Why Apple stock could go to $500

If you exclude the company's significant pile of cash, the stock trades at a strikingly low 10 times trailing earnings.

By Jim J. Jubak Jan 25, 2012 2:18PM
Image: Money (© image100/SuperStock)Apple (AAPL) reported December quarter earnings Tuesday that blew away Wall Street estimates. And then the company raised guidance for the March 2012 quarter. 

The stock was up 6% at midday Wednesday in a generally lackluster U.S. market.

Should you buy? Well, the stock is still very cheap -- especially once you subtract the company’s nearly $100 billion in cash. But you might get a better entry point sometime in the next three months -- the March quarter is always weak for Apple. And while that weakness is absolutely predictable, many investors still sell on that worry. 

The only reason to rush in now is if you think Apple will do something soon with its cash -- like pass out a special dividend -- that would send the stock up even further in the short term.

Earnings for the December quarter of $13.87 a share handily beat Wall Street expectations of $10.07 and the company’s guidance of $9.30. (You might think the company set guidance so low to make sure new Apple CEO Tim Cook would be able to report a huge surprise to make up for Apple's missing Wall Street projections in the previous quarter, Cook’s first as CEO after the resignation of Steve Jobs. If you think that, I wouldn’t argue with you.) Revenue for the quarter came in at $46.3 billion, well above Wall Street projections for $38.8 billion in revenue.

I can’t find a product segment that disappointed in the quarter. Sales of Macintosh computers grew by 26% year over year -- an amazing growth rate, given that PC companies such as Microsoft (MSFT) are reporting a 2% to 4% decline in PC sales for the quarter. (Microsoft owns and publishes Top Stocks, an MSN Money site.) 

IPhone sales grew to 37 million units, up 128% year to year. (That let Apple pick up share in the smartphone market from Android phones. In December, according to Nielsen, 45% of U.S. shoppers bought an iPhone -- up from 25% two months earlier. Android phones were purchased by 47% of buyers, down from 62%.) 

Apple sold 15.4 million iPads, up 111% year to year. (For the first time ever, Apple sold more iPads than No. 1 PC seller Hewlett-Packard (HPQ) sold PCs. HP sold 14.7 million PCs in the quarter.)

Apple’s retail division, which had been a worry before the report, showed a 59% increase in sales. The iPod business sold 15.4 million units, a 21% drop year to year, but still above Wall Street projections.

Gross margins climbed 4.7 percentage points to 44.7%. Operating margins increased by 8 percentage points. Apple’s cash hoard grew another $16 billion in the quarter to $97.6 billion.

And the March 2012 quarter? Well, it will be weaker than the quarter just finished -- Apple typically sees a drop in sales after the holiday season. But Apple did raise its guidance Tuesday to $8.50 a share in earnings on revenue of $32.5 billion (32% growth from the March quarter in 2011.)

If you back out the company’s $100 billion in cash, Apple sells at a strikingly low 10 times trailing 12-month earnings per share. That kind of multiple says a significant number of investors are totally skeptical about Apple's ability to keep up this kind of growth. I understand the skepticism, but I think it's wrong -- at least over the next few years. (And I like this level of skepticism, since it means there are lots of skeptics still to convert.) 

Apple is picking up share in the smartphone market, but it still has "only" a 20% to 30% share (depending on who’s measuring). The company is the dominant tablet maker, but that market is growing so fast that Apple could lose share and still sell more iPads. And as CEO Cook said in presenting the earnings, there was no evidence that Amazon's (AMZN) new Kindle Fire cut significantly into iPad sales.

Apple’s huge and well-organized app store is an underappreciated competitive advantage. And the company’s new iCloud service looks like it could become another very sticky advantage. Already 85 million users have signed up to sync their Apple devices through the free service, which is just three months old.

I think a $500 target price in 2012 is very reasonable. That's roughly 11% above Wednesday’s price. If that doesn’t meet your definition of a good investment -- and with $100 billion in cash and a P/E ratio of 10, this is a low-risk investment -- you can hope for a dip on seasonal weakness that would let you in cheaper (a drop to $425 gives you an 18% return to $500) or figure that Apple will announce a cash dividend that will up the total return from the stock.


At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. 
The fund did own shares of Apple as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

5Comments
Jan 25, 2012 3:38PM
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Another possibility with all of that cash would be buying back shares.  Creates sort of a win win situation.

 

 

 

 

Jan 25, 2012 9:07PM
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If only the government would run their business like Apple...
Jan 25, 2012 4:31PM
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I said a year ago it could easily hit 500 on this thing and everyone called me crazy.  Whos laughing now.
Jan 25, 2012 7:28PM
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Good headline. Why not make it, "Why Apple stock could go 10% higher". Because it's only 10% off 500 now. This article might have meant something if it was written a couple of months ago. But now it is just stating obvious.
Jan 27, 2012 11:49AM
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If only the government would run their business like Apple...

Yes, they should embrace the old "ask not what you country can do for you...."


And make those citizens work like this....

 

http://kotaku.com/5553243/foxconn-employee-dies-after-34+hour-shift

 

If only the US gov had a supply of slaves to make everything easy. I know, let's do some concentration camps.

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