Apple's Stuck in the 180s: What Can Push Shares Higher?

Apple Inc (AAPL) has surged to $180 from $120, where it was trading back in February. Of course, Apple was trading near $200 at the end of December 2007, but sentiment turned and Apple’s shares plummeted January through March before reversing, and staging a rally in April. Shares have been stuck in the $180s since May. The pivotal question becomes: “what can/will push shares higher?”



Apple’s stock may have gotten ahead of itself at the end of last year (2007), when it hit $200. Analysts were bullish and nearly all had a price target above $200. Then January arrived, Apple provided weak guidance and the Street flipped out. Sentiment quickly turned negative, and heavy selling drove Apple lower. A couple of analysts downgraded the stock, and most revised their price targets lower to the $150-175 range.

As industry data reports showing potential robust Mac sales became available in March, Apple shares began to recover. Apple announced earnings in April that showed strong Mac sales. This further quelled apprehension and eliminated the overly pessimistic attitude on Wall Street. As the chart illustrates, price targets were revised upward. In short, I believe Apple shares collapsed due to worries that they were overvalued, then information subsequently supported those high share prices, thus Apple’s stock returned to that level.





Apple has been stuck in the $180s since the beginning of May. Nothing has been able to power shares beyond the current range. There have been several analysts raising price targets. However, the effect on Apple’s share price has been insignificant. Apple announced the July arrival of its new 3G iPhone, yet Apple shares were still unsuccessful in breaking out into the $190s.

Apple has announced the expansion of iPhone countries from 5 to 70, as well as a much lower price point of $199. However, EPS estimates for FY09 have only slightly budged.

According to the EPS revisions table, most recent changes to the consensus estimates have been downward.





In my opinion, I think the catalyst for a move higher will be upward revisions to EPS estimates. I don’t think they currently account for the immense sales potential of the new iPhone, as well as the momentum in the demand for Macs. Albeit, Apple is giving up the monthly subscription revenue payments from AT&T (T), thus the increase in volume will be coming at a lower margin. This might possibly be why Apple’s shares have failed to respond more positively.

There are a couple things to consider. First, there have been estimates that the new phone’s manufacturing cost is half of the current iPhone. Second, the MobileMe service at $100 per year adds revenue potential associated with the new iPhone. Sales of iPhone applications from Apple’s App store is another avenue to boost revenue. Most importantly, iPhone sales will expose the Apple brand to many who lack experience, and ultimately boost Mac sales.

I think we will gain more clarity in July, when the new iPhone hits stores and Apple releases Q3 results. It’s likely, until then, there won’t be many developments capable of really moving the stock, other than possible EPS estimate revisions.

Apple isn’t cheap trading at 35x FY08 consensus EPS estimates and 28x FY09. It may actually be cheaper if you believe those estimates are too low. I think the estimates are likely too low, thus Apple would be trading at slightly lower multiples. I think Apple could be bought on any weakness or pullbacks, since Apple’s share price reflects the fundamentals as opposed to pure sentiment, as it did last fall and this winter.

Disclosure: None

Comments

[lifesabeach]

Well said. Apple's stock price will move steadily upwards throughout 2008 & 2009 based on ever growing market share and consistently increasing revenue. In a very short while you will see iphones in every high school classroom, college dorm room as well as mansions around the world. And then there are the macs....The sky is the limit for Apple for the next few years.

[User 208939]

Old words of wisdom: stay clear of ships generally regarded as unsinkable.

[User 208961]

Perhaps you should update your spreadsheet to reflect current analyst ratings. You can find these at aaplinvestors.net/fact.../

[digivision]

the catalyst will be the first update on the iphone sales
it is now more than obvious that Apple can maintain ... no, exceed a 50% growth so this sideway movement is to be expected until we get confirmation of such potential

[tom1234]

like i have been asking ---ARE WE THERE YET----

[datdude]

A declining market will add downward pressure to AAPL and it's PE

[tom1234]

if there are 75 countries signed up and there are six months left in this year and the average amount of sales for all 75 countries is 300,000 iphones would that not put sales in the 22million range

[mollytjm]

Thank you for an intelligent article. I think the problem may be that most people have no grasp of what this technology really means and where it's going. They think of it as one thing...a smartphone, or a combo ipod/smartphone. mobileme will bring in sooo much money and the itunes store will benefit, but so will the makers of all accessories, games, everything...and every added application or accessory will appeal to someone and THAT hold out will buy the iphone and/or a MAC and then spend more $ in the itunes store, mobileme or on other APPL stuff. And did we mention APPL is STILL sitting on a huge mountain of cash? APPL remains undervalued for the long run.

[msftxno]

In three months things will be all too clear.

- iPhone roll out in 70 countries, along with the launch of iPhone app store.
- China and Russia are likely to be onboard by then as well.
- macbook and macbook pro get long overdue replacements in Sept., which will result in exploding pre-school sales
- iMac still booking record sales at 46% year over year growth
- iPhone SDK will fuel development for Mac and Apple TV as well
- Expect more future product innovations such as an iPhone based micro laptop.

[Toni]

User 206138, you just gave me an hard-on.

[Toni]

Doris ?