Why Apple Will Be Much Higher in 6 Months

By Erick Santos, M.D., Ph.D. - November 30, 2012 | Tickers: AMZN, AAPL, FB, GOOG | 0 Comments

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Apple (NASDAQ: AAPL) is a company I have followed for many years, since I am primarily a Buy and Hold type investor liking to buy companies and hold them for very long periods of times. I have had a chance to see AAPL grow and have been richly rewarded over the years for holding my original shares bought in 1997. The last few weeks have seen the AAPL share price take a substantial beating, but as a long term investor some perspective is needed.

Of the blue chip tech names, including Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN) and Facebook (NASDAQ: FB), it is my opinion that this is Apple's game to lose and I see them having inherent advantages in the marketplace at this moment. Short term stock price movements are mostly noise, and earnings are what will eventually drive the stock price higher or lower. Apple's earnings should continue to increase at a rate of more than 20% for the next few years, especially given the full product line being offered for all of those eager Christmas shoppers out there. Most of Apple's troubles have been about an inability to meet demand of for its products, which not a bad problem to have despite what the bears might say. Let's have a look at the competition.

While Google is a leader in the smartphone market, the monetization of Android is only indirectly achieved through search revenues, and as mobile gains over PC ads it becomes more difficult to squeeze revenue out of those clicks. At some point Google may want to charge for Android, but for now it is happy to give it away and rely on ad revenue from search.

Amazon of course makes its money not on its devices so much as in selling the content, and right now it is being valued more on potential than on actual earnings. If you look at it as a retail play the stock is way overvalued, but as a cloud computing company its valuation may be more reasonable (still out of this world, but not as bad).

Facebook really has a lot more work to do to get a handle on making money in the mobile space. It remains richly priced in terms of valuation, and while its user base continues to exand, its metrics indicate that they will not make as much money from mobile as they did from the desktop.

Of these big 4 companies I mentioned, only Apple represents the complete package. They sell you the device making excellent margins as well as sell you the content through iTunes, and it seems they are trying to horn in on Google's territory now that they displaced the Maps app in order to monetize on local mobile searches. Apple continues to monetize mobile through their devices and together with Samsung represent the lion's share of profits in mobile devices.

The Apple ecosystem is arguably as strong or stronger and stickier than the ecosystems of Google, Facebook and Amazon. The reason for this is that the phone is always with you. This applies to Android too, but Android marketplace has not been nearly as popular as iTunes since they were not the first mover in this space.

In the last few weeks Apple has lost a significant portion of its market capitalization. This is not an atypical movement for the stock and in my opinion represents seasonality. The stable of products is full now with the iPhone 5, new iPad model, new iPad mini and new MacBook Pros. The pump is primed for an excellent quarter that should blow the socks away of the doubters.

Why do I think Apple will be 20-50% higher in 6 months?

1. They will have blow out Q2 and Q3 earnings reports. It happens every year like clockwork -- you buy on any weakness now and you collect in the spring and summer. People are sucked into Apple iDevices and once sucked in they don’t leave, they upgrade! Guess what is going to be in that stocking during Christmas: iDevices galore (iPad Mini, Regular iPad, iPhone 5, new iMacs, etc.). The iPad mini will be a worthy competitor to the Google Nexus and Amazon Fire, and if past experience serves to guide us, the problem Apple faces is able to ramp up production quickly enough to meet demand. The early numbers so far are encouraging with strong early sales.
2. Apple will throw resources at solving supply constraints and buying their way into the best Maps app possible. I already read a report claiming Apple is hiring away Google engineers who worked on their Maps app. They’ll have an updgrade in a few weeks and all of this Map-Gate fiasco will be forgotten in time for the Christmas shopping season! They will also use their i$Billions to buy any needed components and to get FoxConn to crank out those iPhone 5s! Tim Cook’s specialty is solving supply chain issues and he is a magician in that arena. Really, Wall Street punished Apple because they reportedly sold 5 million iPhone 5s instead of 8 million. The demand is out there, they just can't make enough to satisfy the demand just yet. I also see sales of iPhone 4 and 4S making up for shortfalls in iPhone 5 sales.
3. Apple is still relatively cheap. With a PE ratio hovering around 13, over $120 billion in the bank, and a growth rate greater than 20%, Apple is a good value play. The 2% dividend yield is also bound to be increased over the next few years. 
4. Don't forget about Apple's other products. Their mac computers continue to outperform compared to the rest of the industry, and they have been refreshed with new retina displays. Even though PC sales are weak throughout the industry, Apple's poducts have held their own and have benefitted from the halo effect of their other products.

In summary, Apple is cheap given its sustainable growth. It's misunderstood by Wall Street, and if you understand the mechanics of the company you will realize that it will likely be 20-50% higher in 6 months. I’m betting my money on it. 

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