AAPL At $400 Per Share By May: Here’s Why

  • Posted: 22 August 2010 03:08 AM

    My latest missive at Eventide.

    I’ve been asked on several occasions to spell out my $400 per share price forecast for May 2011. This is pretty much as easy an explanation as I can make it. Reaching that price target does not require a significant expansion of AAPL’s currently low p/e multiple relative to growth.

    Snippet: The release of the Apple iPad, continuing strong growth in iPhone unit sales, lower effective tax rates, the boost to revenue and the influence on margins from iPad and iPhone accessories sales all combine to push AAPL to $400 per share by May 2011.

         
  • Posted: 22 August 2010 05:56 AM #1

    Agree, have seen large corporations being in testing of ipads, iphones and macs and this prompted mostly lately by the ipad as a possible mobile laptop replacement. This will be huge and will come typically after 9 months of testing so Q1-Q2 next year. I think the ipad has been the tipping point - sales and marketing love that form factor and it can do all they need compared to finance and R&D which typically need more processing power. The iphone was just seen as a potential replacement for a RIM-BB - the ipad is (currently) the only choice in its category

         
  • Posted: 22 August 2010 07:17 AM #2

    DawnTreader - 22 August 2010 06:08 AM

    My latest missive at Eventide.

    I’ve been asked on several occasions to spell out my $400 per share price forecast for May 2011. This is pretty much as easy an explanation as I can make it. Reaching that price target does not require a significant expansion of AAPL’s currently low p/e multiple relative to growth.

    Snippet: The release of the Apple iPad, continuing strong growth in iPhone unit sales, lower effective tax rates, the boost to revenue and the influence on margins from iPad and iPhone accessories sales all combine to push AAPL to $400 per share by May 2011.

    Your prediction demonstrates what a huge error and misallocation of resources it is for Apple to sit on their cash hoard. Assuming your prediction is correct, and all other things being equal, I will demonstrate how Apple would be worth $440 per share in May instead of $400 if they used 23 billion of their cash (1/2 of current total at the end of last quarter) to buy back shares at the current market price.

    This assumption factors in a market cap of $366 billion under both scenarios at the end of the forecast period (today’s 229B market cap X 1.6 = $366B or todays share price of $250 X 1.6 = $400). Note that Apple will likely have $32 billion or more in cash and market securities after the $23 billion buy back at the end DT’s forecast period in May, 2011 ($46 billion less 23 billion, plus 10 billion of additional cash flow from operations through the forecast period and no debt).

    All things being equal… The effect of buying back 10% of the stock (23 billion of the current $230 billion market cap) will cause Apple’s share price to increase by 10% ($250 to $275). The market cap would remain the same at $230 billion because there are now 10% fewer shares outstanding. DT had forecast an increase in the value of Apple’s stock of 60% ($250 to $400 or 1.6 X $250). Because shareholders now own a greater percentage of Apple’s earnings, shareholders will now earn an extra 10% more than they otherwise would have, had they not repurchased Apple stock ($275 X 1.6 = $440). It is assumed that Apple’s market cap will be the same in both scenarios.

    In other words, the stock buy back transfers $40 per share to Apple stock holders in May of 2011 from todays shareholders selling to Apple today.

    This is not rocket science. It is a gross misallocation of resources.

    Jeffi

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  • Posted: 22 August 2010 08:36 AM #3

    jeffi - 22 August 2010 10:17 AM

    if they used 23 billion of their cash (1/2 of current total at the end of last quarter) to buy back shares at the current market price.

    Wow. What an absolute waste of 23 billion dollars. Just to keep us shareholders better off by 10%? I am assuming that you wouldn’t be happy enough with the percentage gains from 250 to 400 then? I think I prefer the 23 billion in the bank or the possibilities of what that 23 billion can do for the company if required than a 10% additional salve on the share price. Given this market the 10% could be lost in a heartbeat and Apple would be 23 billion worse off.

