Apple: $700 Done. $800 When?

| About: Apple Inc. (AAPL)

On March 19, 2012, we wrote an article titled "Apple: $600 Done. $700 When?" where we concluded that the most likely scenario was for Apple (NASDAQ:AAPL) shares to reach $700 sometime between May and September 2012, as long as no major stock market sell-off developed.

As it turned out, no major market sell-off developed, and Apple shares reached the $700 milestone for the first time during extended hours trading on September 17, 2012. Although it has taken Apple shares about 6 months to go from $600 to $700, the next $100 increment to the $800 level could happen much sooner.

With a stock price of $700, and earning expectations of $44.18 per share for the current fiscal year ending September 2012, and $52.84 for next fiscal year ending September 2013, Apple shares P/E ratios stand at 15.84 and 13.25, respectively. If Apple shares were to trade at $800, then with current earnings estimates, Apple P/E ratios for next fiscal year ending September 2013 would be 15.14 .

If, with a share price of $800, Apple shares were to retain their current forward P/E ratio of 13.25 for next fiscal year, then Apple's earnings would have to be $60.38 per share. In other words, earnings for next fiscal year ending September 2013 would have to be about 14.3% higher than analysts' next fiscal year estimates of $52.84 per share.

How likely is it that actual earnings will exceed current estimates for next fiscal year by 14.3%? Apple's earning estimates for the period from September 2011 to June 2012 were $37.96/share, while actual earnings turned out to be $42.54/share. Hence, during the past year, Apple has exceeded earning estimates by about 12.1%. Given Apple's new release for the iPhone 5, and although historical performance is not necessarily indicative of future performance, one can conclude that it is very likely that Apple can indeed exceed current estimates for next fiscal year by 14.3%.

In order to determine when the $800 milestone will be reached, and analyzing matters on a ceteris paribus basis and purely from the preceding P/E ratio perspective, that milestone can be reached as soon as traders are convinced that current earning estimates are too low, or as soon as the estimates are revised higher. Naturally, the biggest factor in play will be the iPhone 5, and preliminary numbers clarifying the success of its sales should become apparent within the next few weeks. Hence, it is very possible that Apple shares may actually reach the $800 milestone sometime during the next 4 to 8 weeks.

Considering that the last $100 increase in the value of Apple shares took about 6 months to achieve, wouldn't it be too aggressive to expect the next $100 increment to take less than 2 months? The next $100 represents a percentage increase of about 14.3% in the value of Apple shares. If such increment occurs within 4 to 8 weeks, that would translate to an average percentage increment of about 1.79% to 3.57% per week.

That does seem quite hefty. On the other hand, when Apple shares reached a price of $600 per share, it took less than 5 weeks for the share price to increase 20% from when it reached $500 on 2/13/2012 (on an intraday basis), to $600 on March 15, 2012 (on an intraday basis). That was an average increase of about 4% per week. Again, past performance is no indication of future performance, but there is a precedent for accelerated increases in the value of Apple shares during a short period of time. Furthermore, on a year to date basis, whereby Apple shares have increased from $405 to $700, the average non-compounded weekly gain has been about 1.97% per week, above the lower end of our estimated range of 1.79% to 3.57%.

In reality, the world does not move on a ceteris paribus basis. In case the Federal Reserve's latest quantitative easing move results in an increase in inflationary expectations, resulting in higher interest rates, then it is possible that a contraction in the market's overall P/E ratio would ensue.

However, in such scenario, Apple still holds two advantages. First, Apple would be able to secure higher return on its massive cash holdings. Second, a drop in the value of the dollar would result in an increase in Apple's U.S. dollar denominated international sales.

Currency Shares Euro Trust ETF - 3-month chart

In conclusion, it is possible that Apple shares may reach the next milestone of $800 per share within the next 4 to 8 weeks. Naturally, that event could face headwinds in case of a market wide selloff, or in case of lower than anticipated iPhone 5 sales. However, Apple has announced that pre-orders for the iPhone 5 have topped 2 million in the first 24 hours, double the sales for the iPhone 4s on the same comparative basis. Hence, although it may still be too early to reach any conclusion, early indications do favor healthy sales numbers for the iPhone 5.

Investors who share this view but are concerned about the macro environment (or possible disappointment on ultimate iPhone 5 sales) can possibly purchase Apple shares at current levels, while purchasing November 2012 680 puts for a premium of about $25. Such strategy would provide a target upside of $100 with a capped downside risk of $25 to $45 in case Apple shares end below $700 on November 16, 2012 (November options expiration date).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. 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.