iPad 3 should propel AAPL to $700
Ali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Undoubtedly you have heard of Apple (NASDAQ: AAPL) releasing its well-known and lauded iPad 3 this past Friday with millions of people around the world ready to get their hands on one. The tablet has proven to be immensely profitable for AAPL as in their most recently reported quarter, the company sold approximately 15.5 million iPads equating to roughly $9 billion in revenue, or 20% of AAPL’s total revenue.
Moreover, year over year revenue growth was an astounding 111% and with the new release and initial reports affirming expectations of yet again record breaking sales, AAPL looks poised to have another blow out quarter. Of course, AAPL year to date has increased nearly 50% and on the surface looks to have gotten ahead of itself, however when we look deeper, the stock still looks cheap. Trading at a 17x trailing P/E and 12x forward P/E for a company expected to continue growing revenues the next five years 20% annually is not expensive by any means. Add in the fact that the company has zero debt and approximately $100 billion net cash, equating to approximately 18% at its current share price, and the stock comes to a 14x trailing P/E and 10x forward P/E further exhibiting the still great value AAPL has in its stock. I think that a 20x multiple of earnings (trailing twelve months is $35/share) to match AAPL’s expected revenue growth of 20%, which would equate to $700/share is certainly justified as the company has shown time and again its ability to execute beautifully. The already strong indication of robust sales for its iPad 3, the company's spectacular balance sheet (why doesn't AAPL have a AAA credit rating by the way?), and strong prospects of a massive share repurchase program and/or a dividend further support this thesis.
Moreover, one can profit from suppliers of the iPad 3. Two of which in particular are Broadcom (NASDAQ: BRCM) and Qualcomm (NASDAQ: QCOM). BRCM trades at just a 12x forward P/E, .85x PEG, and has a diversified revenue stream aside from its very profitable relationship with AAPL. Moreover, the company generates over $1.5 billion in FCF annually and has just a 22% payout ratio giving strong reason to believe that the current 1% dividend yield will be raised in the near future.
QCOM is a telecommunication giant with a market capitalization in excess of $100 billion and revenues exceeding $16 billion. The company has a reasonable 16x forward P/E, 1.15x PEG, and perhaps most importantly a balance sheet with over $10.5 billion in net cash. The company generates a very healthy $4.5B in FCF annually and has just a 32% payout ratio meaning the current 1.3% dividend has a strong chance of being raised again in the near future.
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