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Apple Shares (AAPL) Still a Good Buy at $300

There's still plenty of growth left for AAPL


Apple Inc. (NASDAQ: AAPL) is the epitome of a game-changing company. They turn out one successful product after another, and yet, they are a pretty tight-lipped operation. That’s why I always look forward to their earnings reports, and the next one — due out Monday after the close — is no exception.

Analysts across the Street share my optimism. In fact, citing “strong sales momentum” for the iPad and iPhone, J.P. Morgan raised its revenue estimates for Apple’s fiscal fourth quarter last week from $18.13 billion to $18.71 billion, reiterating the company’s price target of $400 by December 2011.

J.P. Morgan’s positive revision of its revenue estimates extended out to the end of Apple’s 2011 fiscal year, with an estimated revenue of $81.53 billion up from a previous estimate of $78.84 billion. The report emphasized there’s “plenty of growth” left for Apple, and I agree. The sales trends have been impressive, and I like to make my own informal checks by talking to people on the street (Main Street, not Wall Street). I chat with people all the time, including in Apple stores, and everything I heard led me to expect that the iPhone and iPad were still gaining momentum all the way through the end of Apple’s fiscal fourth quarter on September 30.

By the way, if you’re worried about competitors launching iPad tablet copycats, don’t be. Nothing could even come close to the iPad — at least not yet. I have three myself! Apple has the content, the apps and the first-mover advantage, all of which will be hard to overcome for would-be competitors. And if you think about it, iPad sales could actually help sales of Macs. Once you own an iPad, the next logical step is to buy a Mac and leave the PC for good.

As you may have seen, AAPL crossed over $300 for the first time this week. I now also believe that Apple shares will hit $400, so I am raising my target.

There are additional catalysts beyond the iPad that I expect to drive the stock higher. The first is the potential release of an iPhone 4 through Verizon Communications Inc. (NYSE: VZ), which has more subscribers than any other U.S. wireless provider. While still only a rumor, there have been reliable reports from The New York Times and  The Wall Street Journal that make an Apple/Verizon partnership appear to be imminent for the first quarter of 2011. Some analysts have estimated that a Verizon iPhone could boost earnings $2 per share next year. I and many others are eager to see what specific information about this prospective deal might be included in AAPL’s earnings announcement on Monday.

Another big reason I’m lifting my target is the impact of a China Telecom Corporation Limited (NYSE: CHA) iPhone in 2011. The Chinese market potential is immense and enough to warrant even a Blackberry loyalist (like me) to double down on my investment in AAPL.

It is also important to keep in mind gross margins. I am betting that they will now return to the 40% range relatively soon. Street analysts are inching up their estimates and are currently in the area of 39%. If we see a crossover to 40% or at least guidance that we are heading there, the stock will likely move up even further. Declines in component pricing, especially HDD, DRAM and NAND flash, are expected, and that may be able to counteract the hit from the “antenna-gate” fiasco that lead Apple to offer free iPhone 4 bumpers.

Given my revised target of $400 for Apple shares and given the stock’s momentum, I’m raising the buy limit for new money to $300. I do recommend you get in before earnings are announced on Monday if at all possible.

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