Expecting Apple to Reach $300 in 2008

by: Stephen Coleman April 03, 2008 | about stocks: AAPL    
Stephen Coleman

Stephen Coleman

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I expect Apple's (AAPL) share price to reach $300 in 2008. Apple is around $147 today. I expect a gain of over 100% from today’s price. Keep in mind that Apple finished 2007 at $198.08. From there, the trip to $300 per share is over 50%. I have a core belief that informs my judgment: stock prices are made by earnings growth and public expectations. Earnings growth is my key metric. I believe that the earnings growth predicts the direction and the magnitude of a stock’s price change.

In essence, by predicting a $300 share price for Apple, I am saying that Apple’s earnings should grow by 50% or more in 2008. I believe this will be the case. Before I make my case for Apple’s expected earnings growth, I would like to explain its decline in 2008.

Apple’s stock basically fell from $198 on December 31, 2007 to $120 in February, a decline of 39% in two months. Why did it fall so dramatically? It was not because of the MacWorld event in January which brought us the MacBook Air. That product is a runaway hit and oh so very cool. It was not because of Apple’s earnings report, also in January of 2008. Apple reported year-over-year earnings growth of 58%. That rocks. No, the problem was the EPS guidance. Apple’s guidance was that they expected to earn $0.94 in the quarter ending March 31, 2008 versus actual earnings of $0.87 in the quarter ending in March 31, 2007, a gain of 8%. Nobody pays a premium for 8% earnings growth. The expectations declined. The stock price followed. This decline says less about Apple and more about its stockholders. uPOD. under Promise Over Deliver. That is Apple’s approach to guidance for Wall Street.

Apple’s guidance is consistently wrong on the low end. I have owned Apple in my clients' accounts for 17 quarters, since February of 2004. In that time frame, Apple has provided quarterly EPS guidance 16 times. They have gotten it wrong 16 times. On average, they have been wrong by 48%. Let me translate that statement. If Apple says that they expect their earnings to grow by 8%, add 48% to that estimate and expect 56%. I do not think that we are being sandbagged. It is just impossible to predict the creation of a new industry. Who saw the iPod industry coming? Who can predict the size of the iPhone industry? I find Apple’s conservative guidance comforting. If you overstate earnings in this environment, the trial lawyers will feast on you.

I am a long-term investor. I only measure my returns from one year end to the next. But there is another investor type among us with far less patience and perspective. I call them "The Visitors". "The Visitors" are short-term investors. Their knowledge about Apple is essentially an “elevator pitch.” No one should take "The Visitors" lightly. They seem to be about 40% of the investor population. The conservative guidance provided by Apple’s management invited "The Visitors" to panic sell or short the stock. There are four days a year when you get the truth about a company’s financial condition. Those are the four quarterly earnings calls. That leaves 361 days for mischief. This explains the drop in Apple’s share price in 2008. "The Visitors" got exited. By the way, Apple’s next earnings call is April 23, 2008.

The case for a $300 share price has two keys, of which only one needs to occur to make that $300 stock price real. The first is the robust sales of the Mac. The second is the tsunami that is the iPhone. Mac sales grew by 36% year-over-year in the quarter ending March 31, 2007. The buzz is that this growth has accelerated. The buzz is that Apple’s Mac sales are now growing at a 60%+ rate, year-over year. If that is validated during the upcoming earnings call, that profits from the Mac are sufficient to deliver earnings growth of 50%+ for the entire company.

The iPhone is something else entirely. I have never loved anything that I have ever bought more than I love my iPhone. It has organized my life. The iPhone also happens to be the most profitable product I have ever analyzed. In order to understand that statement, you must know that I believe that Apple makes 30% of the carrier revenue on all iPhones sold. I assume that this translates into a profit of $25 per iPhone per month. That is $300 per year from carrier revenue plus $200 in profits per phone on each unit sale, amortized over twenty four months. So, the annual profit per phone is $400, $300 from the carriers and $100 for the actual sale of the phone. If Apple sells 10 million iPhones this year, it should earn $4 billion from the iPhone alone.

