Could AAPL's stock price go up more than 4x from here? It 's more plausible than you may think. It's my contention that at its software development conference, Apple took some important, albeit baby, steps towards a very exciting destination.
To begin, important iPhone tech upgrades keep it a step above the rest of market in terms of quality. Price slashing on iphones (at $99) represents a major market-share grab. Also, further upgrades of notebook computers and slashing of prices. Again, a market-share grabber.
One aspect of the conference many may be missing the importance of is the Snow Leopard Operating System (or OS) release by September, with a $29 upgrade for Leopard users. This OS is so superior to MSFT products that it will continue to drive market-share gains for Mac products for some time.
Incorporating these baby steps into an earnings model, I get pro forma earnings of about $11 and free cash flow (or FCF) of about $13 for fiscal year 2010. Note that these estimates are within striking distance of the estimates of several street analysts.
Applying a conservative FCF yield of 4.5% on the 2010 FCF, the stock should be trading at around $289. Assuming a 5-year earnings per share (or EPS) growth of 18%, and applying a price/earnings to growth (or PEG) multiple of 1.5 to 2010 pro forma earnings, produces a price target of $297. Now add in the approximately $30 per share of cash on the balance sheet, and you have a stock that, only accounting for the factors that have been announced, could well be well above $300 by the end of 2009....
Additionally, there will be no more AT&T exclusivity. This is the factor preventing AAPL from capturing the lion's share of the 3G market. Also, a new product that opens many possibilities is the touchscreen tablet. Another one is a iPod Touch with camera and video capabilities.
And very importantly, the upcoming invasion of the Chinese market. First with iPhone, then with Mac. I read many who have lived in China, and they all rave about and have witnessed the power of the Apple brand there. The potential is mind-boggling. Apple is an aspirational brand with which all young people want to be associated (which is very important there).
And now the elephant in the room: Steve Jobs' comeback to announce any or all of the above. Please note: Jobs' return will be in late June. How unlikely is it that his comeback will not be accompanied by an announcement of a major new initiative? Very.
Now incorporating these developments into an earnings model could easily produce a price target of $400+ by the end of 2010. The following, I must admit, take some major leaps moving forward:
1. Introduction of touchscreen PCs and notebooks in 2010-2011. Mac instantly doubles its market share of the PC market.
2. 2012: Apple's first truly integrated home/business computing, communications and telecom device, complete with video phone, next-generation gaming, high-definition TV, and so on. This features voice and facial recognition and an Apple version of Microsoft's recently unveiled Project Natal concept. Revolutionizes telecommunications and computing....
3. Release of “teaser” versions of its OS to compete directly with Microsoft. Superior product captures 50% of market. Premium versions of OS and software products only available on Apple hardware.
If any one of these 3 possibilities comes to pass, Apple very well could go to $700 to $1000 by 2012. If all 3 occur, one could argue for the equivalent of $1,200 to $1,400 by 2015 (obviously there will be some stock splits along the way). Indeed, it is possible for the valuation to go even higher if Apple achieves global “cult-brand” and “cult-stock” status -- not an unlikely scenario in my view.
Factoring in only current announcements, Apple could be well on its way to $300+ by the end of 2009. Based on this outlook and some likely short-term catalysts in the pike, I believe $200 by late July is quite possible.
Looking forward to late 2009 and early 2010, some pretty major catalysts are virtually certain to materialize that could take the stock to $400+ by the end of 2010.
Looking further out, Apple seems to have a major edge in technologies that are going to revolutionize computing, entertainment, gaming and telecommunications, and in the closely knit integration of these technologies in our daily lives at home and at work. Indeed, it is virtually certain that in the next 5 years, we are going to experience the first wave of a revolution in the way we live. The only real question is: Which companies will capitalize?
Apple is extremely well positioned to become the dominant global player in this brave new world.
Obviously there's nothing certain about any of this. However, the very fact that, from an analytical point of view, we can very plausibly speak of Apple at $1000 is something to ponder. And ponder again.
With the stock currently in the $140s, I like that risk-reward ratio.
Position in AAPL common; long calls; looking to add many more longer-dated calls (than 7/09) and more common