On and off over the last 5 years I have been a holder of Apple stock (AAPL). While a simpler and probably more profitable strategy would have been to accumulate and hold the stock, I instead traded AAPL as it continued to rise and occasionally pullback. However, I am now going in for the long haul as the stock looks stronger than ever. Here are 5 reasons why Apple looks like a great medium-term investment with a $1,000 price target not as ridiculous as it may have once sounded.
“Over the past five years the stock has returned over 50% a year….If the shares rise at a similar rate from here, it would take Apple’s market cap to $1.25 trillion, or over $1,000 a share by 2014”
1. A Dividend or Stock Buy-Back is more likely than ever because Apple’s cash pile is soon going to be over $100 billion (cash and marketable securities), which has become a mountain investors and company executives can no longer ignore. Apple has the ability to easily pay an ongoing dividend with a significant yield (2% to 3% range) along with the ability to grow it over time. Defined quarterly dividends would increase the value of the stock in addition to its incredible capital growth. Once they issue a dividend a whole other class of mutual fund and professional managers who have to buy dividend stocks will pile into the stock, providing further upside.
[Update March 19] – Apple did indeed declare a dividend as predicted. Chief Executive Officer Tim Cook said that Apple will dip in to its $96.7 billion in cash and investments to pay investors $2.65 a quarter for each share owned. They also instituted a $10 billion share-buyback program.
2. New Product Pipeline: The iPad3 and iPhone5 are coming out this year, and from early reports they are going to be a big step up from previous versions, particularly because they are now aggressively going after the corporate/business market. These products and their future versions are going to be ongoing growth drivers for the top and bottom line of Apple. Plus all their other new products like Apple TV and iCloud based applications are like bonus icing on the case. Finally, their Mac PC market share continues to grow, with plenty of room still left. Even if they double and triple Mac PC and notebook sales, it’d still be a small fraction of the overall PC market. So despite popular opinion and a seemingly ubiquitous presence, Apple products are nowhere close to market saturation levels.
3. Strong Fundamentals. On a earnings valuation basis Apple’s still one of the cheapest stocks in the market, while being among the fastest growing blue chip stocks in the market. It has P/E ratio of about 12, versus the market (S&P) average of around 15. If you look at it’s competitors P/E ratios like Google (20) , Amazon (131) – it is especially cheap. Facebook’s latest IPO offering put their P/E at over 100! An even stronger sign of the company’s growth is their 5 year price to earnings/growth rate (PEG) ratio, which is 0.60 for Apple. A PEG less than one indicates the stock is cheap based on future growth. Google and Amazon have a PEG rations of 0.9 and 4.8 respectively.
4. Relentless Execution. Everyone assumes Apple is great because of their products and ability to shape consumer demand (sell them what they don’t yet know they want). But this is only half their story. Tim Cook, their new CEO, provides the second ingredient to their success – execution. They have one of the most efficient and low cost global supply chains, which is why the company enjoys gross margins over 40% across its product lines.
5. Untapped Global Growth – Apple’s most mature markets by far are the U.S and Europe, which drive over 60% of sales and revenue. This is reinforced by the fact that in any major western metro area, it seems like every other person has an Apple device on hand. However in Asia, Apple’s penetration or market share is less than 20% in most major markets. If they were to simply grow US sales at current levels, while doubling Asian sales (not as hard as it sounds) their sales, revenue and even stock price would easily double by 2014.
The potential upside in Apple is reflected in the revised price estimates of leading Wall Street analysts:. $570 a share, said Oppenheimer. Credit Suisse upped that to $600. Morgan Keegan and Canaccord went to $650, with some independent analysts putting the two year price target around $800.
Should I buy now? A number of market pundits are saying that Apple is due for a pull back after a very strong run. They may in fact be right, but any pullback represents a great buying opportunity if you missed the latest run. So do your own research, weigh the pros/cons from your investing lens and buy in for what should be an amazing ride.
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