    [ Edited: 22 August 2010 08:43 AM by John Molloy ]

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  • Posted: 22 August 2010 09:51 AM #4

    rattyuk - 22 August 2010 11:36 AM
    jeffi - 22 August 2010 10:17 AM

    if they used 23 billion of their cash (1/2 of current total at the end of last quarter) to buy back shares at the current market price.

    Wow. What an absolute waste of 23 billion dollars. Just to keep us shareholders better off by 10%? I am assuming that you wouldn’t be happy enough with the percentage gains from 250 to 400 then? I think I prefer the 23 billion in the bank or the possibilities of what that 23 billion can do for the company if required than a 10% additional salve on the share price. Given this market the 10% could be lost in a heartbeat and Apple would be 23 billion worse off.

    The issue is maximizing share holder returns and properly allocating capital. It is not greed as inferred by your comment “you wouldn’t be happy enough with the percentage gains from 250 to 400”. Ten percent of DT’s Apples forecast market cap is $36 billion dollars. This is a huge amount and that’s an understatement. Based on the forecast, Apple will also have $33 billion in cash and no debt in 10 months. Even this amount is way, way, more than Apple needs and the forecast includes R&D investments at current rates. Your entitled to you opinion, but it appears illogical and irrational. Isn’t the reason for owning Apple stock financial?

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  • Posted: 22 August 2010 11:00 AM #5

    jeffi - 22 August 2010 12:51 PM

    The issue is maximizing share holder returns and properly allocating capital. It is not greed as inferred by your comment “you wouldn’t be happy enough with the percentage gains from 250 to 400”. Ten percent of DT’s Apples forecast market cap is $36 billion dollars. This is a huge amount and that’s an understatement. Based on the forecast, Apple will also have $33 billion in cash and no debt in 10 months. Even this amount is way, way, more than Apple needs and the forecast includes R&D investments at current rates. Your entitled to you opinion, but it appears illogical and irrational. Isn’t the reason for owning Apple stock financial?

    But you are assuming that the money is going to be used for R&D which in itself is wrong. Apple spend comparatively little in R&D compared to their competitors. If they want to keep the money they have earned it should be their decision. I mean Apple’s board have done pretty much everything right to get into this position (apart from allowing their competitor have access to their product line going forward) I think that they probably know what to do with the money (forward buying components for example to ensure product delivery) than an armchair investor who just wants to see short term gains.

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    Posted: 22 August 2010 11:08 AM #6

    On one of the quarterly calls, I believe SJ was quoted about having to “think big” about the cash horde.

    They have plans. Patience is a virtue.

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  • Posted: 22 August 2010 11:38 AM #7

    P/E doesn’t drive AAPL valuation today, so it’s probably a false assumption that a higher EPS # based on fewer shares from a buy-back would produce a higher stock price.  The stock price would likely sit where it is today, because engineering a higher EPS # by artificial means isn’t going to fool anyone.  And by spending the cash, Apple would have less flexibility to make tectonic-sized moves it has suggested it might. 

    Apple will get to $300 the old fashioned way:  It will earn it.

         
  • Posted: 22 August 2010 11:38 AM #8

    Didn’t you also predict $300 by about now, or am I remembering incorrectly?

         
  • Posted: 22 August 2010 11:55 AM #9

    I too would like a share buyback and admit it is out of greed. However as I have learned second guessing Apple and their plans is not only futile but becomes sophomoric. Also if Apple were to announce a 20 billion dollar buyback it does not mean that Apple would buy that much back and there could be a five year timeline attached to the deal. The only thing it would accomplish IMO is to give pause to the shorts. If the board would not buy the stock at $78 a share I doubt they would approve $250.
    One thing the board should do immediately is split the stock. This company should be owned by the people who believe in it and its culture of being beyond the balance sheet. Of seeing the future and building great products, of respecting their customers, of settling for nothing short of excellence. I would like to see children getting a share for their birthday much as parents bought Disney years ago. Five for one would suffice but 10 for 1 would blow us all away including the street.

