Apple (AAPL), the iPad 3 and the $500 Billion Question

Shares of Apple (AAPL: Charts, News), the largest company in the world, have risen 30% since the beginning of 2012, topping out its market cap at over $500 billion. Despite the loss of iconic visionary Steve Jobs last October, the world's most popular tech company's product line will remain strong for years to come, with three main products - the iPhone, iPad, and Mac - forming the core of its business with seasonal and annual refreshes.

This Wednesday, CEO Tim Cook unveiled Apple's next iPad, the iPad 3, which boasts a quad-core processor, improved cameras and a screen resolution higher than any HD television or monitor on the market. This makes it twice as powerful as the iPad 2, which will be discounted by $100, and more powerful than many modern PCs and consoles.

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Apple's new tablet is likely to be a hit, but investors are having their doubts about the stock's sustainability. In history, only five companies have ever crossed the $500 billion threshold Intel (INTC: Charts, News), Cisco (CSCO: Charts, News), General Electric (GE: Charts, News), Microsoft (MSFT: Charts, News) and Exxon (XOM: Charts, News). None of those companies managed to hold that level, which is seen by many as a "terminal velocity" for stock growth. Intel, Cisco, Microsoft and General Electric were pushed to that level by the buying frenzy that preceded that dot-com bust of 2000. During that time, those stocks were so overbought that their P/E multiples hovered near 100. By comparison, Apple trades with a healthy trailing P/E of 15 and an even more lucrative forward P/E of 11. Apple is clearly not Intel in August 2000, as some bearish analysts claim. In fact, to even match Intel's valuation in 2000, based on its current multiple, Apple would have to be valued at $5 trillion, with shares trading at $5,000 per share.

Apple is also flush with cash, with a $98 billion cash hoard that could nearly buy the entirety of McDonald's (MCD: Charts, News) in a single payment. That's $100 of cash per share. Bullish analysts believe that number could rise to $150 by the end of the year. Apple's latest numbers support the belief that its fortune will only increase in 2012. In the most recent quarter, the company's iPhone sales rose 128% from the previous year, iPads gained 111% and Macs were up 26%. The only blemish was its 21% decline in iPod sales, which was more than offset by Apple's other three main product lines. The larger iPod Touch and iPhone have slowly evolved into a single product, while the iPod Shuffle and Nano remain the company's niche choice for casual consumers. Wall Street analysts believe that magic will continue - out of 54 S&P analysts, only four rated Apple as a "hold" and one as a "sell".

Apple is also expected to announce a disruptive TV technology sometime this year. Apple watchers have already speculated wildly, claiming that an "iTV" would look like a giant iPad, run on Siri and replace traditional TV sets. Others have claimed that it would merely be an upgrade of its $99 Apple TV. No one knows for sure, but Apple has had a stunning record of disrupting markets that it did not create - such as smartphones and tablet computers. The iPhone 5 is also expected to be released in the fall, which most analysts believe will further solidify its market lead over Nokia (NOK: Charts, News) and Research in Motion (RIMM: Charts, News). Google's (GOOG: Charts, News) fragmented "Android Army" remains Apple's top threat, with South Korean giant Samsung remaining its top priority, both in the marketplace and in the courtrooms, where the two companies have sued and counter-sued each other over the past year due to alleged patent infringements.

However, with great growth comes great expectations. Repeatedly beating earnings estimates and posting strong guidance often raises the bar too high. Growth leaders such as Google (GOOG: Charts, News) and Baidu (BIDU: Charts, News) have learned that shares are rewarded lightly when expectations are beat, but are punished severely when missed. Apple will have to keep impressing investors and maintain pitch perfect guidance if it wants its shares to grow steadily. Anything less than perfect can cause shares to plummet and volatility to return. Apple may still be a great long-term investment, but investors need to have the stomach for some big swings, since the stock is undoubtedly a favorite among day and swing traders.

Other News About AAPL
Apple market capitalization exceeds $500-billion mark
Apple shares venture into "no man's land" - can they stay there?
iPad 3 launch: What you need to know about the new iPad
All the technical details of the iPad 3. Other Stocks in the News
5-Star Stocks Poised to Pop: Intel
Is Intel finally ready for a comeback?
Google Play Exemplifies How Cloud Is King
How does Google's new cloud app measure up to its competitors?

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Published on Mar 9, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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