Apple Should Soon Blow Past $100 a Share

Source: Thinkstock

Source: Thinkstock

Let me begin by telling you a story. I am one of the poor souls who sold his shares in Apple (NASDAQ:AAPL) back in the summer of 2011 for $383 and change. In truth, I kicked myself as I watched the stock blow through $400, then take out $500. Surely I thought that was the top. Oh, how wrong I was.

Quickly we reached $600 and finally topped $700. I figured, well, I had a nice gain, but I it hurts to know that I missed another 50 percent to 75 percent. When the major selloff from its highs of over $700 began I started to get intrigued about the possibility of getting back in. I chose to get back in at $600 on the button, with the idea that I would pyramid down into the shares if it further declined, and if not I would be happy with capital gains as well as a cushy little dividend. To my surprise, it didn’t take long to breach $550 when I added again, and once more at $475. I thought there was no way it could go lower, and I wasn’t prepared to add another layer to my pyramid buys. After all, shares are pretty expensive on an absolute dollar basis. Shocked I watched it fall to the $400 level. I decided I would add one more layer if it breached $390. When it did, I had a full position. What is the worst part of all of this? Well, I completed the new position at levels that were just a few bucks, or 2 percent above where I first bailed out.

Why do I share this story? Because history repeats itself. I sold my entire position when Apple made its huge run after announcing its 7 for 1 stock split. I sold at $640 and was very happy with my gains. I was sure I would get a chance to buying in lower. Nope…the stock has continued to move higher, currently trading at $95.30 (or $667.10 on a pre-split basis). Sigh, it looks like another mistake. Why? Because I was playing the trading game. I wasn’t holding a solid investment. I still believe that Apple is one of the great growth stocks of our time, and I do not think the run is over.

So many of you are probably thinking “I missed the move.” I am writing this article because I firmly believe the stock is going to continue breaking out. Technically, the chart looks great but fundamentally, we are entering another huge product cycle and the holiday season of 2014 stands to bring in massive Q4 revenues that could trump estimates. Further, I think the market still under appreciates the expansion into China and Japan. This really is a major catalyst which has yet to be fully appreciated.

For those who may not be aware China is among the most populace of nations on the globe. In fact, there are about 1 billion more people in China than in the United States. With about 750 million customers, China Mobile (NYSE:CHL) does business with well over half of China on its 3G network. China Mobile will be able to rollout 4G LTE technologies over the next five years and Apple conservatively stands to generate $10 billion in revenue from this China Mobile deal. As such, Apple’s revenues could grow to around $185 to $205 billion for fiscal year 2014. Apple has over a 40 percent market share in the U.S., and I think the real value of this China Mobile deal is long-term. If Apple can grow their presence and share in China, expect to be rewarded as shareholders.

Here is what is interesting. Many on the Street are discounting the deals in Japan. It is true, it is not as glamourous as the China Mobile deal. When you have a deal like the one with China Mobile it is easy to breeze over other key deals that Apple is making. Much like the China Mobile deal, another key long-term story is the deal with Japan’s NTT DoCoMo (NYSE:DCM). While it pales in comparison to the 750 million China Mobile subscribers, 62 million subscribers on the NTT DoCoMo is huge as Apple expands into Japan. Japan has been a growing positive for Apple where iPhone sales increased nearly 30 percent year over year to over $13 billion. iPhones are very popular in Japan and sales are expected to double year over year. The fact is this NTT DoCoMo deal and the launch of the new versions of the iPhone later this year we could see sales of iPhones around 20 million plus by 2015.

I would also be remiss if I did not acknowledge Carl Icahn. He has pushed hard for the company to do something. Increase buybacks, boost dividends etc. He was instrumental in the split which brought Apple back to greatness once again as a stock. I’ll be honest, with the massive cash reserves the company has, an expanded buyback could be a strong boost to shareholder equity.

But the company and the stock rests on its products. Right now the least expensive iPhone 5s retails for around $199. The least expensive iPhone 5c sells for as little as $99. You can get older generation models for even cheaper. The least expensive iPad Air retails for $499. But there is fierce competition from Samsung, Nokia, and other similar tech companies. This is the dilemma I have. I am concerned about the lack of innovation in the newest generation models. The new iPhone 5s and iPad Air are not incredibly different from their earlier versions to truly motivate many consumers to upgrade. Apple has a pretty decent history of substantially changing product features from one generation to the next, but lately it has fallen off that path. It is surprising given the billions of dollars being invested into research and development.

You know the iPhone 5s isn’t really spectacularly different from the predecessors. That said, a revolutionary iPhone in the form of a 6 is probable. What will it be a game changer? I hope so. There is consumer demand for bigger screens on the iPhone 6 to compete with many of the Android devices that offer larger screens; so called ‘phablets’. Also look to a more powerful and faster phone. This generally lies in the processors but let’s face it the latest chip used in the newest phones is as close to the best it gets. Look for more development of finger print technology, extended battery life, changes to the camera system to compete with expensive stand alone cameras, including eye and facial pattern recognition. I would also be looking for deeper integration with social media apps to improve speeds and ease of use with instant sharing.

There is no doubt that having iOS in your vehicle and being able to communicate via a much more user-friendly Siri will have a huge impact on the company. Look for the integrated system to come pre-installed on many vehicles to be released next year (the 2015 models). Major auto manufacturers are clamoring for the potential iOS in the car can bring. Apple can earn revenue from licensing in this regard, as well as fees for having the technology and software be installed in the autos (costs which will be passed on to the consumer for those holding auto stocks). This will be a revolutionary change. Utilizing iOS and voice command with Siri to play music from iTunes, get directions from the navigation system, place voice calls, integrate voice to text messaging, etc. For auto manufacturers, this will create a unique demand. Thus far, Android OS has not made strong headways in the auto world as Apple and its iOS is doing. I suspect that revenues will be light in this venture to start, but the share price of the company could rocket higher in the anticipation of what is to come for future revenues. After all, isn’t that how a stock works, buying shares to capture future earnings? 2014 will indeed be exciting in this regard.

Apple really was on the sidelines during the massive rally in stocks until this spring. I still see it as incredibly undervalued compared to all of the major averages and larger competitors. Overall, Apple is selling for nearly half price compared to the rest of the market if we factor in cash and deals with China Mobile and NTT DoCoMo. A good comparison value wise is with Google. If Apple traded at Google’s valuation, it would be selling for about $1600. As Apple shares gain popularity again and the investment community takes into account the depressed valuation in tandem with the exciting products of 2014, I expect share prices to approach $100 to $105 near-term. Long-term Apple is setting up as a winner once again. Apple is already paying out over $40 billion on an annualized basis between buying back stock and paying dividends to shareholders. However, its share price, even at $95, seems low.

Disclosure: Christopher F. Davis holds no position in Apple and has no intentions of initiating a position in the next 72 hours. He has a buy rating on the stock and a $107 price target.

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