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Apple’s next stop: $1,000.

madhedgefundtrader's picture




 

When I took a young, cocky, long haired, Levis wearing Steve Jobs around to meet Morgan Stanley’s institutional investors to pitch an Apple share offering 28 years ago, I vowed never to buy anything from the man. He was such a great salesman, and possessed such a messianic devotion to his product, the risk of getting legged over had to be great.

This proved a good strategy for the next 18 years, when the company nearly went under three times, and the stock repeatedly plunged from its initial listing price of $22 down to $4. Disastrous products like the Apple Newton came and went, and then poor Steve got fired.

Living in the San Francisco Bay Area, I was also creeped out by the fanatical cult following that Steve enjoys. Criticize an Apple product here, and you risk getting attacked, ostracized, deleted from address books, and chopped off Christmas card lists. There was also no end of abuse from my IPod and Imac addicted kids.

I have to confess now that my prior prejudices caused me to miss the boat on Apple for the last decade, when the stock soared from $4 to $275, eventually topping Microsoft (MSFT) with a $238 billion market capitalization last week. To see the company bring out a ground breaking, high end $499-$829 product like the IPad and sell 2 million units in a short two months during appalling economic conditions is nothing less than amazing. The recent stock performance has also been miraculous, bouncing back from a flash crash low of $195 to challenge its old high in a matter of weeks, while the rest of techland lies in ruins.

Forecasts for the global smart phone market are ratcheting up by the day on the back of surging demand from emerging markets. Sales could reach 250 million units annually by 2012, of which 17% currently is sold by Apple. The company has become a monster cash flow generator, spewing out $12 billion over the last 12 months. It sits on a cash mountain of $23 billion, or $45/share. Apple now has the envious problem in that sales of several of its products are going hyperbolic at the same time.

Some analysts have Apple’s earnings skyrocketing from the current $12/share to $30 over the next two years, which at the current 22 multiple would take the share price up to $675. If the company’s multiple expands to its pre crash average of 35 X, that would take the stock to a positively nose bleeding $1,073, giving it a 400% return over the next two years.

I’m not saying that you should rush out and load up on stock today. But it might be worth taking a stake on the next wave of fear that strikes the market.

To prove that I am not the world’s worst Apple analyst, let me tell you about Ron Wayne, who owned 10% of Apple (AAPL) and you sold it for $800 in 1976. What would that stake be worth today? Try $22 billion.

That is the harsh reality that Ron Wayne, 76, faces every morning when he wakes up, one of the three original founders of the consumer electronics giant. Ron first met Steve Jobs when he was a spritely 21 year old marketing guy at Atari, the inventor of the hugely successful “Pong” video arcade game. Ron dumped his shares when he became convinced that Steve Jobs’ reckless spending was going to drive the nascent start up into the ground, and he wanted to protect his assets in a future bankruptcy.

Co-founders Jobs and Steve Wozniak kept their original 45% ownership. Today Job’s 0.5% ownership is worth $1.5 billion, while the Woz’s share remains undisclosed. 

Ron designed the company’s original logo and wrote the manual for the Apple 1 computer, which boasted all of 8,000 bytes of RAM (which is 0.008 megabytes to you non-techies). Today, Ron is living off of a meager monthly social security check in remote Pahrump, Nevada, about as far out in the middle of nowhere you can get, where he can occasionally be seen playing the penny slots.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.

 

 

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Tue, 06/08/2010 - 21:25 | 402825 Ned Zeppelin
Ned Zeppelin's picture

Try on the concept of "bubble." Apple will be nothing a few short years from now. Mark it down. What happens when Chinese labor is paid fair wages, for starters? Their products are useless luxuries, the last gasp of a consumerist society buying silly luxury toys.

 

Please.

Tue, 06/08/2010 - 12:35 | 401810 b_thunder
b_thunder's picture

1. The MadHedge Dude said it himself: Apple is a cult.  How long can it draw new memebrs?

2. Two million iPads sold?  Did you know that until recently you HAD to use a credit card to buy it?  Cash was not accepted?  Well, since most of the iPad/AAPL fanboys are "creative types", i don't expect them to pay their credit card bill in full.  Ever.  Eventually their credit will be cut off, and so will be their electricity, water, gas, internet and wireless services.  what then?

3. Unlike the 1980s, when MSFT managed to beat AAPL witht he new, but inferior, UI, AAPL almost went under thanks to its' "closed" model.  This time it's different: AAPL had a 2+ year head start on the competitors. But now, droid is NOT inferior to apple stuff as Windows used to be for nearly a decade.  As Droid-based devices reach "critical mass" it wil attract greater and greater share of developers. In 2 years AAPL may already be a distant #2

4. ' If the company’s multiple expands to its pre crash average of 35 X.." -- 35X ??? Are you sure 35X is not too low?  why not 50? or 60?  after all, iAnything are so addictive, they act as a drug, users can't get enough of them!  

i've yet to see any mega-cap, let alone a 2nd largest mega-cap, where anythign near or above 20X was jsutified long term.  But i suppose this time i have to "think different..."

 

Tue, 06/08/2010 - 12:07 | 401753 SylphGlitch
SylphGlitch's picture

Apple products are only revolutionary to Apple fanboys.  If you're willing to spend 10 minutes learning how to use a PC you can easily find hardware that does twice as much at half the cost.

