With new iPhone in the works, Apple shares headed toward $200

PHOTO: A customer views an iPhone 7 smartphone at an Apple Inc. store in New York, Sept. 16, 2016. PlayJohn Taggart/Bloomberg via Getty Images
WATCH Apple suffers an unexpected decline in iPhone sales

In the 1994 movie “Forrest Gump,” the hapless hero learns that his friend Lt. Dan invested their Bubba Gump fortune in shares of Apple, making them both very wealthy men.

Though Apple stock has long been more reliable than an undistinguished box of chocolates, it was up and down as recently as a year ago. The price per share hit a peak of $134 in the summer of 2015, and was down to $90 in the summer of 2016.

Apple was trading in the $150s this week, having been on a tear all year. Shares of the world’s largest company, now collectively worth more than $800 billion, are up about 32 percent this year. There is no company anywhere near the size of Apple that has done that well. By contrast, Amazon and Google are up 28 percent and 21 percent this year, respectively.

Historically, Apple’s price/earnings ratio has averaged about 20 times earnings (it’s currently at 18 times). Using 20 times earnings as a price target, the stock could hit $200 per share in a year.

Analysts’ projections are sanguine. The average rating of the 46 analysts covering Apple is a buy and for 35 of them, a strong buy. About half of Apple analysts have increased their earnings for this year and next.

The strong growth is mainly because of the success of the iPhone 7, the most popular smartphone on the planet. Apple sold 21.5 million iPhone 7 units in the first quarter of this year, capturing a global market share of 6 percent. That percentage may not sound like a lot, but it actually is, considering the plethora of phones available, especially in China, the world’s largest market, where less expensive models dominate.

With the 7 model taking the more affluent parts of the world by storm, all eyes are on the next iPhone iteration (presumably the iPhone 8), expected to be released in the fall. Sure, Apple gets points for general sexiness (people still talk about the possible viability of Apple TV and the company is getting in on the self-driving car mania), but the relevant news driving the company’s fortunes is all about the phones.

Some analysts are so optimistic about the iPhone 8’s success that they talk about the company’s value potentially ascending in the next 12 or 18 months to the $1 trillion mark.

Why are they so confident that the new model will succeed? The reasons include:

• Customer loyalty. About 92 percent of buyers of the new phone are expected to be repeat customers, based on projections from historical buying patterns.

• Success thus far in the Indian market, where smartphones are an aspirational product for most (priced at roughly half of the average resident’s annual salary) and a new status symbol for the affluent. Apple is well positioned on the subcontinent amid competition for high-end consumers, and is taking market share from Samsung there. Samsung took 23 percent of this market last month, but Apple eclipsed this with 66 percent. The company has plans to open Apple stores there.

• Increased domestic consumer confidence and wage confidence, which means Americans might be more disposed to upgrade their 4s and 5s to the new model than they would have been a year or two ago.

• Apple's cash reserve ($250 billion) means the company can spend whatever it needs to remain competitive and still have plenty to buy back shares to massage earnings. (Counterbalancing this is the reality that about $230 billion of this cash hoard is languishing overseas, awaiting a congressionally signaled repatriation holiday for taxes before it comes home. Even kind tax treatment by Congress would lower earnings a bit.)

What could go wrong after the next phone’s roll-out? Well, given the reliability of repeat business, going “wrong” for Apple is a highly relative term. But if the sales aren’t gangbusters, it would be because loyal customers may not have the upgrade fervor they once did — in part because the power difference from one model to the next isn’t as great as it once was.

Or, Apple’s buoyant boat could go down with others in a subsiding tide if there’s a market pullback, which hasn’t occurred since early 2016. But the company is performing so well that it could sustain a 20-point event and still be in a technical uptrend. And regardless, for companies with good forward prospects, market pullbacks usually just signal buying opportunities.

A really ripping roll-out of the new phone would depend to some extent on enticing enough Samsung users to change brands. Samsung phones’ pesky problem of batteries catching fire has naturally hurt the company and helped Apple competitively. And even if Samsung has sufficiently rehabilitated its brand, anticipated sexy new features of the iPhone 8 (including anticipated display technology known as OLED) may be hard for some Samsung users to resist.

However, the price may be resistible. Some analysts are predicting a price point of around $1,000 for the new model, which could test the allegiance of all but the best-heeled iPhone cult followers—the kind who fawn in web postings about the allure of new features.

Of course, to the extent that the cult Apple loyalists—and more level-headed aficionados—must have the new iPhone, the breathless price point may just mean more cash for Apple, as its phones deliver a far higher profit margin than its competitors’.

Overall, barring a disastrous new-model roll-out, the ascendancy of Apple stock will likely continue. Of course, that doesn’t mean the company will necessarily remain a good investment, particularly if the share price rises too high relative to earnings and growth prospect begin to dim.

But Apple’s investment profile seems bright now, and optimistic projections for the next 12 or 18 months seem justified—unless publicity about them (including this article) drives the price so high that the stock becomes radioactive to institutional investors wary about GARP (growth at a reasonable price). If that happens, there could be lots of selling, shorting and resulting volatility—and Apple could return to the organic mortal state it was in a year ago. No company has a guaranteed future. This is, after all, the stock market.

Disclosure: Neither Dave Sheaff Gilreath nor members of his family own shares of Apple or Samsung.

Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry.

Any opinions expressed in this column are solely those of the author.