Shares of Apple (NASDAQ:AAPL) skyrocketed following the company's most recent earnings release and are now trading within spitting distance of $600 a share. This places Apple squarely at the top of the tech stock food chain as the world's most valuable company, commanding a market capitalization of $510 billion as of writing -- well ahead of Google's $359 billion and Microsoft's $330 billion. However, the question that's on many investors' minds is whether the stock is on its way to $700, an 18% increase from current levels.
Justifying a $700 fair value
For a large-cap stock with a fairly predictable business, using a discounted cash flow method to value the stock makes a lot of sense (although it is by no means the only way to do so). In order to justify a fair value of about $700, the company would need to grow earnings at a 9% 10-year CAGR before leveling off to a more modest 5% growth for the following 10 years. In this case, assume a discount rate of 12% (this isn't super aggressive) and add the roughly $138 in tangible book value to the mix.
This isn't incredibly far-fetched, particularly as Apple could see a large "gap up" in earnings from a successful iPhone 6 product cycle as well as the success of a potential iWatch. However, it is understandable that the stock doesn't trade there today as the visibility to this type of sustained earnings growth isn't obvious yet.
iPhones, iPads, and new products
Apple's iPhone growth, even without a larger iPhone, has been quite robust over the last several quarters. There still appears to be plenty of market share to take at the high end and if Apple can successfully expand its lineup to multiple screen sizes, it could see a large spike up in earnings and then growth from that new, larger base. iPad, however, seems to be faltering with sales actually down year over year, so this is something to keep a close eye on.
Possibly more importantly is the "new categories" angle. Everybody's looking to something like the iWatch to drive the next leg of growth, but the truth is that hardly anybody has a good idea of how well these will do. Sure, there is a preexisting market for digital watches and moving from traditional watches to the iWatch could be similar to the move from feature phones to smartphones, but this is by no means guaranteed. The good news, though, is that a blockbuster new product category would invalidate most financial models today and drive significant upside to today's stock price.
Foolish bottom line
Could Apple hit $700 on a successful iPhone/iPad product refresh? Sure. A larger iPhone dramatically expands the company's addressable market within premium smartphones, creating a real opportunity for share gain at high ASPs. However, this is only an 18% gain and some growth investors are hungrier for more than that. To blow meaningfully past the $700 level, Apple's going to need a big new revenue stream, but if any company can do it, it's Apple.
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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Google (C shares). It also owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.