Icahn says Apple stock still a real moneymaker
Investor declares shares of company are worth $240
Apple stock is up big again Monday — breaking the $130-ashare barrier. But some investors — including Carl Icahn — are convinced you can still make money on this juggernaut. How?
Normally, investors might think Apple is a stock that got away from them. Its shares are up more than 17% this year —and a whopping 260% over the past five years. The massive run in Apple shares almost makes the historic bull market in the Standard & Poor’s 500 look underwhelming. Shares of Apple were up $1.40, or 1.1%, to $130.17 Monday.
But that’s why some investors — looking beyond the stock’s rise — think there’s more upside to this runaway winning stock. Icahn, for one, believes the stock is worth $240 a share — which would give the company a market value of $1.4 trillion (it’s worth about $740 million now). The bull cases hinge on a few key developments happening, including:
Faster revenue growth than expected. Revenue growth at the company — until very recently — has been decelerating. It’s hard to remember this now — but during fiscal 2010, Apple put up 52% revenue growth, says S&P Capital IQ. That growth rate dropped to just 7% in fiscal 2014. Strong reception of the latest iPhone bumped revenue growth to 20.5% over the past 12 months — but investors are wondering where the momentum has gone.
But with the Apple Watch off to a somewhat disappointing start and the iPad fading, how can Apple boost revenue growth? That’s where China comes in. Daniel Ives of FBR Capital Markets told investors in a note to clients Monday that China is the “growth opportunity.” Ives told investors that taking market share in China will bring enormous growth and turn the Asian nation into the most important for China.
Analysts currently expect Apple to boost revenue this fiscal year by 39%. Greater-than-expected revenue growth could help bulls justify higher prices.
Higher P-E. If there’s one knock against Apple, it’s that the company is a hardware company. Hardware companies tend to have low profit margins relative to other tech companies. Hewlett-Packard, for instance, has a trailing P-E of roughly 13 times earnings — well below the roughly 20x valuation of the market. The fact Apple is almost entirely a tech hardware company is holding back the P-E to 16 times trailing earnings. It rarely trades above 18 for long before investors slap it back down.
One way to get the stock price up is to boost profit, of course. That way, even if investors are only willing to pay 16 times — on a higher profit, that’s a higher stock price. But the other way is for investors to be willing to pay more for profit. That’s where the company needs to be more than a hardware company. Investors are willing to pay higher valuations for tech services companies. Take Netflix as an extreme example. The video streaming service trades for 159 times trailing earnings. If Apple can boost its services business — such as with Apple Pay or a music streaming service — suddenly the 18 times ceiling on the valuation might fade away.
Additionally, Apple could possibly win a higher valuation multiple if it didn’t have so much cash sitting around. The company has $193.9 billion in cash and investments essentially collecting interest. That idle capital isn’t worth a premium to investors. The company’s return on capital — all the money invested into the business — is 25.8% over the past 12 months. That’s down from 35% in fiscal 2012. Sitting on less cash could help this metric, which investors pay attention to.