In 2007, Apple had calendar year earnings of $4.1 billion. Apple sold 3.7 million iPhone units in 2007. If it sells 10 million units in 2008, the profits should be sufficient to drive earnings growth above the 50% level. I expect the stock price to follow the earnings growth. So, I have given you two scenarios for driving earnings growth to 50% in 2008. The truly exciting thing about these scenarios is that both could be true. If both of these scenarios occur, then my $300 share price expectation may prove to be conservative.

Disclosure: Author has a long position in AAPL

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This article has 38 comments:

  •  
    Apr 03 04:57 AM
    Finally, someone who understands the stockholder makeup and the reasons behind the winter loss for Apple. While I think the predictions are a tad optimistic I hope they are indeed correct.
    Reply | Link to Comment
  •  
    Apr 03 06:08 AM
    Intelligent assessment of one of the most under appreciated stocks/company in the market today. Pleasure to read this...
    Reply | Link to Comment
  •  
    Apr 03 07:36 AM
    Congratulations! Finally here is an author different from all the analysts who constantly underestimate the potential of apple. To those I can only say: Think different. Dare to have your own judgement. Over the last ten years this was the propper way to approach the phenomena apple.
    Reply | Link to Comment
  •  
    Apr 03 07:39 AM
    Thank you sir for writing a well informed factual based article based off true analysis. I look forward to reading more of your articles because your analysis is very similar to how I value my stocks. I realize that you are going to get many rebuttals because you were bold enough to list a price that you believe the stock will reach but I would like to remind those commenters that you were ok with the idea that Apple was going to plummet lower than 120. Once again great article you have renewed my faith in the articles on this site.
    Reply | Link to Comment
  •  
    Apr 03 07:55 AM
    Just bear in mind that a LOT of iPhones are being sold for unlocking, and therefore won't achieve the level of carrier revenue you describe. BUT I think you're underestimating the profit per phone, particularly for higher capacity models.
    Reply | Link to Comment
  •  
    Apr 03 08:30 AM
    Well done! I think the Apple stock is dirt cheap (long term perspective). For everything that they doing, we are going to kick ourselves to not buy it at $150, $175, $250...

    I remember seeing Berkshire Hathaway at $5,000/share, then $10,000/share....$50,0... and each time, it was cheap.

    Apple's got great business, great products, great customers and great earning potential...what else can we ask for in an investment?

    Reply | Link to Comment
  •  
    Apr 03 09:00 AM
    hmm, what about this?

    Jefferson City, Missouri — Missouri Secretary of State Robin Carnahan’s Commissioner of Securities, Matt Kitzi, issued two enforcement orders late last week against Stephen M. Coleman of St. Louis and his investment adviser firms for fraud and unsuitable recommendations related to a mutual fund and an investment group he controlled.

    www.sos.mo.gov/news.as...
    Reply | Link to Comment
  •  
    Apr 03 09:19 AM
    Best article/analysis I have read in a long time not only you did your homework but it is well written ...

