Here's How Apple Got Back Above $600

Apple's stock split doesn't matter, but these factors do.

May 5, 2014 at 7:00PM
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After opening lower this morning, U.S. stocks finished ahead on Monday, with the benchmark S&P 500 gaining 0.1%. Meanwhile, the narrower Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.2%, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) was up 0.3%. In company-specific news, shares of the world's most valuable company, Apple (NASDAQ:AAPL) closed above $600 for the first time in over a year and a half. That level in itself isn't particularly meaningful, but it's an opportunity to examine some of the factors that are underpinning the recovery in the share price -- and one that isn't!

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Split happens
First, here's one reason Apple's stock didn't break $600: the imminent 7-for-1 stock split the company announced along with its fiscal second quarter results on April 23. The announcement may have had a (very) small, (very) short-term effect on the stock price, resulting from buying by short-term momentum "investors." Fundamentally oriented fund managers, on the other hand, won't have bought the stock on that basis. As far as making Apple's stock "more accessible to a larger number of investors," per the stock split FAQ on Apple's website, that wouldn't have any effect until the stock begins trading at its split-adjusted price on Monday, June 9. At this stage, the aggregate effect is zero.

Another bad argument I have read relating to the stock split is that it will enable Apple to be considered for inclusion in the Dow Jones Industrial Average and that this is positive for the share price. The Dow is price-weighted, so, at $600, Apple's stock would have a lopsided weighting in the index -- roughly 15 times that of Microsoft, for example. The original observation is correct: The stock split does remove a barrier to inclusion in the Dow. However, the conclusion is false, as the total amount of assets that track the Dow is insignificant.

(For an even more wonkish discussion of Apple's split, I recommend this post from the Financial Times' Alphaville blog -- registration may be required.)

Here's matters for Apple's stock price
Instead, the April 23 fiscal second-quarter results have clearly been the catalyst for a re-rating in the shares (from close just before the announcement, the stock is up 14.5%). Specifically:

  • Growth matters: In its March quarter, Apple soundly beat Wall Street's expectations on revenue and earnings-per-share (by 5% and 14%, respectively), proving that it still has the capacity to genuinely surprise investors and that its growth engine is not stalled, let alone reversed.
  • Cash matters: Simultaneously, Apple announced that it is raising its dividend by 15.5% and adding $30 billion to its existing share repurchase authorization, to be put to use before the end of 2015.

What's missing from this picture? As legendary activist investor Carl Icahn -- one of Apple's top shareholders -- tweeted on April 23:

Indeed, Apple CEO Tim Cook has promised a new product category this year; Apple has not launched a new product since the introduction of the iPad in January 2010. Will a new product be the catalyst for the next significant share gains? In the short term, it's the most obvious one, yes. Reuters ran a story this morning according to which the company is on a hiring spree in the area medical technology, which suggests a wearable technology device could be in the pipeline.

Longer term, a successful new product category will be instrumental in fueling Apple's future growth. At 12.2 times forward earnings per share, however, the growth hurdle for shares doesn't look excessive, particularly when one takes into consideration the beneficial effect of repurchasing shares that are undervalued. Naturally, however, the margin of safety is smaller today that it was on April 23, with the shares at $524.75 -- on that day, both Cook and Icahn declared they were still undervalued. The $600 level is another reminder that Apple shares are getting closer to fair value.

At $600 Apple is a big as they come, which makes future returns more difficult for investors. If you want a tech company that's quite a bit smaller (and has been named a Top Stock for 2014), you can click here to read more.  

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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