Can Apple Be a $300 Stock?

Oct.22.09 | About: Apple Inc. (AAPL)

Yesterday, the market sold off fairly hard, but one stock that stayed in the green all day was Apple (AAPL). The chart above shows the recent stock action, accompanied by a huge volume spike, as well as the long uptrend. The gap higher on Tuesday was the reaction to the company's blowout earnings report. I covered the earnings conference call for TheStreet.com Monday night. Here is a copy of my comments:

"Apple reported a true blowout quarter. When the headline first crossed the newswire, I mumbled "wow." That's how surprised I was by how much the company surpassed consensus estimates.

EPS came in at $1.82, 40 cents ahead. Revenue also surprised at $9.87 billion, as did gross margins coming in at 36.6%.
Growth accelerated for the third consecutive quarter. Revenue grew 25% from the year-ago period, while earnings surged ahead 44%. The tax rate also helped, coming in at just 26% vs. expectations of close to 30%. Gross margins were boosted by component costs coming in less than forecast, and the product mix of higher-margin products, including Snow Leopard software (high margins), which sold at twice the rate of the first Leopard release.

Macs were the standout, and the leading driver of the revenue upside. The company sold 3.05 million Macs, with the growth rate accelerating to 17% year over year. This is an order of magnitude greater than the 2% overall PC growth that has been estimated for the quarter. Apple cited a very strong back-to-school season, strength in Asian demand (up 42%), as well as a consumer who was very attracted to their portables, which grew 35% from last year. That is impressive growth, and management says the segment still has fantastic momentum.

iPhones were also very strong, with 7.4 million units sold (up 7%). The response to the new 3GS phones has been strong, and management noted that the iphones have led the J.D. Power consumer satisfaction polls. They noted that demand did indeed outstrip supply in the quarter, but the equation should be coming into balance. They start selling in China later this month and are also expanding carriers in the U.K. and Canada. By year-end, they should be selling in 80 countries.

iPods fared better than the Street was expecting, with 10.2 million sold (down 8%). Of iPod buyers, 50% were reportedly first-time buyers, intrigued by the new features on the Nano and lower price point on the iTouch ($199). iTouch sales actually spiked 100% and should be a strong seller in the holiday season. The company claimed 70% market share in MP3 players, and I believe that sales should be strong this holiday season. I know I am ready to upgrade my iPod, as I would like the new FM radio and camera functionality (is it weird to snap pics at the gym?).

The other major factor that helped the stock top the $200 level after hours was stronger-than-expected guidance. EPS guidance of $1.70 to $1.78 was well above the whisper numbers of $1.68. Moreover, revenue guidance was in line with current estimates ($11.3 billion to $11.6 billion), a big surprise given their normal conservatism, and well above whispers of $11.0 billion. Similar to last quarter, gross margin guidance was 34%, and the tax rate at 30%.

The CFO said the company is unsure about when it would adopt the new FASB accounting standard, but it will probably occur at some point during 2010. Interestingly, if you look at the end of the press release, the company shows that if FASB were adopted now, it would have earned $3.12 in EPS this quarter. That's pretty amazing, and if we were to annualize that, we could argue that AAPL has earnings power of $12 next year. Now don't get all crazy on me for being bullish, but if you apply a P/E of 25 times to that figure, you could justify a price target of $300. I'm just saying...

So I posted my $300 target on TheStreet.com Monday night. The next evening, on Jim Cramer's Mad Money show, he devoted some time on the show to Apple. Guess what price target Cramer came up with for AAPL? $300. Go figure. Welcome aboard, Jimmy.


Disclosure: long AAPL