Apple at $700 Isn't Crazy

Analysts raise their price targets, but Apple is up to the task of earning them.

May 28, 2014 at 2:05PM

More analysts are trying to keep pace with reality. Barclays boosted it price target on Apple (NASDAQ:AAPL) from $590 to $655, retaining its neutral rating on the stock. Bernstein Research pushed its goal from $615 to $700, also sticking to its bullish outperform rating on the consumer electronics giant.

Both analysts have their reasons for propping up their price targets. Bernstein feels that the inevitability of the larger iPhone, upgrade-friendly moves at wireless carriers, and even Apple's upcoming stock split make it more valuable. Barclays feels new products and Apple's bottom-line resilience through the first half of this fiscal year warrant a higher target.

They are being honest, but they may not be telling the whole story. After all, neither rating changed. They are simply adjusting to a stock that has appreciated sharply in recent weeks. With Apple starting off the day north of $625, it's not as if Bernstein's $615 could be considered bullish. It's not as if Barclays at $590 could be considered equal weight.

The higher price targets may be sending Apple stock to its highest level since October 2012, but it also makes sure that Barclays and Bernstein are adjusting their price targets ahead of next week's Apple Worldwide Developers Conference. 

No one is expecting any major iPhone news. That will likely come at some point over the summer. However, there's already chatter that Apple will announce smart home initiatives at the annual powwow for iOS and MacOS developers. There's also the worst-kept secret about Apple's potential $3 billion deal for Beats Electronics that could very well be announced during the conference.

Apple can use the catalysts. Analysts see revenue climbing just 6% this year and 7% in fiscal 2015. They see earnings climbing at a slightly higher clip, but a lot of that is just making up the lost ground for when margins contracted through most of last year. There's nothing wrong with seeing sales and profitability going in the right direction, but Apple investors are used to headier growth.

Apple at $700 would be a multiple of 16 based on this year's projected earnings and less than 15 times next year's multiple. Back out Apple's ample cash and the multiples drop into the low teens. That's not cheap if Apple fails to land a hot new product and we're eyeing sales growth in the mid-single digits and margins possibly under pressure as mobile gets even more competitive. However, all it takes is a single hit in smart home, wearable computing, or some other disruptive technology to turn a fairly priced Apple into a screaming value where $700 will be the floor -- and not the ceiling.

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Rick Munarriz 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 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.

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