The Fox Business Network’s Stuart Varney is one of my favorite financial-market commentators.
And not just because he keeps inviting me back as a guest on his popular Varney & Co. segment.
I like and respect the iconic Varney for his no-nonsense demeanor, his ability to quickly cut to the heart of a story, and because he welcomes strong opinions – as long as they’re backed by sound arguments.
So I was as surprised as anyone back on Dec. 5 when a stock-price prediction I made during an interview rendered the polished TV host momentarily speechless.
A Wild Ride
The story I’m sharing today is a great one.
But before you tell a great tale, you first have to set the scene.
Back in September 2012, after Apple’s shares had pierced the $700-a-share plateau to establish an all-time record high, most folks were saying it was a lead-pipe cinch for the iDevice innovator to join the exclusive $1,000-a-share club.
But just six months later, after the stock had plunged all the way down through the $400 level, nobody was taking that bet.
Even now, with Apple shares having recently hit a new 52-week high in the $575 neighborhood, even the most aggressive pundits will only speculate about the stock’s chances for getting back to $700. And few of those “experts” would offer even-money odds.
So on Dec. 5, when Varney asked me to handicap Apple’s odds of getting back to that $700 level, I totally understood his stunned reaction when I said that target was “too conservative” – and predicted the stock would be taking up residence in the $1,000-a-share neighborhood within 30 months.
A week has passed since I made that prediction. And U.S. stocks have just endured their worst three-day losing streak since October.
And yet, I’m more confident than ever about my prediction for Apple.
Birth of a (New) Legend?
As I’ve said before, it’s never easy to take over for a legend.
Jeffrey Immelt had to do it when he succeeded Jack Welch at General Electric Co. (NYSE: GE). Heartley William “Hunk” Anderson had to do it when he followed Knute Rockne as head coach at Notre Dame. And current Apple CEO Tim Cook had the misfortune – from a succession standpoint – to take over for the late Steve Jobs, the Apple co-founder and industry impresario who was ousted only to return and transform the company into a consumer icon.
It was bad enough that Cook lacked Jobs’ amazing charisma. But when consumer-gadgets powerhouse started to stumble, and its share price plunged, the naysayers began to circle Cook’s corner office like buzzards over roadkill.
Now, however, it’s the gloom-and-doomers who are eating crow.
In recent months, Apple has demonstrated it can still flex its muscles. That’s ignited a healthy rally in the company’s share price and forced Wall Street to reassess its overly negative view of Cook.
For instance, Apple is having a great holiday season, and will enter the New Year with enormous momentum behind it.
The company sold a record 9 million iPhones in a single weekend when two new versions were launched in September. And the much-ballyhooed iPhone 5C “bargain” phone actually turned out to be a winner – not because of huge sales but because it grabbed just enough of the volume to keep the rivaling iPhone 5S from “stocking out” during that initial surge.
And several visits to my favorite Apple store out here in the Bay Area since that time tell me that business continues to be brisk – for iPads and Macs, as well as for the company’s sleek smartphones.
But Cook’s resurgent reputation and a good start to the Christmas shopping season are only a piece of the story. There are three other catalysts that allow me to be so confident about my $1,000-a-share prediction for Apple.
Let’s run through them together.
Let’s Make a Deal
Over the past year, one of the biggest bummers about Apple’s outlook was China.
The company was losing market share there and investors weren’t seeing the progress that Cook kept promising.
A newly reached deal with China Mobile Ltd. (NYSE ADR: CHL) could provide a real boost to Apple’s fortunes beginning the current fiscal year, which started Oct. 1.
As the nation’s leading wireless carrier, China Mobile has roughly 760 million subscribers, meaning its customer base is double the entire U.S. population.
What’s more, the carrier boasts that country’s wealthiest subscriber base, says Mizuho Securities analyst Marvin Lo.
With that in mind, Lo estimates at least 10% of China Mobile’s subscribers would be potential iPhone customers – translating to an additional 75 million of the devices sold in the world’s biggest mobile market over the next few years.
Of course, those won’t come all at once. For instance, China Mobile is just now starting to roll out 4G service, a standard the U.S. market has featured for several years and one that Apple prefers for its iconic iPhones.
Already, however, research firm Trefis is predicting that roughly 20 million iPhones will be sold through China Mobile in 2014, or about 1.5 million per month.
Thus, iPhone sales from the deal could easily add another $42 a share to the value of Apple’s stock next year. I’m basing that on the midrange of analyst net-earnings estimates of $2.50 to $3.50 a share, and the current Price/Earnings (P/E) ratio of 14.
