Analysis: Apple stock headed for $1,000 per share

Posted:
in AAPL Investors edited January 2014
Analyst and AppleInsider contributor Andy Zaky has issued a rare "buy" recommendation of AAPL stock ? only his sixth since 2006. Read why he thinks Apple's stock is headed for $1,000.

History has repeatedly taught us that the best time to buy Apple is when the bearish sentiment in the stock has reached the pinnacle of extreme pessimism. When every guest on CNBC is calling for the imminent demise of Apple, when every headline is making a case for why Apple has peaked, and when the stock continues to slide by over a 2% a day right in the face of a market rally, that?s when you know it?s time to buy.

The last two times we publicly advised investors to buy Apple was on Thursday, May 17, 2012 when Apple was at $530 a share and on Friday, June 17, 2011 when Apple was at $320 a share. In both cases, Apple bottomed out on the following trading session and then went on a 30 percent+ rally. We have only ever published five public buy recommendations on Apple and each one was published within a few days of Apple?s final bottom. We have never missed a long-term price-target on Apple.

Today, Apple has reached one of those very rare buy points. However, unlikely our previous five recommendations, we do not necessarily believe that Apple has bottomed right here at $630 a share. We just believe that Apple won?t see much lower prices from here thereby making this a unique buying opportunity. It?s better to buy at $630 and accept a small potential drawdown than to miss the entire move. We do not believe Apple will see levels below $615 a share. Thus, anything between $615 and $630 is an extraordinary buying opportunity. Between $630 and $650, you have a great entry level.

At $630 a share, Apple?s stock has the potential to rally over 60 percent over the coming 12-month period. And that?s assuming Apple merely continues to trade at the same depressed valuation it has been trading at over the last several quarters now. If Apple?s valuation were to somehow improve, we can see Apple reach $1000 a share much sooner than many expect ? perhaps even as early as next July.

The simple truth is that despite all of the sensationalist rubbish surrounding the launch of iPhone 5 ranging from ?Mapplegate? to purple hazes or scratched iPhone cases, Apple is selling literally every iPhone 5 that it can make in what has been called the most aggressive international roll-out in consumer electronics history.

What?s more, based on the expected smartphone growth rates estimated by IDC and Gartner, the consensus among analysts is that Apple will sell somewhere between 160 million to 180 million iPhones in 2013. This expectation is further supported by the very aggressive capital expenditures Apple has been making ahead of this international rollout as well as the capital expenditures Apple plans to make next year.

In fact, Apple?s massive increases in capital expenditures suggests the company expects to build and ship more iOS devices in the first two quarters of 2013 than it shipped all of last year. Horace Dediu at Asymco has put together a pretty compelling piece showing the relationship between capital expenditures and build plans for iOS devices. Apple?s planned expenditures shows that the company is planning to ship a massive number of iOS devices this year. A number that can dwarf all current expectations.

Yet, assuming that Apple delivers at the low end of the range, the company will likely report just a little over $66.00 per share in 2013. At a 15 P/E ratio, that would put Apple at $990 a share before the end of next October.

In the post-financial crisis era, Apple?s P/E ratio peaked at 35.87 in fiscal Q4 2009. Since that time, the stock has underwent a very long multi-quarter process of P/E compression until things sort of flattened out in fiscal Q4 2011. Since that time, Apple?s P/E ratio has more or less stabilized and has been well contained within a range of 14.5 to 15.5. One can very safely assume that Apple will continue to trade around this level for the foreseeable future. It?s right near the S&P 500 average and a fitting valuation for the world?s only mega-cap growth company.

The chart below shows Apple?s average quarterly P/E ratio from Q1 2010 until Q4 2012. As you can see, the curve began to flatten out a little over year ago around fiscal Q3 2011. And since that time, Apple has more or less traded at the same 14.5 to 15.5 P/E ratio level (click to enlarge):

Zaky


Zaky


This flattening out of Apple?s P/E compression curve clearly indicates that the market believes Apple?s true value relative to its actual earnings stands at roughly a 15 multiple. That is the level at which the market has been very comfortable pricing shares of Apple on a very consistent basis over the past year and a half.

