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Apple (Nasdaq: AAPL ) shares may have been waffling about in recent weeks, but it's not a crime to dream bigger.
Piper Jaffray analyst Gene Munster reiterated his bullish call on the company. He outlined several catalysts that will drive the stock toward his price target of $910 -- and then out to $1,000 and beyond.
That magically round four-digit number seems far away these days. The stock has meandered since hitting an all-time high last month. However, it's not as if the market should be shocked if Apple finds its way up to that meaty $1,000 milestone sooner rather than later.
Cheap is relative
Let's put things into proper perspective. Apple at $1,000 translates into a market cap of nearly $950 billion, but keep in mind that the class act of Cupertino has $110.2 billion in cash and long-term investments on its balance sheet. In other words, Apple at $1,000 with its top-heavy balance sheet calls for an enterprise value closer to $850 billion.
Apple's balance sheet is an important component in valuing the company. After all, on a market-cap basis, Apple is fetching 12 times this fiscal year's projected profitability, and a little more than 10 times next year's forecast. Back out the company's net cash to weigh Apple on the fairer enterprise value basis, and the multiples drop by roughly 20%. Yes, Apple really is fetching just 10 times this year's earnings and 8 times next fiscal year's target.
Now let's look at Apple with a share price of $1,000. Its P/E starts looking more like P.U. at that point. Apple would be priced at 21 times this fiscal year's earnings and less than 19 times next year's earnings. That doesn't seem like much of a bargain, especially as analysts see revenue and earnings growth slowing to 20% and 15% respectively in 2013.
Stack that up against Baidu (Nasdaq: BIDU ) . Analysts see China's dot-com darling growing revenue and earnings by 42% and 39% respectively next year, and it's only fetching 18 times 2013's earnings. Is Apple really worth a slightly higher multiple at less than half the growth?
Well, when you back out the company's cash -- and it would be closer to 13% of Apple's market cap at $1,000 -- the fiscal 2013 multiple on an enterprise cap basis is closer to 16. Oh, and even with Apple's new dividend and next year's buybacks, the company's cash hoard will continue to grow with every passing quarter.
Another thing that makes Apple cheaper than it seems on paper is that it's a pretty safe bet that the tech darling is going to obliterate Wall Street's estimates.
With the exception of a rare miss two quarters ago, Apple has consistently landed ahead of market profit expectations for years. Outside of that Halley's Comet of a miss, Apple has landed ahead of analyst bottom-line forecasts by 34%, 37% and 23% over the past year.
This is ridiculously encouraging -- and probably by more than you think.
It's not just that dozens of well-paid analysts are perpetually underestimating Apple's reality. It's that they are way off the further out they go.
See, we can't just look at the average percentage that Apple has historically achieved in its beats. Let's look at the past year. Let's add in the 5% miss during Apple's September quarter, even if it stemmed largely from analysts underestimating the impact of the iPhone 4S being released after the period came to a close. We're still talking about Apple landing ahead of the prognosticators by an average of 22%.
The knee-jerk bullish reaction would be to just apply that markup to the $53.95 a share that the market's banking on for the fiscal year that begins in October. At $1,000, Apple would be trading at just 15 times the $65.82 a share that landing 22% ahead of the target implies.
But it gets better.
A lot better.
You haven't seen anything yet
Apple beats are based on what the pros were forecasting at the time. Analysts have a silly ritual. They miss a quarter. They jack up their estimates. It isn't enough. A quarter later, they jack them up again. Yes, this even happened during last year's quarterly miss -- as analysts slapped their foreheads and realized that Apple would be selling a ton of iPhones during the new holiday quarter.
Let's flesh out the magnitude of this very important point. Just six months ago, analysts were expecting a profit of $34.77 a share in fiscal 2012 and $38.96 a share in 2013. Today, those targets have increased by 35% to $46.94 a share this year, and 38% to $53.95 a share come next year. In other words, even before we get to the actual beat, the starting line is being moved up aggressively.
Here, history teaches us that the further out you go, the larger the gap between perception and eventual realization will be.
What I'm trying to tell you is that if you eye the fiscal 2015 target of $80.59 a share -- argue that $1,000 would be a pretty cheap price for Apple then -- that you shouldn't be surprised when Wall Street's estimates are far higher than even that as we get closer.
So don't be surprised if Apple hits $1,000 in a matter of months -- and not years. Time has been very kind to Apple. Reality has been even kinder.
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