Apple Target $425? Bond Guru Gundlach Now An Apple Guru?

Marc is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple Nearing End of Correction?

I'm getting the feeling lately that Apple (NASDAQ: AAPL) is now approaching the bottom of its recent correction.  Apple has gone through similar corrections in the past, only to prove time and time again that these were buying opportunities.  It seems you can't go more than an hour now on CNBC without hearing some sort of Apple bashing.  Everyone is an expert on Apple these days, including bond guru Jeffrey Gundlach.  The other day on CNBC he slapped a $425 price target on Apple.  Can anyone now be an expert on Apple stock?

Who Do You Get Your Investing Advice From?

Now, I'm not sure about you but I usually don't take my tech stock investing tips from bond guru's.  I've been in the tech industry for over 15 years now and follow the sector closely, so maybe I feel better equipped to gauge Apple's prospects than a bond guru.  Gundlach argues that because Apple shares have gone up rapidly they must retrace back to their starting point of $425.  Interesting logic, right?  I must add that Gundlach is talking his own book; he has disclosed he is short Apple shares.  I'd expect nothing less from a bond guru opining about tech stocks.

No Shortage of Bear Arguments

The endless string of arguments predicting the imminent demise of Apple is clearly laid out by the Apple bears.  Management shakeup is one big piece of evidence.  However, I believe losing Scott Forstall may turn out to be a blessing and I certainly do not worry about the loss of him at Apple.  There are many smart people at Apple, and many more hot shots Apple could easily attract to work for it. Forstall was rumored to not play well with others and take credit for the work of other employees.  It made me wonder how much was truly his idea or work and it might make you wonder too.  If Apple lost Tim Cook I would be more concerned, and if it lost Jony Ive I'd put the risk for the company at a very high level going forward.  However, they retain what I believe to be an "A" team capable of running the company and continuing to evolve and innovate.

Innovation or Evolution? 

Gundlach further argues that Apple just shrunk their iPad, which is not innovation.  I didn't realize that every product Apple ever made in the past was revolutionary and not evolutionary (detect my sarcasm?).   Apple came out with a hard drive-based iPod under Steve Jobs.  Next it was the flash-based iPod.  Then there was the iPod Nano, Shuffle, and Touch.  Were any of these products really any more innovative than the original iPad's evolution to its current full size generation or mini? 

The Nano was a shrunken version of the touch and the shuffle was the micro-sizing of it.  How about the iPhone?  Under Steve Jobs they had iPhone version 1. Next was the iPhone 3G and then the 3GS!  Did every bear come out and say the 3G and 3GS were just the same iPhone's in a slightly different form?  Next was iPhone 4 then 4S!  The 4S didn't even change form factor, and it sold like crazy!  These iPods and iPhones were not any more innovative than any of the past or current iPad iterations, and remember that these were all during Steve Jobs' tenure!

Can Apple Grow by Simply Evolving

Here is the deal.  Apple does not need to innovate brand new, never before seen gadgets in order to prosper.  It does need to innovate, rather than simply grow, if it wants to annihilate the competition.  If they can't create entirely new products, well than they will just compete, and do it well.  No other company had a "Steve Jobs," so it's not as if they need to compete against a genius running their competitor. 

Few companies in the world posses Apple's brand loyalty and awareness.  I have yet to see people line up outside any store for an Android phone or tablet. Apple can just improve what they have, tweaking the current product lines in larger and smaller form factors. Make them smaller, lighter, sleeker and add incremental improvements.  Small innovations on the existing lines are fine; nothing revolutionary is needed for Apple to simply grow at a market-beating pace for years to come.

Market Beater to Market Crusher

No company is doing anything better than Apple is.  Apple is not competing against any company that isn't also doing just what Apple is doing.  Samsung is making smaller and cheaper tablets. Big deal. Amazon (NASDAQ: AMZN) is giving away tablets that are not as good as iPad.  What company is outflanking Apple? Not a single one, as far as I have seen. 

That is a lot of Cash

Apple sits on the largest cash warchest of any company in the world.  If Gundlach's price target is achieved, that would mean Apple would be trading for $300, if you back out the net cash on the balance sheet.  With over $50 in earnings per share for 2013, that is a P/E of 6.  Right now Microsoft (NASDAQ: MSFT) trades for about 16 times earnings, while Adobe trades for 21 times earnings. 

The Apple sell off has been driven by fear and charts.  Perhaps there are also traders taking gains before a potential cap gains tax rate increase next year.  Whatever the reason, I am confident the bond guru's target is not going to happen.

You Have to Execute

As someone who follows Apple and other technology stocks closely, I would say that the only risk for Apple in the near and medium term is execution.  There are currently supply constraints for iMac, iPad Mini, iPhone 5.  Apple needs to get these products into the hands of the consumers who want them.  If they can't produce them they cannot sell them.  It seems production problems are a major issue right now;  in fact, Foxconn's CEO stated the other day that they can't produce enough iPhone 5's to meet demand. 

I fear Tim Cook has spread himself too thin, taking on his former COO supply chain and operations role along with Steve Jobs' CEO role.  That is a lot for one man to handle.  The Q4 risk will be on the supply side, and how well Cook solves this will make or break this quarter.  If Apple doesn't blow the number out we'll see a lot of push through into Q1 next year.  However, there will be opportunity costs in lost sales, as they miss the holiday gift season and corporate end of year buying.

Stock Prices in AppleGeddon

Even if Apple only meets its number or beat/miss by a bit, I believe there's much worse priced into the stock.  Trading at about 7 times next year's free cash flow on an ex-cash basis, the stock is priced for some serious declines in revenue and earnings for the foreseeable future.  I think Apple's loyal and growing fan base will prevent this from happening, as long as Apple can ship product.  Other catalysts still include China Mobile and its 700 million subscribers.  Emerging markets, such as India, are also going to come online.  

Apple 98% of Tablet Traffic.  iOS 54.5% of Total Mobile Content Consumption

One more thing bears, and certainly not bond gurus, won't tell you is Apple's total domination in tablet-based web browsing.  Apple owns 98% of the market, and also creates 54.5% of all traffic from mobile devices.  (Source: AppleInsider/Onswipe).  This makes you wonder what people are doing with their non-iOS tablets?

Be Greedy; The Glass IS Half Full

There are many great things happening at Apple right now, and will continue to happen over the next few years.  Right now it seems the pundits only want to see the glass half empty.  This happens a lot, as "Mr. Market" often mis-prices stocks, both on the upside and downside.  I think that fact that Apple's shares are on sale for 20% off should encourage investors to "be greedy when others are fearful," as Warren Buffett often advises.  I'd also be careful about taking my tech stock investing advice from any bond gurus.

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