Go back to Apple?s fiscal Q1 2012 for example. The day before Apple reported earnings, the stock was trading at a 15.4 P/E ratio. Apple reported one of the biggest earnings blowouts in the company?s history which caused Apple?s P/E ratio to fall from 15.4 down to 12.5 over night.

As a result of this collapse in the P/E ratio, Apple saw one of the biggest rallies in its history which aimed to correct Apple?s overly depressed valuation. The stock went on an almost vertical parabolic rally from $420 a share up to $644 in just two and a half months time. This rally helped bring Apple back to its center of gravity near the 15-P/E ratio level.

In fact, since June 2011, any time Apple?s valuation fell substantially below a 15 P/E ratio, the stock found a lot of buying interest which helped bring Apple up to fair value at 15x earnings.

Yet, aside of the issue of valuation, Apple is now also technically oversold and trading at a level that will likely constitute the low-end of the range for the stock over the next few months. While Apple may very well revisit these lows at some point in time over the coming weeks, it is still sitting near the low-end of the range. That?s what makes Apple an extraordinary buying opportunity today.

Buying Apple down here at $630 a share will make any fund manager?s year. It?s an easy 60 percent gainer over the next 12-month period. Apple should be a top holding of the average fund, and smarter fund managers are riding this thing all the way to the bank. It is pretty much a no brainer at these levels.

Finally, it is important to note that we?re already starting to see a lot of very interesting parallels between the hyper-bearish sentiment in Apple during the fall of 2011 and the hyper bearish sentiment that we?re seeing in Apple in the fall of 2012 (today).

In both years, the sentiment reached a bearish extreme peak despite the fact that Apple was busy selling millions upon millions of iPhones and showing no signs of actual weakness whatsoever. In both 2011 and 2012, the sentiment was driven by the same sort of abstract and non-concrete B.S. we basically see in every sentiment driven sell-off in Apple. Instead of pointing to any actual or real issues impacting Apple?s sales or margins, the attack on Apple has been largely very vague and very general at best.

In 2011, the bears argued that the passing of Steve Jobs meant the death of innovation at Apple. And as an example of this, the bears pointed to Apple?s lack of innovation with the so-called ?disappointing? iPhone 4S. While Wall Street was disappointed with the iPhone 4S, the rest of the planet was busy buying the device in droves. During the launch quarter, the iPhone 4S represented 1 out of every 4 smartphones sold which was by far Apple?s biggest penetration within the smartphone space. Even though the form factor didn?t change, the iPhone 4S was far more successful than the iPhone 4 in terms of penetration within the smartphone market.

In 2012, we?re seeing the same exact nonsense. Wall Street by all accounts appears to be largely disappointed with the iPhone 5. The bears have argued that Apple?s fumble with its Maps App suggests that the company lacks leadership without Steve Jobs. A fund manager even argued that the iPhone 5 felt more like a toy instead of a smartphone, and that his personal assessment somehow suggests that Apple will struggle to sell iPhone 5?s.

Meanwhile, Apple is busy selling every iPhone 5 it can make and has already suggested that it plans to sell 50-60 million iPhones this quarter which would drive EPS up to nearly $20.00 or 44.2 percent higher than the year-ago period. Yet, instead of breaking out above $700 a share in an effort to stay ahead of P/E compression that will surely hit the stock once Apple reports earnings, Apple has tumbled 12 percent off of its highs. Apple is setting up to repeat what happened in January 2012 and it seems a lot of people are just sitting there twiddling their thumbs.

In 2011, we had Steve Cortez leading the bear raid against Apple. Cortez was the most prominent Apple bear with his admitted big short position on the stock that he was not shy about disclosing pretty much every day on Fast Money. On November 25, 2011, Apple?s stock reached $363.50 a share. Exactly four months later, Apple?s stock-price was 75.17 percent higher and we never heard from Cortez again.

While Cortez lead the bear raid in the fall of 2011, Doug Kass of Seabreeze Partners is leading the bear raid in the fall of 2012 today. It will be interesting to see if Kass has any comment about his Apple short position or any comment about his commentary on why Apple is peaking when the stock rallies to $1000 a share next year. Like Cortez, we probably won?t hear from Kass until he comes out with another recommendation to short Apple at $1000 a share.

