In past years, taking Apple shares off the table has proven foolish, as every potential threat, including what was considered the ultimate one, the loss of Steve Jobs late last year, has done little to slow its growth.
Now at $528, its shares have had a 48 percent run-up in the past 12 months, roughly consistent with its five-year annual return, which is amazing given its now-$508 billion market value.
So the pressure is on the company to keep it up. Its latest product iteration of the iPad, the iPad 3, is expected to be introduced today. It’s another step in determining whether consumers and investors will remain happy, an increasingly difficult challenge.
Just consider the latest results.
In its most recent fiscal quarter, reported Jan. 25, unit sales of iPhones were up 128 percent from a year earlier, iPads rose 111 percent, Macs increased 26 percent, while iPods declined 21 percent. Those statistics are why Wall Street analyst are so bullish.
A recent S&P survey found 36 “buy” ratings, 13 “buy/holds,” four “holds” and one “sell.” But at some point, something will eventually upset the Apple cart.
Peter Cohan, a business consultant, author and business-management teacher at Babson College in Wellesley, Mass., speculated that any abrupt slowing in the company's earnings growth rate or a quarterly earnings miss versus its own projections would cause analysts to scale back price targets and precipitate a share-price slide.
“All a company has to do is miss once and you’re dead for a year,” given the sterling performance record for a company such as Apple, he said. “You have to beat the (Wall) Street expectations and raise your forecast every quarter.”
Under Jobs, the company had a steady string “of inventions one after the other, that created an ability to come up with massive upside surprises,” Cohan said. “Tim Cook [the new CEO] is not Steve Jobs, so the big question is whether Apple will have a new game-changing innovation after the expected iPad 3. If it doesn’t, the current growth projections look too optimistic.”
But Goldman Sachs said in a March 2 research note it expects Apple’s rampant growth to continue, hence its conviction list “buy” rating and suggestion that buyers be “aggressive.”
“After the iPad 3 launch, we still expect several critical positive catalysts for Apple’s stock this year,” it said, including an updated iPhone 5 in the second half of this year, the beginning of a long-awaited return of cash to shareholders through a dividend, and strong growth in demand from emerging markets, all of which will help the company beat revenue and profit expectations.
Finally, in a nod to product innovation, Goldman expects “the launch of an iOS-centric Apple television set.” But is it possible for one’s appetite for Apple to get out of hand? David Rolfe, chief investment officer of Wedgewood Partners in St. Louis and manager of the RiverPark/Wedgewood Fund, with over $1.5 billion in assets, said he and his fellow managers are constantly monitoring Apple since it's his fund’s biggest holding at 9 percent of the portfolio.
His firm uses four criteria to assess the investment.
First, no investment in the firm's funds can exceed 10 percent of the portfolio, so that dictates that Apple gets pared back when it does.
The second is monitoring risk versus reward to set a fair value price, which is determined by fundamentals, such as price-to-earnings ratios.
His firm expects Apple to earn $55 per share in fiscal 2012, which ends in September.
Given its current price-to-earnings multiple of about 15, and with a view that earnings are about $50 per share now, it would give the shares a fair value price of $750.
Rolfe thinks a price in the range of $500 to $700 is quite reasonable. And that view looks even more conservative when considering Apple’s $100 per share in cash on the balance sheet, which Rolfe said he expects will grow to $150 by the end of December.
The third variable being monitored is top management changes. Rolfe said Jobs “left a great management team behind. They’re young, passionate and talented (but) if they lost one, we would reassess our rating.”
The fourth criteria is potential competitive threats to Apple’s products, which so far is moot, Rolfe said, noting that some doubted whether the company's iPad could own the tablet market.
But Apple now has about a 75 percent to 80 percent market share of the product niche with the nearest competitor holding 5 percent, so that threat essentially amounts to “zippo, and by [today] we'll find out how much more of a technological leader they are.”
“So, in our opinion, all four of those boxes check off in the affirmative,” Rolfe said, meaning his firm isn't likely to turn negative on Apple any time soon.
That’s a view held by many Wall Street analysts, and tough to argue with even from a contrarian standpoint, except if you’re Edward Zabitsky, an analyst at ACI Research in Toronto.