March 19, 2012
This story was updated at 10:30 a.m.
Wall Street is calling it the “700 Club”– the group of buy-side analysts who have gone public in recent days with projections that Apple’s stock (which closed Friday at $585.57 a share) will soar to $700 or more. The stock has edged slightly closer to that goal today, gaining more than 1 percent after the company's announcement that it will start paying a quarterly dividend of $2.65 a share and launch a $10 billion, 3-year stock buyback program.
It may take a few prayers to get all the way to $700, but so what? Even though the price is still $100 above its current share price, no fewer than five analysts jumped aboard Apple’s bandwagon last week, just as the first of the company’s new iPads arrived in stores and made their way into the hands of eager consumers.
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Piper Jaffray was the latest addition to the 700 Club, when analyst Gene Munster boosted his price target on the stock to $718 from $670 previously. Munster had previously expected the iPad to lose market share next year; now he’s calling for 2013 iPad sales to jump 44 percent from forecast levels this year. Even if rival tablets catch on, Piper Jaffray still expects Apple to own 60 percent of the market by 2015.
Of course, the Apple bulls don’t rest their case solely on the prospects for the brand-new iPad and its future incarnations. There is also the iPhone. Munster boosted his outlook for both the number of units sold and market share, after Apple reported an astonishing 25 percent surge in sales of its iPhone 4S in its fourth quarter. Indeed, Munster now expects Apple’s share of the smartphone market to rise from a previous estimate of 20 percent in 2013, to 23 percent that year and 33 percent by 2015.
Other analysts who are banging the drum in support of Apple 700 include Mike Walkley of Canaccord Genuity (target: $710) and Katy Huberty of Morgan Stanley (target: $720). Such a move seems almost inconceivable, given that Apple has already soared 44 percent this year from its December 30, 2011 close of $405 a share. If it does rally above $700, that would mean it has gained more than 72 percent in a single year – an astonishing feat for such a large and well-established company.
By some measures, that would leave the company richly priced. For instance, the company’s current book value is only $82.45 a share. On the other hand, Apple’s earnings growth has been so astonishing that its valuation is well in line with the market. Apple trades at only 16.7 times trailing 12-month earnings, and 13.6 times prospective earnings. That’s not pricey, by any stretch of the imagination, particularly when measured against both the growth Apple is recording and the stock’s momentum.
Peter Misek, an analyst with Jefferies & Co., for instance, now expects Apple to earn $10.72 a share in the first quarter, thanks to the contribution of the new iPad, up from a previous forecast of $9.51 a share. The fundamentals are strong.
But the sheer magnitude of the stock’s overwhelming advance, ironically, is causing a different kind of problem. Already, with the first quarter of the year still two weeks away from drawing to a close, it’s turning into one of those markets where an investor’s success or failure depends on whether he’s been right on a single stock. Buy Apple, keep buying Apple, and buy more Apple: That has been the recipe for outperformance.
Anyone who hasn’t drunk the Kool-Aid is going to fall by the wayside this year, performance-wise. This isn’t the first time investors have had to watch in astonishment as success boils down to getting the direction and timing of a single stock right. During the height of the dot.com boom, getting Cisco (CSCO) right was what it took to outperform the market and for an investment manager to beat her peers. That ended in tears when Cisco’s share price and valuation plunged.
The Apple story – and its valuation levels – may look very different to investors more than a decade later, but the very fact that there is such a parallel may cause some to hesitate. After all, with every additional $25, $50 or $100 in per-share valuation of Apple’s stock comes more vulnerability to the unexpected. The higher that stock price, the more skittish investors will be, and if there’s a problem with the fancy new iPad screens or the latest iPhone, well, that’s a recipe for a meltdown.
That’s particularly true because if Apple is to bear out the predictions of the “700 Club” and see its share price rise another 20 percent or so this year, it will be relying on newer investors to take it over the $700 mark. The rapidity of the stock’s rise in recent months – it looks almost like a straight vertical line on any stock price chart – has forced many long-time fans to refrain from adding to their positions or even to think about unloading some of that stake, whether they want to or not.
After all, while the broader stock market has done well so far this year, it hasn’t fared nearly as well as Apple. So on a relative basis, investors who once had 4 percent or 5 percent of their fund invested in the technology giant may find themselves with positions of 7 percent, 8 percent or even more, depending on when they bought and how well their other positions have done.
At the very least, those investors will refrain from future buying. Depending on what position limits they have in place, they may have to lighten up. Are there enough new Apple aficionados to offset any downward pressure on the stock as such selling ripples through the market, and to propel the share price higher still?
That’s something that the 700 Club may not have factored into their estimates, which rely principally on fundamentals, such as future demand for Apple products. Apple has grown so much and so rapidly on both an absolute and relative basis, regardless of the fundamental investment case to be made, is there simply enough capacity in the market for investors to own more of it without tossing concepts like risk and diversification out the window?