But I think there potentially is much more at stake here for Apple. This is a company that excels at creating a customer ecosystem in which iPhone sales leads to a deeper relationship with Apple.
I believe Apple will do in China what it does so well in the rest of the world — upsell customers to iPads, laptops, Apple TVs and its iTunes digital music store.
So, Apple will actually add more to the bottom line in China than simply selling iPhones…
As Apple’s stock price skidded in late 2012 and early 2013, veteran Apple watchers demanded to know how Cook intended to improve the company’s operations, growth and margins. The fact that he remained vague only exacerbated their dissatisfaction with the company.
Turns out, Cook was being coy for a reason.
Cook’s minions were quietly shopping for small firms whose technology would make Apple’s current products more competitive and set the scene for new offerings in the future. Many of the acquisitions focus on mobile devices and services.
Apple has a history of not commenting on acquisitions of smaller firms. However, it has confirmed that Cook bought 10 companies this year. Apple hasn’t said how much it spent but press reports indicate it could be as much as $400 million. Here’s a look at what I think are the three most important Apple mergers this year.
- Topsy Labs Inc., a social-media-analytics firm that analyzes the global conversations on the short-messaging service Twitter. Topsy determines how often a term is tweeted, finds influential people on specific subjects in the news, and also can measure the exposure of a sponsored event or PR campaign.
- Passif Semiconductor, which specializes in developing communication chips that use very little power, including those for Bluetooth applications and health-monitoring and fitness devices. Apple won’t say just how it will integrate Passif into various iDevices. But Cook has said that wearable tech is “a very key branch of the tree.”
- And WiFiSLAM, a small mapping venture that allows a mobile device to track a user’s location indoors using only ambient Wi-Fi signals rather than connecting to a satellite for GPS tracking. The idea is to provide indoor mapping in airports, shopping centers, sports stadiums, and help users locate products at retail stores.
In our recent conversations about Apple, I noted how the stock could get a major boost from activist investor Carl Icahn, who has taken a $2.6 billion stake in the company.
Icahn had been pressuring Cook and Apple’s board to borrow an additional $150 billion to buy back additional shares of Apple.
Mind you, this was in addition to the roughly $100 billion Cook had committed to supporting the stock. That plan calls for roughly $60 billion in share buybacks and the remainder paid as dividends through 2015.
To be totally honest with you, I actually had some reservations about the size of Icahn’s original plan.
Don’t get me wrong, I’m a fan of shareholder buybacks at tech firms awash in cash. And Apple had roughly $147 billion in cash on hand at the end of the September quarter.
It’s just that borrowing $150 billion struck me as adding way too much debt for a firm that is supposed to remain focused on constant innovation and the search for new markets for its highly revered products.
So, I’m glad to see that Icahn has recently cut back the size of his proposal to $50 billion. That is a much more manageable amount that Apple could pay back from operations in just a few years without putting much of a strain on its legendary cash flow.
Because Icahn has gone public with his plan, I have to assume that he has the support of illustrious investors George Soros and Leon Cooperman, both of whom have moved into Apple.
Thus, I think we have a good compromise with $50 billion in additional buybacks. That’s enough cash to add share appreciation but still leave the firm plenty of money to chart a path for future growth.
We’ve talked in the past that investment returns are far more important than a stock’s “sticker price.”
Yes, at about $560 a share, Apple does appear expensive on a dollar basis.
But when the stock crosses the $1,000 threshold you’ll look back on this as a great foundational play. And one that was highly cost effective.
A look at the investment math underscores that my prediction isn’t overly aggressive – it’s just that I believe there’s much more clarity about Apple’s outlook than most of Wall Street.
Given what we’ve detailed here – the growth in China, improved operations from the “suddenly smart” Tim Cook, new products and services emanating from the company’s shrewd dealmaking, and the heightened shareholder focus spawned by what two colleagues of mine here have termed the “Icahn hug” – I think the stock can advance 30% a year for each of the next three years.
And that means Apple will double in 28 months (my prediction is actually 30 months because I padded it a big just to be a bit more conservative).
As I told you at the start of this story, Fox Business’ Varney was temporarily stunned by my prediction.
But only temporarily.
His composed demeanor quickly returned, and he then upped the ante by referring back to my prediction and then issuing a challenge to the viewing audience.
Remember, he said, “you heard it here first … on Varney & Co.”
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[Editor’s Note: Your feedback is very important. As always, I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you..]