparisons of every company's ability to sell enough product or services to justify a stock price -- or you investing your hard-earned dollars in more shares -- should be standard practice.
And transparently so.