Apple at $800: Why It Will 'Blow the Doors Off' in 2013

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

Without question, over the past five years tech giant Apple (NASDAQ: AAPL) has been the undisputed heavyweight champion of the stock market. However, as every boxing fan will tell you, champions don’t hold their belts forever. Apple is proving to be no exception. However, just as in boxing, titles are lost and titles are regained.

Hopping Off the Bandwagon, Shameful

Apple has been knocked down over the past three months – shedding billions in market cap with shares falling almost 30% from an all-time high of $705. Whether or not this drop is justified depends on who you ask. However, it was remarkable (if not shameful) to have witnessed how quickly the entourages ... excuse me, “analysts” ... disappeared off the bandwagon.

Last week alone, several sell-side analysts have rushed to issue preemptive cuts without truly appreciating what is really going on with the stock. RBC Capital’s Amit Daryanani trimmed EPS estimates citing (among other things) iPad 4 cannibalization. Daryanani cut his price target on the stock from $750 to $725, but maintained his outperform rating.

Bernstein analyst Toni Sacconaghi also trimmed his target from $800 to $750 while cutting FY 2013 estimates from $50.57 to $49.41 per share while citing slower growth of 22%, down 5% from 2012. However, Citi then followed with a hold rating with $575 price target – citing rising iPhone and tablet competition from the likes of Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT). But they're wrong -- I'll explain later.

Up next was Abhey Lamba of Mizuho Securities's, while reiterating his buy rating on the stock, saw fit to also cut his price target by $150 from $750 to $600. I’m not sure I follow the logic. He said:

"We believe near-term headwinds from potential F2Q13 estimate cuts combined with lack of material upside to FY13 estimates will make it harder for the stock to revisit its all-time high of $700."

Cannibalization, Innovation & Other Myths

Clearly, the market has grown more pessimistic about Apple’s ability to grow earnings into 2013. This is despite strong Q4 sales figures during which revenues surged 27% year-over-year, while profits grew by 23%. Apple was able to do this while every analyst screamed “cannibalization” on the release of the iPhone 5 and iPad Mini.

Aside from what I believe has been an exaggerated market selloff due to “fiscal cliff” concerns, analysts have also rushed to revise estimates while distressing over margin compression. In other words, they don’t believe Apple will be able to sustain its growth momentum. 

On the other hand, these analysts ignore the high demand for the iPad mini, which is priced (at least) $130 more than the closest rival device and yet Apple still can’t make enough of them. This doesn't support margin concerns. Likewise, consumers still love their iPhones as evident by the 27 million devices sold during the quarter – representing an annual unit growth of 58%.

Not to be outdone, iPads also performed well with unit growth reaching 26%, and this is likely to continue into Q1. In terms of “cannibalization” fears, where exactly is it going to from? What’s more, even if Apple does cannibalize itself, would that be so bad?

While it is true that one item might offset sales of the other -- in this case iPad mini vs. regular iPad -- but the consumer would still be buying an Apple product. In terms of unit growth, it might be an issue, but Apple still wins in market share. It is remarkable how this fact keeps getting overlooked by so many smart people.

Expectations for 2013

One would expect that Apple’s track record would dispel anxieties over margin compression and cannibalization – except it hasn’t and I’m not holding my breath expecting that it will. Despite Apple’s strong sales figures, it also hasn’t stopped the bears from proclaiming Apple’s sudden inability to innovate.

Another popular notion was that the company was beginning to lose its edge to Google – except it’s not true. Apple continues to dominate Google in U.S. smartphone sales – reaching 53.3% market share. This is according to a report released on Friday by Kantar Worldpanel ComTech, which tracks sales data for the 12 weeks ended Nov. 25.

Not only is this Apple’s highest share gain ever, but this is the first time the company has ever exceeded 50%. So how can all the other analysts claim one trend when revenue data continue to tell a different story? It doesn’t make sense.

And when it is not fear over Google, some contend that Microsoft’s Windows 8 and Surface tablet has taken a meaningful bite out of Apple. But that’s false. Both Surface and Windows 8 have underperformed since their respective launches. Consumers and enterprises have not adopted them as quickly as Microsoft had hoped. Also, this quarter’s PC sales are projected to be much lower than expected, causing analysts to revise Microsoft’s estimates. How can Microsoft still be considered a legitimate threat and still cut its outlook?

For that matter neither is Research In Motion (NASDAQ: BBRY). Although RIM is starting to gain some traction with BB10 and having sold 7 million BlackBerry phones in its most recent quarter, I don’t think anyone believes it is sustainable – particularly with the company’s recent concerns over services revenue, which is under change. Nonetheless, some analysts prefer to focus on Apple’s lowered guidance.

Though it’s true Apple’s Q1 outlook was uninspiring, on the other hand, the company is known to under-promise and to over-deliver. The company’s projections of $11.75 per share on revenues of $52 billion now appear extremely conservative. With iPhones having regained its market lead in the U.S. and expected to represent well over 50% of Apple’s fiscal Q1 revenues, I can’t imagine a bigger “no-brainer” on the market.

One has to think that Apple should have no problem blowing the doors off these numbers – especially since iPhones have the highest gross margin of all of Apple’s product lines. Also, with Q1 revenues expected to be helped by a robust holiday shopping season, this is as sure of any sure thing there is – especially since sales of the iPad mini is already exceeding all expectations.

Bottom Line

Despite what analysts are saying, investors should ignore the noise and expect Apple to set the tone for a rebound in 2013 – in what is expected to be a “show me” year. Speaking of “show,” we have not even touched upon Apple’s huge possibilities in the TV market and its “iTV” as it is presumed to be called. I expect shares to regain the $600 range and to reach $650 to $725 sometime in Q1 based on revenue and earnings estimates. While $800 is no guarantee, it is certainly in range.

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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