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White's Great Expectations From Apple

|Includes: Apple Inc. (AAPL)

The official announcement of Apple (NASDAQ:AAPL) fiscal Q2 2012 earnings is about 3 weeks away. Many of us are eagerly waiting for this day, to witness/judge how our favorite billion dollar hippy's corporation is doing.

The recent upward surge in the stock price may not only be an indicator of growing shareholder confidence but also an indicator of Apple delivering respectable fiscal Q2 2012 earnings numbers.

Some of you may be aware that, I am bullish on Apple (based on my past articles). However, I was pleasantly surprised when I came across a news piece, in which Brian White (a Topeka Capital Markets analyst) placed a $1,001 price target on shares of Apple within the next 12 months. Soon, another analyst Piper Jaffray (a Gene Munster analyst) mentioned a similar price target but only by 2014. If the stock of the corporation were to hit the 4 digit mark - it could go on to be a trillion dollar company. A shift to 4G LTE networks, growth possibilities through expansion in the Chinese market and the launch of a flat panel iTV are being attributed as the main reasons for such forward looking stock price targets. I still have not got a chance (I could not find any information on these on the internet) to look at the investment and growth analysis models that could have possibly been employed to arrive at these price target. Last July, White had already shocked the Street by announcing a price target of $666, back then the stock was trading at $390.

I believe that the present day stock price has taken into account all publicly available information relating to the corporation's business activities and reached the present day levels. Based on this, I have used a simple approach to put a value on Apple's possible stock price next year (a year from now, is what I mean), and it appears to be far more conservative than Mr. White's valuation:

By the standard CAPM formula we know that Expected return = Risk-free rate + Beta (Risk premium). Using a risk premium of 6% (a standard number for equity assets traded in mature markets such as the US), I got an expected return of 9.56%. Employing this rate to the present stock price of Apple, the future price that I calculated is presented below:

Current stock price = Div1/(1+R) + P1/(1+R)

Div1 = dividends that will be issued this year

P1 = stock price, one year from now

R= 9.56% : this is the expected return from equity investors to break even (in general, Business managers are expected to employ this number as their hurdle rate to select their projects for investments - of course if the company has some debt component on its financial sheets then they have to employ a different one - the cost of capital number)

630 = 2.65/(1+9.56%) + P1(1+9.56%)

P1 = 688

Therefore, based on above calculations, the price of the stock can be expected to be at around $688 (a year from now). To get a stock price value as high as $1000, I had to plug in a value 59.2% for 'R'.

For different inputs of R, we could get various price targets. For your convenience, I have mentioned the results of some select calculations below:

Cost of equity rate %

Target price $





























The realization of the above mentioned growth possibilities, is dependent on how well Apple's managers incorporate such expectations numbers (determined by the investor community) and use appropriate corporate hurdle rate (or discount rate) while investing in projects and other strategic decisions.

We could possibly get more clarity on how Apple is placed to reach the trillion dollar company mark post the fiscal Q2 2012 results.


This article/blog was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data, calculations and financial definitions, and may contain approximations and errors. Please check for the correctness of estimates, calculations and data before using them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.