Apple: Next Target $500

| About: Apple Inc. (AAPL)

Yesterday Apple (NASDAQ:AAPL) reported yet another quarter of blockbuster sales. In case you missed it, here are the highlights:

  • Record quarterly revenue $28.6B (Up 82%) and net profit $7.3B (Up 125%)
  • 247% increase in Asia Pacific sales
  • Product sales: 20M iPhones (Up 142%), 9.3M iPads (Up 183%), 4M Macs (Up 14%), 7.5M iPods (Down 20%)
  • Every iPad produced was sold in the quarter
  • $11.1B cash flow from operations (Up 131%)

After the runaway success of the third quarter investors are justifiably asking themselves if they should take some profits off the table or let their investment ride. Apple surged afterhours and briefly surpassed $400 per share. To borrow a line from Jim Cramer: “bulls make money, bears make money, pigs get slaughtered.” In the last month Apple has increased $85, or 27%, but can the rally continue? I cannot blame anyone for taking profits after a great month but below I will present four reasons why you still need exposure to Apple in your portfolio

AAPL Monthly Chart
(Click to enlarge)

Cheaper, Prepaid iPhone Closer to Reality

The Apple-China Mobile rumor has been fully explored but CFO Peter Oppenheimer dropped more hints in the conference call Q&A about a possible pre-paid iPhone. Specifically, when asked about gross margins for the upcoming quarter he responded “we think we’ll lose some component leverage, lose a bit on back to school transition, and a product transition. (emphasis added)” Furthermore, in a direct question regarding China Mobile, COO Tim Cook replied “phones without a contract are very key in China – and a number of the emerging markets where the credit systems aren’t as established…We’re not avoiding pre-paid. We know we need to play there, to get the volume we want.” At this point I believe it is only a matter of time until Apple will (a) partner with China Mobile and (b) release a cheaper/prepaid iPhone that will thrive in that type of market. Can you afford to sell Apple before that happens?

The Succession Wheels Are In Motion

As reported by the Wall Street Journal, “some members of Apple Inc.’s board have discussed CEO succession with executive recruiters and at least one head of a high-profile technology company.” While Steve Jobs called the report “hogwash” I would not be surprised to believe this one. As major shareholders of Apple it is only logical that the board would be concerned about who attempts to fill Jobs’ shoes when he eventually decides to leave the company that he founded. It is hardly a coincidence that this rumor was leaked right before the quarter; this was possibly an attempt to further assuage investors concerns and it appears to have succeeded.

Far too many investors and analysts assume that Apple is sitting idle and waiting for Jobs to leave before naming a successor – this is hardly the case for such a well run company. Yes it will be a huge event when Steve Job departs from Apple but the second largest publicly traded company in the United States will continue to thrive for years to come.

Competitors Are In Trouble

Quite simply 2011 has not been a good year to compete with Apple. Research in Motion (RIMM) is rumored to be halting the production of the Wifi Playbook tablet. RIMM has denied the rumor but there is no mistaking the fact that RIMM is serious trouble. Unless RIMM innovates immediately it will be yet another casualty in Apple’s wake.

In addition, HTC and all Google (NASDAQ:GOOG) Android devices are facing legal trouble that could threaten the entire operating system. Tim Cook summarized Apple’s position well: “We want people to invent their own stuff. We’re going to make sure we defend our portfolio.” Cook continued to take aim at both RIMM and Google with his comments:

“Android numbers are tricky. Remember, we have the iPod touch for iOS devices too. We have over 222 million overall. We think it’s incredible. Our numbers are straightforward. iPhone is up over 2x versus rest of smartphone market. We sold every iPad 2 in the quarter we could make. There’s no shortage of demand. Gaining traction in enterprise too. Largest app store, over 100,000 iPad app. The other ones have only hundred. The other tablets aren’t getting any traction to speak of. (emphasis added)”

As a reminder of what can happen when you cross paths with Apple, below is a six month price chart of Research in Motion. Warning: it is not pretty.

RIMM 6 Month Chart
(Click to enlarge)

Apple Is Still a Value Play!

With a TTM EPS of $25.53, Apple has a PE of 15.6, which is virtually the same as IBM’s (NYSE:IBM) PE despite Big Blue growing at a fraction of Apple’s rate. After adjusting for Apple’s $76.2B in “cash”, or $82.28 per share, the PE falls to 12.4. In contrast, Netflix (NASDAQ:NFLX) has a PE of 82.5. I will return to a question that I have posed in the past – would you rather own Apple or LinkedIn (NYSE:LNKD)? One company practically prints cash while the other is struggling to report any earnings, thus has no PE. I do not mean to pick solely on LinkedIn but these “Tech 2.0” companies are all the rage despite they lack of proven success while Apple is occasionally dismissed as “old tech.”

In closing, there is nothing wrong with some profit taking on your Apple holdings – no need to be pig; however, I urge you to refrain from liquidating your entire position. As unbelievable as it seems, there is still money to be made by simply investing in Apple. Who knows? Maybe at this point next year we will be discussing Apple at $500 as the largest company in the United States.

Disclosure: Author is long AAPL and GOOG; short AAPL July 22 370 Calls.