AAPL: To Buy and To Hold

Apple Inc (AAPL) shares have hit an all-time high of $600.01/ share (before closing for the day at $585.56/ share), giving the company a $545 billion valuation, making it the largest company in the world in terms of market capitalization. This happened right after the first batch of “the new iPad” was sold in Australia (from telecom company Telstra’s stores); soon to be followed by sales in Japan, Germany and the US, from retailers like WalMart, Best Buy & Radio Shack apart from Apple’s own Apple Stores.

The company shares reached $500/ share only a month back and the share price has jumped 44% this year alone.

Apple could be valued even higher, according to Morgan Stanley Analyst Ms. Kathryn Huberty, who revised her target price from $515 to $720, predicting that the company would go to $960 (or higher) on a $80 Earnings Per Share (EPS) in 2013. This is based on a Price-Earning Ratio (P/E) of 12, which is at the lower end of Apple’s historical forward P/E (currently at approx. 17). Morgan Stanley is not the only firm revising their prices upwards, earlier Piper Jaffray and recently OppenheimerUBS also have revised their target prices for AAPL. I am sure, others institutions will soon follow suit. IF Ms. Huberty’s price predictions for 2013 come true, that would give Apple Inc. a market valuation to the tune of a mythical $1 trillion!

Meanwhile, news of Apple declaring dividends have been floating around Wall Street, fueled, in part, by CEO Tim Cook’s statement implying Apple officials are in “active discussions” about what to do with the company’s cash and investments, and the amount is “more than we need to run a company”, further adding, “we spend a lot, but we still have a lot”. Moreover, analysts at Bloomberg as well as Morgan Stanley, JPMorgan Chase & Co., Mizuho Securities USA Inc. and Sterne Agee & Leach Inc. also predict that Apple will start paying dividends some time soon. They cite Apple burgeoning cash balance of $97.6 billion, institutional investor benefits, new dividend-seeking investors’ investment in Apple and this boosting Apple share prices even higher as reasons for dividends payment. Also, they believe peer pressure from dividend-paying tech companies Microsoft and Intel would compel Apple to pay.

On the other hand, a number of analysts and experts have voiced their opposition to Apple implementing dividends or even share buybacks. They advance classical dividend irrelevance, clientele effect & capital gains vs. dividend taxes differential (soon to become higher for dividends compared to capital gains in the US) reasons, apart from the more relevant reason that Apple can, in all likelihood, invest at higher returns than the investors can. Also, a strong argument against share buybacks has been made in the form of sending the wrong signal to the market, regarding Apple’s own estimation of its growth opportunities.

Finally, a smart piece on using options on Apple shares to replicate dividends (NoteFinance buffs must follow this link) provides an elegant, albeit daunting solution. It effectively requires writing covered calls on Apple shares, on the hope that the smartly chosen strike price does not materialize, while making profit on the premia. In case the price does materialize, the shares will unfortunately be called away; however, then one has to wait for the downturn to long AAPL, which on a day-to-day basis is almost inevitable.

Fundamentals notwithstanding, for the technical analysts (chartist) at heart, I leave with you two cautionary tales. The first one takes the red candlesticks (where, closing price < opening price) as indication of a top as a prelude to a downturn, while the second has a “resistance level” extended from historic prices of Apple shares as signaling a downward turn. I wouldn’t put too much into either, nonetheless makes for amusing eyeballing!

Apple is so far ahead of both the competition and the curve, that even after they have slowed down, the market is still highly receptive to their offerings. Case in point, both the iPhone 4S and the new iPad are mere improvements on their past devices, rather than pure innovation (as was their usual new product offerings), yet the consumers are lapping the products up. As a consequence, I firmly believe, Apple is here to stay, to grow, dividends and buybacks be damned!

The myth might soon come true.

Disclaimer: The author has no shareholding in Apple. But he wishes he could afford to Long (and Hold) AAPL now!

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