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April 16, 2009

Apple Still Has Upside

Apple reports its March quarter next week. The stock sits near its 2009 high, up about 40%. Each time the stock has pulled back buyers show up and take it right back up.

Recently, the chatter on the street has been bullish as iPhone and Mac demand appears to be holding up better than expected. Apple seems certain to report a quarter better than its guidance. This is widely expected and analysts are ahead of guidance. Estimate increases are far outpacing estimate cuts.

Investors have been worried that Apple's premium priced products would falter in the tough economic environment. This does not seem to be the case, as market share gains continue to offset macroeconomic weakness.

Other factors helping the stock are Research in Motion's strong earnings report and less worry about the future of Apple without Steve Jobs. I think many investors are missing the big picture on smartphones – their penetration is rising so fast in the U.S. that the market is healthy enough to easily accommodate Apple and RIMM.

As for Jobs, I've noted before that Apple is at a point in its product lifecycle where changes are evolutionary. Even a move to a netbook is not much more than a larger form factor iPod touch. This is an ideal time for Jobs to be sidelined as it is even more about operational execution than usual. Furthermore, operational execution is massively underappreciated by Apple observers who focus on product rumors, unit volumes, and average selling prices. Those things are important but have always been in the stock price equation. Operational execution was not in the stock price. It is also Tim Cook's, the heir apparent to Jobs, strength so the timing for the stock is even better.

If the economy recovers into 2010, Apple shares could rise significantly as estimates begin to move up. The current 2010 consensus is $5.94 vs. $5.10 in 2009. If 2010 goes comfortably north of $6, I could see the stock nearing $150 later this year based on a 20 P-E and giving credit for what will be more than $30 in cash presently earning just 1%.

I'll be back next week with a detailed preview of the quarter but remember the stock will react to guidance much more than the quarterly results.

Apple is widely held by clients of Northlake Capital Management, including in my personal accounts.

Posted by Steve Birenberg at April 16, 2009 10:08 AM in AAPL