Who can forget that time in February 2005 when Apple‘s (NASDAQ:AAPL) stock price was abruptly cut in half? One Friday afternoon, the stock is quietly trading just shy of $90 a share. Come Monday morning, it opens at $44 a share. And there wasn’t even any news over the weekend to suggest the company’s financials warranted such a dramatic change in the stock price.
OK, I suspect pretty much everyone but Apple’s investor relations department has forgotten that weekend, because the change in Apple’s stock price was caused by a garden-variety stock split. But I bring it up because it highlights how silly it is to obsess over something that can be as randomly determined as the price per share of a stock. Because it’s dependent in good part on a number of factors, such as how many shares a company decides to leave outstanding.
However, people clearly do love to obsess over Apple’s stock price, and not just the shareholders. We saw it last Thursday when Apple’s share price of $633 surpassed Google‘s (NASDAQ:GOOG) price-per-share figure for the first time. The first time ever!
But nobody got worked up about the number of shares outstanding for both companies (932.4 million for Apple, 325.1 million for Google, for anyone counting). Which means, as Fortune pointed out, Apple’s worth surpassed Google’s a long time ago.
And, of course, we saw it earlier last week when two analysts suggested what struck some market observers as the unthinkable: that Apple would reach $1,000 a share. Something about having a lot of zeros in a number muddles people’s thinking — as the paranoia over the Millennium bug showed.
One of those analysts, Gene Munster of Piper Jaffray, offered an argument for a $1,000 price target that, whether it proves true or not, seems well reasoned. Munster saw Apple reaching that magic number by the end of 2014 (within the coming year, the standard time range for Wall Street price targets, his target is $910).
Apple has risen 56% so far this year, against a 7% rise in the Dow. It trades at 18 times its historical earnings. Munster reckoned that Apple’s earnings per share in 2014 would reach $65, and a $1,000 share price would value it at 15 times those earnings. Considering that the consensus of analysts is that Apple’s EPS will reach $44 this fiscal year and $50 in fiscal 2015, $65 in 2014 doesn’t seem outrageous at all.
The other analyst, Brian White at Topeka Securities, has a flair for the dramatic. In a moment of Spinal Tap-like one-upmanship, he put a $1,001 target on Apple (at his previous firm, White had a $666 target on Apple). And he sees Apple reaching that level not in 2014, but in the next 12 months.
Even considering the iPad 3, the expected iPhone 5, a new generation of Macbook Pros and perhaps an Apple TV — all released this year — it’s tough to believe that a rational investor would pay $1,000 a share for Apple in the next 12 months. But the key word in that statement is “rational.”
In the early days of the dot-com bubble, wild price targets became self-fulfilling prophecies. There was the infamous $400 target on Amazon, and the $1,000 target on Qualcomm, which caused both stocks to surge briefly before they both crashed. Both calls came when investors were willing to abandon fundamental analysis and rational investing.
Apple’s stock rose 6% last week — hardly a surge, more like a typical week for Apple these days. So, at least investors aren’t getting caught up in the obsession over large numbers, even if some analysts are: White also predicted Apple would reach $1 trillion in revenue in the next decade. Which is just silly. Given enough time, any company that doesn’t go out of business will see $1 trillion in revenue.
As for the $1,000 targets, if Apple wanted to get there sooner, it could buy back a lot more of its shares. Or if it wants all the chatter to end, it can do something even more sensible: Split the stock again. Then its share price will fall back to $500. And at the end of the day, it won’t make much difference to investors.
As of this writing, Kevin Kelleher did not hold a position in any of securities mentioned here.