Apple is very cheap at these levels and is getting very close to a final bottom. While it could very well rebound and then struggle a little after earnings, the fact of the matter is, Apple at $630 a share presents us with an extraordinary buying opportunity. The stock is headed straight for $1000 a share. Don?t get too caught up in bearish sentiment. It?s time to buy Apple.

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Comments

  • Reply 1 of 116


    You know, I doubted $350, then $600, once upon a time. Now I'm wishing I held out.

  • Reply 2 of 116


    Apple Is Doomed™.

  • Reply 3 of 116

    Quote:

    Originally Posted by Suddenly Newton View Post


    You know, I doubted $350, then $600, once upon a time. Now I'm wishing I held out.



    And yet, again, you are going to sit on the sidelines?? What makes this time any different in your mind or are you willing to miss out again?

  • Reply 4 of 116


    pump that stock

  • Reply 5 of 116


    Apple stock will certainly go up a bit from here. However a 60% run in 12 months to $1000? Not likely, particularly in this market. P/E arguments have been made for why the stock is cheap numerous times over the last 2 years, it's refuted all the time and he starts to admit it above and then quietly shift to opinion. Apple will need a new product or 2 (and I don't mean a mini version of a current one...) to break $1000. Hedge accordingly. 

  • Reply 6 of 116


    What's stopping those of us from buying at 1,000/share when we once considered the $350-600 and missed out.. is that it is unlikely Apple will go up much more from here. It's borderline unheard of. At some point, they WILL reach a plateau.. it's the law of large numbers. And 1,000/share is QUITE a large number.

  • Reply 7 of 116
    Horace at asymco.com says that $1000 is inevitable, but it will take a couple years... Apple is valued by it's profit stream (price is 4X-6X of annual profits per share [~1Billion shares))... so when Apple hits $200Billion a year in profits, price should be nearing $1000.

    If Apple had a P/E of 30, which would be normal for a 'growing' internet/tech companies, price would already be at $1500.

    As noted yesterday, look at Amazon's P/E. Zillow's, ATT's?
    Would anyone think Apple is worth less per dollar earned than ATT? Where's ATT's upside?
  • Reply 8 of 116
    At $1000, Apple will sport a market cap of about 900 billion. It will take a lot to swing that pendulum. Also, what are you talking about in regards to extreme pessimism in Apple? I think Facebook is seeing what you called extreme pessimism in the stock, but would I buy FB? Nope. If anything, it seems like everybody loves Apple or owns an Apple product. Who doesn't own Apple stock and still wants it? Not many I bet and why keep buying it if you already own it, you know what they say about putting all your eggs in one basket. Remember what happened to AOL stock.
  • Reply 9 of 116
    MacProMacPro Posts: 17,824member
    I totally agree with the analysis.
  • Reply 10 of 116

    Quote:


    Originally Posted by hface119 View Post


    At some point, they WILL reach a plateau.. it's the law of large numbers. And 1,000/share is QUITE a large number.



     


    The "law of large numbers"is twaddle in my opinion. But I agree, it will reach a plateau, but that time is not now.


     


    Andy Zacky is usually full of shit though. Long term correct, but with suspicious short term timing. The fact that he say buy now, makes me think it will hit the 500's before it hits $1k

  • Reply 11 of 116

    Quote:

    Originally Posted by hface119 View Post


    What's stopping those of us from buying at 1,000/share when we once considered the $350-600 and missed out.. is that it is unlikely Apple will go up much more from here. It's borderline unheard of. At some point, they WILL reach a plateau.. it's the law of large numbers. And 1,000/share is QUITE a large number.



    The law of large numbers has never seen a global market like this and the potential of monopolizing large components of the economies of multiple nations, well not since the days of the British East India company.

  • Reply 12 of 116
    ko024ko024 Posts: 68member

    Quote:

    Originally Posted by hface119 View Post


    What's stopping those of us from buying at 1,000/share when we once considered the $350-600 and missed out.. is that it is unlikely Apple will go up much more from here. It's borderline unheard of. At some point, they WILL reach a plateau.. it's the law of large numbers. And 1,000/share is QUITE a large number.



