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Apple Must Split Its Stock

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With price targets on Apple stock soaring to $1,000/share within the next two years, Apple needs to split its stock to make it “affordable” to most investors.

Today, Gene Munster of Piper Jaffray, arguably the most respected Wall Street Analyst on Apple, upped his price target to $1,000 by 2014, joining the ranks of a couple others who upped the ante over the past couple of weeks.   The valuation, on a Price-Earnings to Growth basis is reasonable.  Today, the earnings estimates for FY2014 are $58.09, resulting in a P/E (excluding cash) of 15.4x.  Growth based on current earnings estimates from FY2013 to FY 2014 is over 16%.  And, we know from experience over the past 25 quarters, that Apple, barring one quarter, always exceeds estimates.  And, we also know that earnings estimates increase over time.  Over the past month, estimates for Apple’s earnings in FY2013 have already gone up 5%.

Thus, on a valuation basis, a price target of $1,000 within 18 to 24 months is reasonable.  However, from the psychology point of view, a stock that costs $1,000, regardless of its valuation, is considered “expensive” by most, that is, retail investors.  Retail investors generally have sticker shock on stocks valued over $25/share, even if the stock were trading at far less attractive valuation metrics.

Many investors can intellectually understand that a $1,000 earning $100 is no different than 50 $20 stocks earning $2, but cannot get over the hurdle of paying $1,000 for the share of stock.  They may understand the argument; then they buy Nokia at $5.47, because it is “cheaper”.  But, Nokia is not less expensive on a valuation basis.  Nokia trades at 13.7x FY2014 earnings on growth of 5%.  On a Price Earnings to Growth basis, that is 2.74x compared to Apple at 0.9x.  In theory, stocks with a Price Earnings to Growth under 1.0 are attractive, those over 1.0 are overvalued.  And, stepping back and looking at the growth prospects of the two companies, wouldn’t you rather own Apple?

In my opinion, Apple’s high price per share is making the stock unattractive for retail investors.  Today, Apple’s institutional ownership is 69%.  This is higher than other popular stocks such as Disney (DIS, 65.8%), GE (52.8%), and AT&T (T, 55.6%), but not out of line.  However, should Apple split its stock, it could open up to retail investors, who by the way, are their consumers.

Moreover, by opening up to a new cadre of buyers, I believe it would release some upside on the stock and potentially reduce volatility.   Institutional investors fall generally into two categories:  hedge funds and traditional money managers.  Hedge funds generally set their own charter so they can be concentrated or not, depending upon their own guidelines.  Traditional money managers, on the other hand, generally are limited in the amount of any one stock they can own.  They can’t be too concentrated or overextended in one stock.  So, perversely, as the stock appreciates and becomes a larger percentage of their portfolio, they have to sell it to keep it or below some set standard, say 5%.  So, again, perversely, as the stock goes up, these investors must sell some of their stock tempering potentially justified upside movement in the stock.

Retail investors, on the other hand, can buy and hold, and, for better or worse, generally do so.  And retail investors generally do not have their stock portfolios on their screens all day, monitoring stock movements.  Thus, these investors tend to hold through thick and thin, providing stability to a stock’s potential volatility.

I join the ranks of analysts who view Apple as a $1,000 stock during 2014.  That is a 62% upside from today’s price of $618, making Apple an attractive investment despite its psychologically-challenging absolute price per share.  If Apple would split its stock, it could help its very consumers who have propelled its growth buy its stock and, in turn, benefit from a more diverse and stable share ownership base, and likely see appreciation sooner.