Why Apple will hit $1,650

Not long ago, investors wondered whether the stock would top out at $500. Now it's at $600. Here's the case for a much bigger move by the end of 2015.

By MSN Money Partner Mar 21, 2012 11:38AM

By Eric Jackson for Forbes

 

With every new $100 level increment in Apple's (AAPL) stock price, we hear a chorus of worrywarts on business TV saying it just can’t continue.forbes.com

 

It’s unprecedented, they say. Apple’s now too big. Steve Jobs is gone. Everyone likes it. It’s a bubble.

 

Yet no company this big before has ever had the opportunities and relatively low market share that Apple now has. And Steve’s greatness actually masked how good the rest of the team is.

 

We’re at $600 now, but I think Apple has much further to go from here. If things play out as I expect, Apple will hit $1,650 by the end of 2015.

 

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Macs. This is the most ignored part of the Apple portfolio. It has consistently grown faster than the PC industry. Macs grew their revenues 26% Y/Y in the last quarter and 22% for the last fiscal year. Macs’ growth rate is actually increasing over time. The Apple halo effect is truly starting to take hold.

 

And PCs aren’t dead yet. The PC industry grew at 10% last year. As of today, Macs represent only 9% of the PC market.

 

If the growth rate continues, Macs could sell 55 million units in 2015 – up from 17 million last year.

 

iPads. It’s hard to believe this is a new category created from scratch 2 years ago and is now 20% of Apple’s revenue. (Remember, most thought it was a dud 2 years ago and fixated on the “dumb” name? Jobs, himself, was depressed with the initial reaction.)

55 million iPads have been sold since inception. There will likely be 58 million iPads sold this year alone.

 

It’s clear that Apple is trying to achieve iPod-like market share with the iPad – not iPhone-like market share.

 

Many estimate 500 million tablets will be sold in 2015. It’s not so hard to envision Apple retaining a 60% share and selling 300 million iPads then.

 

For comparison, 409 million PCs were sold globally last year.

 

iPhones. Although we think of the iPhone as having saturated the market, it’s actually just getting started due to the shift from feature phones to smart phones. Horace Dediu estimates iPhone only holds a 6% share when you add the markets for feature phones and smart phones today.

 

iPhone accounts from 53% of Apple’s revenues today. Recall the product was only announced 5 years ago. It’s likely going to remain 44% of Apple’s revenues by 2015.

 

Smart phones are going to be every person’s primary computing device. 72 million iPhones were sold last year, but they might sell 6x that in 2015, assuming 1.5 billion smart phones are sold then with Apple keeping a 32% share.

 

iTunes. After Macs, iTunes is easily the most forgotten part of the Apple portfolio. Yet, iTunes had $2 billion in net sales last quarter. Facebook only had $1.1 billion in sales in the same quarter. Google overall had $10 billion in sales in the quarter.

 

It’s clear that iTunes sales tag along from the number of iOS devices. If iOS devices explode – as I expect iPads and iPhones to do – iTunes could turn in $32 billion in revenues by 2015. And that’s not even counting on potential uptick in new sales from iTunes Match, iCloud, a new streaming service, or something completely new for the launch of iTV.

 

iTV. No new product that Apple’s rumored to be launching could be as big as iTV. Naysayers say it’s a mature market with established players and low margins. Yet, didn’t they also say that about phones?

 

Here are the facts about the TV industry. 210 million TVs were sold globally last year and that was a 17% growth over the prior year. By 2015, well over 400 million TVs will be sold. Apple will likely sell itv TV for $1,000.

 

That means iTV could be close to a $100 billion a year business for Apple by 2015, or 16% of its revenues.

 

Don’t you think a bunch of people are going to line up for an iTV – especially the folks who already have an iPhone and iPad?

 

There’s another thing at work here which I’ll call the Meeker Effect, named after Mary Meeker who noticed this phenomenon in her last big 70 page PowerPoint. It took Apple 6 years to sell 100 million iPhones. They’ll sell 100 million iPads in 4 years. If I’m right, they’ll sell 100 million iTVs in 3 years. People’s desires for the latest and greatest device to complement their iOS set is increasing over time.

 

iAd. Apple has seemed conflicted about whether or not it wants to get into the ad business. The reason to do it, as Jobs said 2 years ago, is to send more money back to developers and to make mobile ads a quantum leap better than what they are today.

 

Jobs was right. The key to nailing mobile ads is combining “emotion with interaction.” But we’ve yet to see this, even from Apple.

With iTV coming on stream soon though, Apple is going to have to jump in the ad pool. It is something that has the potential to be massive.

 

I’ve seen some predictions that the mobile ad business will be $25 billion by 2015. That’s probably understated by half, given how quickly will flee desktops to smart phones.

 

Can Apple control $20 billion of a $50 billion market? Easily in my view.

 

iPay. If Apple likes to disrupt huge, inefficient markets, why not get into the mobile payments space? Unlike Google (GOOG), Apple likes to wait before announcing a new product. PayPal already expects Apple’s move into this space.

 

To do this, it will by more complex than just amassing 100 million credit cards linked to iTunes accounts.

 

But just shaving off the credit card companies’ fees on Apple retail stores could save Apple $3 billion in revenues.

 

If the mobile payments space heats up as expected, PayPal will see its $4 billion in revenues become $40 billion by 2015. It’s hard to see how Apple doesn’t figure out a way to grab $20 billion of that market by then.

 

Other positives not accounted for. Enterprise could get rid of PCs/BlackBerries and move to Apple even faster than I project. Education could massively adopt iPads to replace textbooks. And the whole dividend/buyback thing might further support the stock.

 

Conclusion. Apple will be a $610 billion revenue company by 2015 as all the key markets start to experience hyper-growth.

 

At the same time, it’s likely the best single metric to watch in the coming years will be price-to-sales. I expect Wall Street to (correctly) get more skeptical that Apple can keep growing its revenues beyond the boom in the next few years.

 

Apple’s price-to-sales ratio (trailing) is currently 4x. I see it trending down gradually to 2.5x by 2015.

Even with that compressed ratio, Apple can easily become a $1.53 trillion company by 2015. That’s $1,650 a share.

 

iTV’s adoption should be even faster than iPad.

 

Feature phone decline will open the door to massive iPhone growth.

 

The iPad market could be close to the size of the PC market today in a few short years.

 

Macs will keep taking share in the PC market as people look to complete their iOS set.

 

iAd and iPay are both wildcards here. They could be much bigger than what even I optimistically envision.

 

Eric Jackson, a founder and managing member of Ironfire Capital, is long Apple.

 

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