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Apple Stock Could Soar Well Past $100

Apple (NASDAQ: AAPL  ) completed its 7-for-1 stock split over the weekend, and Apple stock began trading at its new split-adjusted price on Monday. Investors cheered this change, as the stock promptly rallied 1.6% on a relatively flat day for the rest of Wall Street, reaching a new (split-adjusted) 52-week high in the process.

AAPL Chart

Apple Stock 1 Year Price Chart, data by YCharts

While nothing has changed from the perspective of Apple's business, many investors appear to find Apple stock more appealing at its new price for psychological reasons. Pundits have claimed that it will be easier for Apple to return to its all-time high (previously around $705; now a tad above $100) now that the stock seems more affordable to retail investors.

However, Apple's fate ultimately depends on its ability to grow earnings -- not the accounting gimmick of a stock split. Fortunately for Apple stock owners, the company has a few significant growth drivers coming in the next 2 years. This should keep Apple's earnings moving higher -- sending the share price well beyond $100 to new all-time highs.

A big iPhone product refresh
Apple's biggest near-term growth driver is the upcoming release of the "iPhone 6". There are a lot of open questions about how the iPhone 6 will differentiate itself from earlier iPhones and the Android competition. However, it is almost certain to have a bigger screen and incorporate some new features like near-field communications or wireless charging.

In fact, many tech analysts have commented that Apple will likely release two new big-screen iPhones this fall: one with a 4.7" screen and a "phablet"-type device with a 5.5" screen. While there's nothing inherently better about a bigger screen, Apple's lack of a big-screen phone put it at a disadvantage because Android phones are available in a large variety of sizes.

The release of these two new iPhones should drive a strong upgrade cycle. For example, in the U.S., close to one-third of all iPhone users will be eligible to upgrade by the fall. (Another large group will become eligible to upgrade during the winter.)

Apple fans will probably rush to upgrade to the iPhone 6 this fall

Two years ago, investors got excited about the iPhone 5's ability to drive a strong upgrade cycle. Indeed, Apple's revenue rose 9% in its last fiscal year, largely on the back of the iPhone 5. However, Apple stock plummeted because investors were blindsided by the corresponding 5 point drop in Apple's after-tax profit margin (from 26.7% to 21.7%).

This time, most investors understand that the iPhone 6 introduction will cut into Apple's profit margin initially. As a result, it is less likely that Apple stock will endure a repeat of its 2012-2013 slide from more than $700 to less than $400.

Growing in China
Apple added the world's largest wireless carrier -- China Mobile (NYSE: CHL  ) -- as a carrier partner last quarter. The company saw a quick jump in sales in China, as early adopters snapped up the first iPhones that were compatible with China Mobile's new 4G network. Apple set a new sales record in the Greater China region last quarter.

However, the initial boost Apple received from adding China Mobile pales in comparison to the long-term opportunity to grow sales in China. There are 3 major factors that will cause Apple's sales on the China Mobile network to skyrocket in the next couple of years.

The iPhone 5c may become a big seller at China Mobile as its price comes down (Photo: Apple)

First, China Mobile will be rolling out LTE service in additional cities in 2014 and beyond, increasing the iPhone's utility. Second, Chinese consumers have fallen in love with phablets, so the iPhone 6 is likely to be far more popular in China than the 5s. Third, Apple reduces the price of old devices each year -- so the LTE-equipped iPhone 5c will become a more viable option for the Chinese middle class with each new product cycle.

Entering new product categories
Apple's last main growth driver is its entry into new product categories. The "iWatch" is the most-hyped of Apple's potential new products. This would most likely be an iPhone accessory that allowed users to access some smartphone functions without having to pick up the phone. It may also add some fitness or health-related capabilities.

Given the still-large contingent of Apple doubters who claim that the company lost its innovation edge as soon as Steve Jobs died, releasing a successful product in a new category could make investors more excited about Apple stock.

That said, the "iWatch" -- or any other new product -- will have a modest impact on earnings for the foreseeable future. For example, tech analyst Steve Milunovich thinks the iWatch would provide an EPS boost of about 2% in FY15 and 4% in FY16. That makes it less significant as an EPS growth driver than Apple's share buybacks.

Apple stock is ready for takeoff
Apple's 3 big catalysts -- the upcoming release of large-screen iPhones, further exploitation of the China Mobile opportunity, and the introduction of new product categories -- should help Apple post solid earnings growth in the next few years. Despite Apple stock's big run in the last year, shares still trade for just 15 times current-year earnings. That's less than the market multiple.

As a result, Apple stock has plenty of room to run beyond the $100 mark in the next couple of years. Indeed, if Apple manages to grow EPS at a double-digit rate for the next 2 years -- which is definitely achievable -- and the company holds on to its current multiple, Apple stock could surpass $120 by this time in 2016. If its multiple expands, the gains for Apple shareholders could be even more impressive.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Read/Post Comments (8) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 11, 2014, at 11:48 AM, anash91 wrote:

    Why is everyone buzzing over Apple doing what every other smartphone has been doing? You can go out and buy a windows phone or an android with all of these features for cheaper.

  • Report this Comment On June 11, 2014, at 11:53 AM, Mathman6577 wrote:

    @anash91: The buzz is that Apple makes a lot more profit than Samsung or Microsoft from selling in the high-end of the market.

  • Report this Comment On June 11, 2014, at 1:22 PM, deasystems wrote:

    @anash91: No Android or Windows phones have the features of iOS-based devices like the iPhone.

  • Report this Comment On June 11, 2014, at 2:41 PM, gca wrote:

    IPhones are playing catch up to Android Phones. A lot of the features in the upcoming iOS8, have been in use for years on the Android OS.

  • Report this Comment On June 11, 2014, at 2:53 PM, zippero wrote:

    Android phones can't even get updated and are malware magnets. KitKat's adoption is only 10% a year, at which rate it will take basically a decade to achieve the same 90% penetration rate that the latest iOS version achieves in less than a year. Anyone who uses an Android phone for mobile banking and other financial transactions in particular is a prime candidate for identity theft.

  • Report this Comment On June 11, 2014, at 3:45 PM, wesl8n02 wrote:

    Cheaper, cheaper, and cheaper. That is the one comment Android users repeat. However, sometimes a free item isn't worth the cost ;-)

    Apple has presented a product with percieved value that seems to hold its value. I'll admit it is all about marketing. But my spouse had an Android while I had an iphone. Once a week I would have to resolve an issue with the Android. Most of the problems were self inflicted, but I still had to resolve them. I finally purchased a 5S for the spousal unit and have not had to resolve any issues. Software upgrades are painless, apps for the kids are plentiful, usability is easy.

    I'll be first in line for the iPhone 6 with a bigger screen. Best part is, I'll ebay my iPhone and that will pay for my upgrade, just like the last two times. In 6 years it has cost me a total $100 for three iPhones. That, my friends, is cheap.

  • Report this Comment On June 11, 2014, at 4:18 PM, orthophonist wrote:

    Apple will move smartly to higher ground, not because of the contribution of any or two products to bottom line, but when Tim Cook acquires any of the attributes of Steve Jobs. The current PE is a Tim Cook PE; the new products, if announced properly and game changing, can shift the PE to a Steve Jobs PE. Then it will begin to be exciting for all of us - as it used to be.

  • Report this Comment On June 12, 2014, at 3:51 AM, CraigWPowell wrote:

    AAPL is with +24% gain in the last 3 months in accordance with the forecast:

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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