The big question on Apple (NASDAQ:AAPL) follower's minds is whether the stock has run out of steam or has even more room to go. It's up over 65% year-to-date, and is approaching the $700 mark. The company is a worldwide icon and continues to blow away the competition under the direction of Tim Cook. Catalysts keep coming, one after the other (the court case victory against Samsung being the latest). I too am on the seemingly popular side of Apple believers and see the stock continuing its parabolic run. As long as they keep churning out incredible products, I will stay long.
The smaller iPad, the iPhone 5, and the lawsuit victory are some big Apple headlines, but to be discussed in other articles. Here, I'll be focusing on what I think will take Apple's dominance to an even higher level: the mysterious iTV.
Now keep in mind, there has been no information given about the television by the company itself, only rumor. So when reading, bear in mind that this article is extremely speculative. I am assuming that the television will be released in 2013 and be priced around $1500, which comes from analyst Gene Munster. I am also not taking deals with service providers [ATT (NYSE:T), DirecTV (NASDAQ:DTV), Dish (NASDAQ:DISH), etc.] into account. Another factor is that they actually will make the iTV. But with their size, capital, innovation, and tremendous margins, I don't see why they wouldn't enter the television market. They have already touched the surface with the $99.99 set-top boxes, which had decent results.
iTV using Sony
For comparison purposes, I chose to use Sony (NYSE:SNE) as my model. Their information is easily accessible as they are a public company, and I personally find their televisions to be top-notch, alongside of Vizio. In a release by Reuters on August 2, Sony cut its forecasts for television sales down to 15.5 million for the year. Sony has a broad range of TVs with a broad range of prices. To keep things simple, I'm going to put a hypothetical price of $1,500 on the iTV. If they make multiple sizes and models, this number could be a good average price for them. Now let's try and estimate what kind of sales they could have. Like I said earlier, this is speculative, but I am keeping my numbers very conservative. So what's a good estimate? I am going to say 10 million iTVs will be sold during its "2013 release." To justify this number:
- This is about 2/3 of what Sony expects to sell. I'm not at all implying that Apple's sales will come directly out of Sony's. They will steal a little market share away from every company in the industry. I am simply using Sony as a model to base to estimates.
- Apple sold 17 million iPads in the June quarter, so to say they will sell at least 10 million televisions in one year is not ridiculous. It will only be a fraction of the iPads sold because households are not likely to have more than one iTV like they would the iPad. Fewer people will be willing to dish out that kind of money for a piece of technology too (although it's close to the MacBook).
Effect on Stock
So what would the iTV mean to the stock? Let's look at the Price-to-Sales number. Apple having no debt and great margins makes this number very effective.
Price/Sales = Share Price / Revenue per share
If Apple sells 10 million iTVs at an average of $1,500, that would add $15 billion in revenue for 2013. This is a very reasonable, conservative number I think. Add that to a $192 billion revenue estimate by analysts that doesn't take into account a television, and you get $207 billion.
So now back to the equation. Revenue per share would be about $220 ($207 billion divided by 937.4 million shares outstanding). I use a Price/Sales ratio of 4.
4 = Share Price / $220
Share Price = $880
4 = Share Price / $192
Share Price = $768
Based on these numbers, the iTV has the potential of adding close to 15% to the stock price. The $880 target is about 30% higher than today's price.
Risks and Challenges
As you can see in the numbers above, I believe Apple has upside even without producing a televsion. But, since there is so much hype about it, not coming out with one could possibly hurt the stock for a short period of time because of the disappointment. Another risk: the iTV comes out and is a failure. How likely is that? I don't see it happening by a long shot. Apple is a leader in innovation and technology. I'm betting that they come out with another spectacular product that has people excited and buying.
The biggest challenge facing the iTV is that it will be Apple's first televsion. The market is already very saturated with well-known, trusted brands. They will have to prove to comsumers that their product is superior (which they are always able to do). But even Steve Jobs himself once said that he didn't see Apple being a player in the phone market. Look what happened there ...
Again, I reiterate that the iTV itself and these numbers are speculative. But I think I'm being fairly conservative, and the stock could propel even higher than the numbers above. Apple continually impresses me, and I expect its streak to continue. It should hold a spot in everyone's portfolio in my opinion, but I'm no financial advisor. Please leave comments on what you think. I always love a stimulating conversation in the comments section.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.