    I believe the 50% growth is a very safe estimate, Apple could easily top that.. you have not taken in consideration (rightly so) new products/services and of course the impact the iPhone will have outside of the US.
    You could easily quadruple iPhone sales estimates if it catches on in China, Russia and even South America, these countries are also a domain of MS and cheap PCs like acer .. will there also be an halo effect in these countries as well ???
    Reply | Link to Comment
  •  
    Apr 03 09:20 AM
    That's not good to see, but the article he wrote is on the money regardless.
    Reply | Link to Comment
  •  
    Apr 03 10:07 AM
    Finally someone that understands the madness of the "casino" stock markets and validating a corporate performance should be based on "reality checks". Apple has impressed me from the day I bought my first Mac over 30 years ago and sadly for a long period of time the visionary Steve Jobs was sidelined, but since his return has shown that the "cult cloud" was more than a hype by delivering quarter over quarter stunning gains and most noteworthy product introductions that baffled the most optimistic fans. The reason why I'm a Apple movement fanatic is because of a corporation that provides me tools that improve creativity and productivity. And that is the bottom line for any business owner. I believe your predictions are on the low side since Apple is quite obvious showing where it is heading but stubborness does not allow "the visitors" to see beyond there cornea. Content is king and no-one better understood this than Mr. Jobs in 2001 and has been amassing the sources and resources and providing Apple buyers the tools to be in the front line when the content delivery method dust settles. Mark my and the words of this article's author.
    Reply | Link to Comment
  •  
    Apr 03 11:14 AM
    I like your number, Stephen – because it's the same target I had pegged for Apple in 2008, based on its having already reaching $200, the amazing growth of the Mac market, and the potential for iPhone.

    Granted, from there my $300 figure rests on touchy-feely guesswork, whereas your prediction's basis is nicely analyzed and spelled out.

    Here's to $300 in 2008! I'm off to scoop up more shares.
    www.mactivist.com/wall
    Reply | Link to Comment
  •  
    Apr 03 11:15 AM
    I like your number, Stephen – because it's the same target I had pegged for Apple in 2008, based on its having already reaching $200, the amazing growth of the Mac market, and the potential for iPhone.

    Granted, from there my $300 figure rests on touchy-feely guesswork, whereas your prediction's basis is nicely analyzed and spelled out.

    Here's to $300 in 2008! I'm off to scoop up more shares.
    www.mactivist.com/wall
    Reply | Link to Comment
  •  
    Apr 03 11:15 AM
    (Sorry for double post!)
    Reply | Link to Comment
  •  
    Apr 03 12:15 PM
    Bravo! How times have changed. If you had written this article one month ago, all reader responses would have been: "You're crazy". Excellent assessment and, I agree, up we go.
    Reply | Link to Comment
  •  
    Apr 03 09:42 PM
    300 is an optimistic target for this year. Apple will perform just as described (or better) but the stock price may not reflect it this year. It and many others will probably remain semi-depressed by the economic picture (by the talking heads giving us gloom and doom 24/7) and the real issues (credit crisis, etc) we will work though. Also, it is worth noting that quite a bit of the back-end revenue included above won't post in 2008 (Apple is conservative and defers this type revenue so it won't be included in bottom line earnings until they actually collect the dough. We will go way past 300 as Apple will be an earnings powerhouse for the next two years, it just may not happen in 2008 without some help from improving overall conditions.
    Reply | Link to Comment
  •  
    Apr 03 11:11 PM
    @dare:
    You are absolutely right. One has to be careful. And while *I* would not buy stocks from him, he was on the money a year ago when he posted this:
    <seekingalpha.com/artic...;

    But, I and probably everyone commenting here is long on Apple and that is the kind of news we like to hear... :)
    Reply | Link to Comment
  •  
    Apr 03 11:34 PM
    It is true that MAC and Iphone are the two products from Apple with great growth potential. However, I disagree with the author's analysis on IPhone revenue from carrier. First I don't believe AT&T or others would kick back 30% to APPLE, or even if that is true, that is not sustainable as it is more like a rip-off. Some articles say the revenue Apple shares with carriers is ~$10 which I deem more reasonable. In addition, a large number of IPhones are bought, unlocked then used on other carriers' networks from which APPLE gets nothing except the hardware profit. That is why IPhone is everywhere in many emerging markets like China. Some believe this is one of the reasons why Apple is tight on Iphone supply recently. On the other hand, I do believe APPLE will sell more than 10 mil IPhones in 2008 and much more next year given the momentum of the strong global demand, the promises the coming SDK, enterprise features, and new 3G IPhone in the middle of this year.
    Reply | Link to Comment
  •  
    Apr 04 10:43 PM
    I have enjoyed your comments. May we all live long and prosper.
    Reply | Link to Comment
  •  
    Apr 05 01:48 PM
    If it does you will find me in a beach house in Malibu!
    Reply | Link to Comment
  •  
    Apr 07 04:09 PM
    This 300 price is in the clouds. Lets look at both of these scenarios:

    First the Mac. Sales of the Air have been going down due to price and the niche market they are aimed towards...as well as the competing MacPro which is about the same price. But hey they're still buying a Mac right? Well yes but Mac sales are only growing at a projected 33% for the year come this Q2.
    arstechnica.com/journa...
    We also have a big problem with the upcoming economy and Mac's are a premium product. Its hard to shell out $1,500 for a Mac when you can pick up a PC for $500 when times are tough. I don't see Mac sales continuing this growth they've enjoyed over the last couple years.

    Second the iPhone. Sales are great but the numbers in the article above are way too inflated. First ATT only gets $18/month per iPhone. The difference between this and the $25 in the article equates to about $800+ million off the target revenue. Also, there was no accounting for the number of iPhones going on the gray market or being put onto networks like T-Mobile. Conservative numbers suggest that over a million iPhones will be sent overseas...so with the phones going overseas and those on other networks...lets take another $500 million off the expected revenue for these phones. To be conservative I would say that the iPhone might be expected to contribute about $2.5 billion this year...not the 4 billion stated above.

    So in short...with a falling economy and some more realistic numbers behind the iPhone...I'd say Apple is looking to hit somewhere closer to 250/share.
    Reply | Link to Comment
  •  
    Apr 07 04:55 PM
    I believe that "Life on2Whls"' numbers are more accurate especially when talking about revenue received from AT&T. I assume that "Life" means that $300 is an unrealistic price for 2008. I appreciate the research and thought that you have given. I do think Appl will reach $300 but not in this year. No one mentioned ITunes but that revenue continues to increase also.
    Reply | Link to Comment
  •  
    Apr 07 05:34 PM
    That's exactly what I meant.
    Reply | Link to Comment
  •  
    Jun 21 06:10 PM
    June 22: price 175
    Reply | Link to Comment
  •  
    Jul 17 11:35 AM
    I'm a little skeptic.

    July 18: price 172
    Reply | Link to Comment
  •  
    Jul 28 03:17 PM
    Still skeptic.

    July 28: price 155

    JW, PhD still a moronic pumper.
    Reply | Link to Comment
  •  
    Aug 06 10:11 AM
    OH MY GOD

    "There's so much growth to look forward to for the iPhone,'' said Stephen Coleman, chief investment officer at St. Louis-based Daedalus Capital LLC, which owns about $7 million of Apple shares. He projects the stock will hit $600 in 18 months.

    Dec. 26, 2007 (Bloomberg)

    What about 300 by year end ?
    Reply | Link to Comment
  •  
    Sep 15 09:37 AM
    I have some doubts.

    September 15: price 144
    Reply | Link to Comment
  •  
    Sep 17 12:39 PM
    "my $300 share price expectation may prove to be conservative"

    Someone said: price 133 ?
    Reply | Link to Comment
  •  
    Sep 17 06:35 PM
    128 ?
    Reply | Link to Comment
  •  
    Sep 17 07:32 PM
    WOW! So profound, Toni+...........feel good about yourself?

    Jerk-off.
    Reply | Link to Comment
  •  
    Sep 22 01:20 PM
    "feel good about yourself?"

    Yup, good. Very good.

    Reply | Link to Comment
  •  
    Sep 29 10:22 AM
    I feel you should start too to be a little unsure of your prediction.

    September 29: price 110
    Reply | Link to Comment
  •  
    Oct 02 10:48 AM
    October 2: price 102

    A refresh for my listeners: 175, 172, 155, 144, 133, 128, 110, 102, ...
    Reply | Link to Comment
  •  
    Oct 03 02:32 PM
    October 3: AAPL is back to double digits.

    300 by year end ?
    Reply | Link to Comment