     


    You guys really need to educate yourselves.  The term "law of large numbers" has almost replaced "that's so ironic" as being the most widely used saying that people use so incorrectly...  Everyone seems to use "ironic" when they really mean coincidental... Not to say some people cant use it right.  They usually just dont.. Same thing here with law of large numbers.  Jesus.... the law of large numbers is a theorem that states that as your sample size increases, the likelihood that your average moves closer to the theoretical average increases.  For example, if you roll two dice, the most likely average roll is 7.  Do it 3 times and you may or may not see 7 come up most often.  Do it 1,000,000 times and the likelihood that 7 is your average is great.  That is the law of large numbers.  You and everyone else in the media seems to want to use that term to say that apple has become too large.  That means nothing....  Addressable market and market saturation are more relevant metrics... and clearly apple has room to grow in those regards... Please people... please do some research.. apple will go to 1,000... they WILL be the first trillion dollar company.. it is a fact.... get over it.. now you have two choices, you can either wait for that headline and say, aww man I should have bought when it was 600s... OR you can just buy the darn thing now, and be proud of yourself later.. and a little more rich......

  • Reply 13 of 116
    mikeb85mikeb85 Posts: 506member


    $1000 will happen when Apple is selling TVs, home automation systems, etc...  They've nearly reached market saturation, Android, Windows 8, and even fringe OSes like BB10, Mozilla and Jolla OS will start to chip away at their market share.  


     


    Plus, their market cap is getting so big, it's becoming a psychological barrier.  That 15 p/e will contract to probably just under 10 in the coming years.  Once the market decides growth will be hard to come by, they'll value the company based solely on dividends.  That is the end-game for all mega-cap stocks.  


     


    That being said, Apple's going to 750 by the end of the year.  (a few days ago I said 630 was a buy, right now it's at 645 and likely going to maintain momentum until the iPad mini release).  

  • Reply 14 of 116
    Already up over $12 today. :-)
  • Reply 15 of 116
    After so much downbeat news against Apple that seemed designed to only get page clicks, Andy's analysis is a welcome breath of fresh air. He saw the bottom coming and, unlike the pundits who just scream "doom" without analysis, he makes a sound case.
  • Reply 16 of 116
    Unbelievable that anyone can call *the* bottom 6 times in a row! Following Andy Zaky has been very profitable for me :)
  • Reply 17 of 116
    tcaseytcasey Posts: 199member
    Apple stock is not going down that's for sure...there keep selling products and if microsoft fall down now well - that leave more room for apple to gain.

    I never could predict the sales of apple or there stock price...but i don't see people leaving a company there really happy with.

    Samsung is cleaning up the low end but does anyone see a exodus from apple to samsung or anyone else for that matter ?

    Can't last forever but for now it's looking good.
  • Reply 18 of 116
    Excellent analysis! Zaky is always right-on with AAPL. It's good to hear some clear analysis from someone who really knows the stock!! That's all you need!
  • Reply 19 of 116
    Andy Zaky actually has a quite extraordinary track record, he has issued a public buy on apple only about 5 or 6 times and each time has been at or near a low. He also has a track record of being the most accurate forecaster of Apple earnings.

    Apple still has a relatively small market share in its important markets, so there is still plenty of room for growth, it's entirely possible Apple could have 500 billion in cash on its books in 5 years time - although it is more likely to have boosted its dividend to peal off a lot of that cash, but looking at is that way what is a fair value?

    Yes $1000 a share and a trillion dollars market cap both sound like big numbers, but looking at the fundamental story both are more than reachable. They are likely.
  • Reply 20 of 116
    apple ][apple ][ Posts: 8,360member

    Quote:

    Originally Posted by monstrosity View Post


    Andy Zacky is usually full of shit though. Long term correct, but with suspicious short term timing. The fact that he say buy now, makes me think it will hit the 500's before it hits $1k



     


    If somebody listened last time, when he said to buy at $530, they would've made a very nice profit.

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