Tue, 06/08/2010 - 12:04 | 401748 realitybiter
realitybiter's picture

The iphone needs an app for reliable cell service.

Tue, 06/08/2010 - 12:01 | 401741 realitybiter
realitybiter's picture

MHFT cherry picks a lot of his touts.  TBT to the moon was a prognostication a while ago, too.  Yesterday he was singing the praises of of Charles Nenner shorting the equity indexes on the second week of January this year, which was right for 15 days, then wrong for the next 4 months.  Not too impressive.  He does like gold.....hmmmm....Maybe Apple will get to $1000...these dollars you speak of...how many of ounces of gold do they represent?  A Google of dollars per oz?

Tue, 06/08/2010 - 11:55 | 401719 Cactus Rocky
Cactus Rocky's picture

The iPhone needs an app to help the user get a life.

Tue, 06/08/2010 - 11:51 | 401714 realitybiter
realitybiter's picture

I think the good news is all priced in.  The ipad has to cannibalize some PCs...that is at least $500 a unit negated sales.  I have owned iphones since the first one.  It is a cool smartphone, BUT Apple hooking up with A Terrible Telephone Co (ATT) was a big mistake.  I have spent hours with them, replaced iphones, and got nowhere but dropped calls.  The ATT rep said, "well, the chart says you have service, and you say the calls do initially connect, so then, you get 3G."  I respond, "sir, if you bought a new car and it started everytime you tried, yet stalled every time on the road, would you say the car was performing to spec?"  silence.

I have bought 4 macs, itv, 4 iphones.  This will be my last, if only just to give Apple a little bit of its own medicine.  Am I the only one?

Tue, 06/08/2010 - 12:03 | 401705 seventree
seventree's picture

As a daily ZH reader, I sometimes forget there are still millions of Americans with good jobs (in which they feel secure), ample discretionary income, and only a dim awareness of all this "economic downturn" business. For them the new and cool are always worth premium prices. Others in similar financial circumstances know that nothing lasts forever, and are constantly looking for ways to convert current surplus to future safety.

As our national deterioration progresses more will move from the first group to the second, adopting more mature priorities. For this reason I consider Apple to be a coal mine canary. The day they can't automatically sell out anything they come up with will mark a new turning point.

Tue, 06/08/2010 - 11:34 | 401665 Spaceman Spiff
Spaceman Spiff's picture

I think many of the apple faithful are going to get annoyed with the high priced products (especially if things get worse economically), and they will tire of the marginally improved 'new old' gadgets.   [Lets ignore the fact that many of the improvements should be in the first generation models...   like multi-tasking, cameras, perhaps expandable memory in the future and usb ports for printing in the future]

Now, I think it is harder for them to innovate with inventing the next 'must have gadget' then it is for their competitors to undercut their prices with similar devices.

 

Tue, 06/08/2010 - 11:22 | 401624 Henry Chinaski
Henry Chinaski's picture

Speaking of MHFT pics.  Hows RIG at $51 working out for everyone?  

Tue, 06/08/2010 - 12:35 | 401809 Moe Speeks
Moe Speeks's picture

RIG has a big support base right here from $44 down to $42 from late 2008.

I would like to see a bounce from here. If markets happen to bounce by the sheer grace of God RIG could be a buy.

Tue, 06/08/2010 - 11:18 | 401612 Panafrican Funk...
Panafrican Funktron Robot's picture

It will see $1000 eventually, but by that point $1000 will buy you an extra value meal and a couple of mini-bottles of Jack.

Tue, 06/08/2010 - 11:06 | 401574 DosZap
DosZap's picture

Apple, has a problem, it's called bandwidth, and usage.

Jobs demo went to hell yesterday.............the airwaves are saturated, and the deal w/ going to AT&T exclusively, is going to bite em in the Azzz.........

Customers are mad as hell....Verizon looks to gain a lot of new customers IMHO.

Tue, 06/08/2010 - 11:29 | 401615 williambanzai7
williambanzai7's picture

All the US carriers are feeble compared to the rest of the world. Come to Asia or go to Europe and your mobile hardware will work fine wherever you go.

Those who wish to divine a new model for American business would be well served by studying the success of Apple. It maintains it's critical intellectual mass in the US and manufactures at low cost in China. Even with the Honhai labor cost increases it will maintain very attractive margins. Culturally it's products are sought across national barriers. It has a pipeline of products that are consumer friendly, something that is under estimated with aging demographics world wide. It's competition just does not seem to understand the concept of an integrated software/hardware product.

If there is a stock to buy this is it.

Tue, 06/08/2010 - 11:05 | 401572 Brett in Manhattan
Brett in Manhattan's picture

This sounds remarkably similar to all the $900 a share forecasts for Google when the stock was at $750.

Let me guess. This is different.

Tue, 06/08/2010 - 10:39 | 401512 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Apple is in a bubble.

Tue, 06/08/2010 - 11:09 | 401584 Rogerwilco
Rogerwilco's picture

All assets are going to get whacked, and AAPL will not be immune in the next 24 months. That said, they are going to come back faster and stronger because Jobs has assembled a monster lineup of talent in logistics, finance, marketing, and tech. No other tech company even comes close.

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