I'd like to congratulate a certain large cap tech company for breaking the $500 milestone earlier this week. Now, if I didn't say "tech" company, would you have been confused? Maybe. If you are a market maven and know your stuff, you've already realized where I am going with this. Apple (AAPL) was not the only name that broke $500 on Monday, but because it is the largest company by market cap in this country, it received a ton of attention, including several breaking news headlines on multiple financial channels and websites.
However, I didn't hear many people talking about the other large cap name that broke $500 on Monday. That would be Intuitive Surgical (ISRG). Yes, the surgical robot maker also cracked the $500 mark on Monday, literally just a few minutes after Apple cracked that number.
So that got me thinking. With Apple and Intuitive over $500 now, who will win the race to $1,000, and will it come after a stock split? But I'm not just going to look at these two names, let's make this race a bit more interesting by throwing in three other names, two of which have traded above the $500 level for some time now. Let's throw Google (GOOG) into the ring, and while we are at it, let's not forget Priceline (PCLN). I'll even throw a dark horse into the race, a company that hasn't even crossed the $500 mark yet, but one I believe could do so this year. That would be Mastercard (MA). Let's look at some of the positives and negatives each has in this race.
Apple: Apple has many positives that could easily propel this name higher. A dominant global brand name with top of the line products and customer loyalty is a great place to start. Apple's products have a premier sense to them, which is why competitive products usually are priced much lower. With Apple, you know what you are getting. Apple also has a tremendously healthy balance sheet, which has sparked calls for Apple to use some of its cash hoard.
A dividend or buyback would propel this name even higher, with the dividend probably doing better if it were to attract a wide range of value investors. Apple's valuation on an earnings basis is also extremely attractive, so there is potential for multiple expansion, which would really send this name higher. If the stock were to split, it would make shares even more attractive to smaller scale investors, and that would be tremendously beneficial for the name. Apple has plenty of growth ahead of it, there is no question about that.
So what are some negatives? Well, everyone mentions the law of large numbers. For Apple to grow to $1,000, it would almost be a trillion dollar company. For some, that is just unthinkable currently. Also, because Apple is the best, everyone wants to take shots at them. Apple right now is facing lawsuits for trademark infringements in China, and is also trying to sue some of its competitors. Also, Apple has been criticized for the poor working conditions throughout its supply chain. Apple has defended the working conditions in supplier plants, but this issue seems to be growing by the day.
Intuitive Surgical: Congrats to this name on breaking the $500 level as well. Intuitive has several positives, the first of which is that they dominate their industry. The company has almost no competition in the surgical robot field, which is allowing them to maintain extremely high margins. The company is selling more products each year, and is getting approval for more procedures to be done using its products.
This company is the smallest by market cap on this list, which one might think makes it the easiest to get to $1,000. The company has a very impressive balance sheet, and is currently buying back its own stock. I recently said that this name could reach $700 by the end of 2012, and that's without a stock split. The company has been known for crushing earnings expectations, and it did again last quarter.
What are the potential headwinds for this name? Well, the valuation has been criticized over the years. Intuitive trades at a premium, of which I think is justified given its market leadership presence. The company is trading at 41 times last year's earnings, but that's fairly in line with its valuation in past years. It's currently trading at 30 times 2013 earnings. The second headwind is government regulation. If governments try to exert more of a force in the healthcare industry, the company may be forced to lower the prices of its products and services. That would have a huge impact on margins.
Google: Google's positives include the growth that they have ahead and their dominance in the search market. Google is projected to grow revenues by about 20% both this year and next, and the valuation is quite fair. Google is currently in the process of a large acquisition, and that could provide the potential to get the name going again. With other names in the industry struggling, Google's strength makes it a best of breed investment. The company also has a very clean balance sheet, one thing I always look for.
The acquisition of Motorola Mobility (MMI) could also be seen as a headwind for Google, but the most concerning issue was last quarter's earnings report. Google severely missed estimates, sending the stock way lower. Was this just a bad quarter, or a sign of things to come? We'll find out in the next few months. Google's price also has been a headwind, as it has struggled to go higher with such a high price. Over the last three years, Google has underperformed significantly when compared to the NASDAQ composite. I've stated in the past and will continue my stance that Google needs to split its stock in order to go much higher.
Priceline: Priceline hit a new 52-week high (and I believe all-time high) on Tuesday, and the stock is rapidly approaching the $600 level. Like Google, Priceline is obviously the largest and most well known name in the industry. We haven't seen the 2011 results yet, but if they beat the 40% expected revenue growth, expect shares to keep rising. Revenues are expected to grow by more than 20% in 2011, and Priceline is doing extremely well in terms of international bookings. In terms of price to expected growth, Priceline trades cheaper than the competition, and it is clear that many people love the name your own price structure of their site. Priceline is growing much faster than the rest of its industry, and is another best of breed name.
The biggest headwind is obviously a global recovery. If economic conditions worsen, in the US and or Europe, people might cut back on their vacation spending, and that would be detrimental to Priceline. Priceline is starting to get close to the average analyst price target, but targets may be raised after they report the past quarter. Is Priceline getting too big? Some may say so, but there's still plenty of room for growth.
Mastercard: The credit card industry is doing extremely well right now, as we have seen recently in reports from both Mastercard and fellow competitor Visa (V). Mastercard is projected for solid 12% growth in revenues this year and next, which is slightly higher than what is expected of Visa (although Visa's fiscal year is different). However, Mastercard also has a lower PEG and P/S valuation. Mastercard just doubled their dividend, making shares even more attractive. As I said above, I think this name goes to $500 this year.
So what are some headwinds for Mastercard? Well, government regulation in the industry is always going to linger for these names. Also, while Mastercard has done well recently, the credit card business has gotten extremely more competitive thanks to a bunch of promotions recently, including cash back cards, so Mastercard will have to fend off this competition. The company does trade at more than 26 times trailing earnings, which could become a headwind if people question the valuation.
Conclusion - Who Wins the Race:
You may be tempted to take one of the three smaller companies, Mastercard, Priceline, or Intuitive Surgical. That's a fair argument since going from say $20 billion to $40 billion doesn't seem as hard as $475 billion to almost a trillion. But the smaller names carry higher valuations, which might scare some people off. You could easily use the argument that it has to be Apple because there is no reason not to own the stock right now. I can't disagree with that point. You might even think that Google could do it because it has lagged recently and is due to catch up, as well as being the closest to $1,000. It's viable, but not in my opinion.
All of these companies have great growth potential, very good balance sheets, and are leaders in their industries. They all are favorites among analysts and investors, and if they continue to be strong, will provide strong results in the future.
So who wins the race to $1,000. Well, in my opinion, it's the stock that splits first. Why do I say that? Well, all of these names have extremely high prices, on a dollar basis. Lower prices generally should equal opportunities for more investors to have access to these shares. Just look at Baidu (BIDU) from two years ago. Baidu was in the $600s and split 10 for 1, and has doubled since then. I don't think Baidu would be at $1,400 now if not for the split, which fueled the next leg up.
So what's my guess. I'll go with Priceline. I think that the company will announce a stock split with its next earnings report, and that sends the shares above $600. Once it splits, more investors will come in and it will go higher. It will be a fun race to sure, and we'll see who gets their first and how long it takes.