For the past couple of years as Apple (NASDAQ:AAPL) stock became ... a "laughing stock," of sorts, bears toasted the company's fall from grace, given than Apple was always perceived "too arrogant" and pandered only to "the elite." Some claimed when Steve Jobs died, Apple's innovative quality was buried with him. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Samsung (OTC:SSNLF) had done too much damage from which Apple couldn't recover. For others, current CEO Tim Cook was the problem. He had to go, they insisted.
All of a sudden, following Apple's blowout quarter, everyone is proclaiming how they've been right about Apple. The company's future is now "favorable." But consider, even when things appeared gloomy and Samsung was "eating Apple's lunch," Apple had never missed its own estimates. In fact, Apple is on a string of four consecutive quarters where Tim Cook has met or beaten the midpoint of his guidance. But even with Apple's recent surge, the stock remains considerably undervalued to both the company's near term and long-term potential.
Today, the story has changed. There are rumors circulating that Apple is buying Beats Electronics. The company is also reportedly due to announce its entry into the Internet of Things. Apple wants to control your home from its flagship iPhone, a device, which is expected to arrive this fall in a bigger form factor, presumably called the iPhone 6. And Tim Cook did say that Apple will enter a new product category this year. It is widely expected the company will lift the curtains off an iWatch. All told, very few are still doubting the company's innovative abilities. But that has not stopped the bears from pushing their agenda on Apple stock.
Tuesday, fellow Seeking Alpha contributor and notable Apple bear, Michael Blair vaguely suggested that "Apple Stock Price Likely to Peak Before Long." Now, I have been accused from time to time of writing an article to "stir the pot." But Blair, if I should say so myself carries a PhD. in that category. Blair began his rant by proclaiming himself "smart money," while noting of his dismal track record on betting against Apple. But then he goes on to cite how Apple makes its money and the various markets in which Apple operates.
Admittedly, Blair did an excellent job. But none of that matters. His entire article was on the potential success/failure of the iPhone. Nowhere did Blair mention Apple's growth potential in the new categories, which is the catalyst for the stock's current surge. Blair never discussed Apple's entry into the realm of mobile payments. Nor did he discuss the possibility of the Smarthome where the Financial Times suggest that Apple, which will host its WWDC next Tuesday, will introduce a new software platform that will turn the iPhone "into a remote control for lights, security systems, and other household appliances."
Let's not forget, there is also the mention of an iTV. A combination of a TV product and an iWatch could add an immediate boost to Apple's revenue and (on their own) become multi-billion dollar businesses for Apple. But it's not just about these products per se, but their potential effect to Apple's existing ecosystem and their ability to drive iPhone/iPad sales higher. Blair completely ignored this. I've talked about this recently, the wearable tech industry (watches) has gross margins ranging from 50% to 60%, according to Bloomberg, which fits perfectly in Apple's range.
And assuming that Apple can achieve 10% to 15% market share in wearables, which is conservative, this can immediately become a $10 billion revenue stream. Recall, this is what the iPod did when consumers didn't even know they needed it. Now, combine this with the $150 billion revenue by the TV industry in 2013, Apple stands to make more than $5 billion in potential gross profit. And that doesn't even factor the upselling capability both devices present to iPhones and iPads.
The growth opportunities are endless. But bears like Blair are quick to ignore this. Analysts at Bernstein Research understand these possibilities, however. This morning, while citing potential gains from the iPhone 6, which is expected to come with a bigger screen, Toni Sacconaghi raised its Apple price target to $700 from $615. In the research note this morning, which highlighted the potential of the smartwatch, Bernstein noted:
"We believe investor anticipation of the iPhone 6 will be high because a new larger form factor could stimulate an accelerated replacement cycle and switching from Android users who value a large screen. A higher price point, which could stabilize gross margins and materially boost revenue growth. We expect that Apple will introduce a new product category before year end, which we believe will be an iWatch."
Sacconaghi's price target suggests there is 12% upside from current levels of $627. Note, Analyst Brian White at Cantor Fitzgerald has a price target of $777, which suggests 24% upside potential. While citing data from Morgan Stanley, Forbes reported this morning that of the top 100 institutional investors cut their holdings of Apple in the first quarter of 2014. The research suggest that Apple's institutional ownership is now "underweight" when compared to other large cap companies in the S&P 500.
This means that even with Apple's recent run, there will be plenty of pent-up demand from institutions to buy, especially with the company entering these new categories. It seems both Forbes and Bernstein disagree with Blair; Apple stock is not even close to peaking.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.