         
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    Posted: 22 August 2010 11:57 AM #10

    SNIPUS - 22 August 2010 02:47 PM

    I too would like a share buyback and admit it is out of greed. However as I have learned second guessing Apple and their plans is not only futile but becomes sophomoric. Also if Apple were to announce a 20 billion dollar buyback it does not mean that Apple would buy that much back and their could be a five year timeline attached to the deal. The only thing it would accomplish IMO is to give pause to the shorts. If the board would not buy the stock at $78 a share I doubt they would approve $250.

    A share buyback does nothing to improve the company. Keeping cash for rainy day, for an emergency purchase, for large block purchases (flash for iPods) etc. gives the company lots of flexibility and infinitely more power.

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  • Posted: 22 August 2010 12:00 PM #11

    Apple is not priced in a vacuum.  In case anyone missed it, $33B left the stock market in the first seven months of 2010, largely due to recovery fears, the flash crash in May, and I believe, a growing disgust over Wall Street.  Read here for the full article. 

    Apple had a chance to move past its all-time high of $279 in July, but I think antennagate screwed up everyone’s hope of $300.  Irresponsible media coverage harped on a problem that exists more in the blogosphere and the discredited corpse that is Consumer Reports than it ever did in the phone.  Is the antenna a problem with iPhone 4?  NO!  Proof of that are the millions still being made and sold at an unprecedented rate.  TWO months after the release of iPhone 4, stanchions are still outside my Apple store to manage the crowd that greets the latest supply of iPhones.

    [ Edited: 22 August 2010 12:04 PM by ByeTMO ]      
  • Posted: 22 August 2010 12:11 PM #12

    SNIPUS - 22 August 2010 02:55 PM

    I too would like a share buyback and admit it is out of greed. However as I have learned second guessing Apple and their plans is not only futile but becomes sophomoric. Also if Apple were to announce a 20 billion dollar buyback it does not mean that Apple would buy that much back and there could be a five year timeline attached to the deal. The only thing it would accomplish IMO is to give pause to the shorts. If the board would not buy the stock at $78 a share I doubt they would approve $250.
    One thing the board should do immediately is split the stock. This company should be owned by the people who believe in it and its culture of being beyond the balance sheet. Of seeing the future and building great products, of respecting their customers, of settling for nothing short of excellence. I would like to see children getting a share for their birthday much as parents bought Disney years ago. Five for one would suffice but 10 for 1 would blow us all away including the street.

    Even though a split does nothing to add value, I too would welcome it a split.  More AAPL stock in the hands of small retail investors would be a good thing.  Perception is reality, and there’s no denying the fact that some potential stockholders think $250 for AAPL is “expensive.”

         
  • Posted: 22 August 2010 12:30 PM #13

    Mercel - 22 August 2010 03:11 PM

    Perception is reality, and there’s no denying the fact that some potential stockholders think $250 for AAPL is “expensive.”

    And 462 for Google is cheap?

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  • Posted: 22 August 2010 12:41 PM #14

    rattyuk - 22 August 2010 03:30 PM
    Mercel - 22 August 2010 03:11 PM

    Perception is reality, and there’s no denying the fact that some potential stockholders think $250 for AAPL is “expensive.”

    And 462 for Google is cheap?

    cheaper than it was but not as cheap as it is going to be

         
  • Posted: 22 August 2010 12:53 PM #15

    rattyuk - 22 August 2010 03:30 PM
    Mercel - 22 August 2010 03:11 PM

    Perception is reality, and there’s no denying the fact that some potential stockholders think $250 for AAPL is “expensive.”

    And 462 for Google is cheap?

    I don’t go near GOOG, and I would not try to argue that GOOG is “cheap.”  Too, its P/E is higher than AAPL. 

    I just don’t like GOOG’s business model of free.  The Company is all over the map with product strategy, which is not a good sign.  Nexus One anyone?  :-D

    If you really want to own GOOG, I would wait for a lower price: Patience will reward you on the downside.