Barron’s – Tiernan Ray
Imagine if shares of Apple, which currently fetch about $345, were to increase by 30%, to $450. Apple’s stock-market value would then surpass ExxonMobil’s, making it the most valuable company on earth. I say imagine because it’s rather fantastic to think of a consumer electronics company pushing aside a company with oil, and because it’s hard to imagine Apple’s shares going anywhere these days.The stock (ticker: AAPL) is up about 7% this year, just even with the Dow Jones Industrial Average—hardly what one would expect for a company that created a new market overnight, the tablet computer craze, with its iPad business expected by some to be worth $17 billion this year.
That’s $17 billion in revenue, out of thin air.
Moreover, backing out cash and marketable securities of $60 billion, or $64 per share, Apple shares aren’t just cheaper than the S&P, they’re bizarrely cheaper. It trades at 11 to 12 times this year’s projected earnings per share, versus the S&P’s average of 14 times, despite EPS growth projected at 52% this year by analysts. In fact, there is a plausible path to seeing the shares rise into the ExxonMobil (XOM) neighborhood, but it is the awesome scale of Apple that lately seems to sharpen for some investors all the things that could go wrong.
TO HIT A $450 PRICE TARGET at its current multiple, Apple would have to produce something on the order of $31 per share in earnings, assuming its cash per share rises to more like $86 in the coming year. That’s not impossible. Projected EPS next year is around $26. What would it take to add an extra $5 per share? The iPad alone is a brand new category, unanticipated a year ago, but that may produce an additional $3.00 or more per share in earnings, based on a net profit margin in the high teens. If that business turns out better than expected, it’s possible for 2012 earnings to be at least a couple of dollars higher. Similarly, the expectation for iPhone sales of perhaps 60 million to 70 million units this year doesn’t seem to fully reflect Apple’s opportunity. The company has under a fifth of the smartphone market, the most valuable piece of cellular. Even if Google’s (GOOG) Android software continues to win converts, the proliferation of smartphones, while also lifting other boats, will likely mostly enrich Apple. For Ticonderoga Securities analyst Brian White, who has the highest price target on the Street, at $550, there is plenty of upside. White notes that Apple’s computer market share is still just 4% to 5%, leaving plenty of business to be won. And then there’s the iTV. « I think it’s reasonable to assume Apple could introduce their own branded television set in the next 12 to 18 months, » says White, something I’ve written about on this page in recent months. « That’s a hundred-billion-dollar-per-year market right there. »
FEARS ABOUT CEO STEVE JOBS have not subsided among many since his return from a liver transplant in 2009, and his decision in January to step away from day-to-day duties. « He’s a genius, » says Scott Black, head of Delphi Management in Boston, and a Barron’s Roundtable member. « How do you replace him? He’s the modern-day Thomas Alva Edison. » The entire issue for Apple, in Black’s view, is, « can they keep creating? Jobs’s amazing record doesn’t lend itself to McKinsey-style focus group planning. » Concern about Jobs is the main reason Black won’t own Apple shares now. Sushil Wagle, a vice president with the technology practice of J&W Seligman, part of Columbia Management, agrees there’s deep, deep value in Apple shares. While he won’t part with any, he’s not buying despite the fact that demand for the company’s products « shows no signs of tapering off. » Most people Wagle talks to these days, he says, think that « there is a very small chance that Jobs is coming back » to Apple on a day-to-day basis.
But doesn’t the stock already discount that? Not at the current market cap, says Wagle. « The stock is so big now, it’s so widely owned, that you’ve got to convince the new buyers who haven’t yet gotten into the stock. » Those investors, rather than looking past the problems, put their concerns front and center. « You have to think about the fact that there are human beings trading these things, and there is emotion involved, and sentiment, » says Wagle. Barron’s Roundtable member Fred Hickey, editor of the High Tech Strategist Newsletter, contends that there is a wall of worry confronting Apple, especially given its market cap, that didn’t exist a few months ago. « At the beginning of the year, when I thought the stock would go to $400, everything was going perfectly for them, » says Hickey. « They were putting up huge numbers, the iPad was coming down the pike, the iPhone was on its way to Verizon. » The stock looked undervalued then, he says, and maybe it still does, if you think « perfection will continue. » Concerns have cropped up. The disaster in Japan is one of the biggest challenges, of course, and Hickey says the implications for Apple, and indeed for all of tech, are deepening day by day. « I think at first people tried to shrug it off, » he says of supply-chain problems stemming from Japan. « We’re seeing just in the last 24 hours reports of motherboard prices rising, disk-drive prices going up. »
Despite Apple’s deep, deep pockets and its long-term supply agreements, Hickey doesn’t believe we can say for certain whether Apple’s margins will get hit by higher component prices. Nor can we say for certain that the company will get enough components to make enough iPads to meet raging demand. Add to the mix rumors last week that Apple’s iPhone 5 may not ship this summer, as expected, but perhaps in the fall. Is that a result of component scarcity or a deliberate choice by Apple? « I think it’s going to take a couple of quarters for all this stuff to work itself out, » before Apple shares work again, says Hickey, during which time he would neither short nor buy.
I WOULDN’T BET AGAINST APPLE on supply concerns alone. When one factors in the negative sentiment among some fund managers around Jobs’ hiatus, and worries about broader market factors, such as the end of the Federal Reserve’s quantitative easing this summer, there’s a passel of worries one has to look through. And yet, if any part of the math I laid out makes sense, if there’s a real prospect that Apple can joust with the world’s biggest oil company for the top-dog spot, then perhaps it is worth looking through all those concerns. I guess it just depends on how much chutzpah you have.