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Apple At $1,650 Looking Like A Pipe Dream

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I have been a mega bull on Apple (AAPL) ever since recommending a buy in the stock when it was $131. I rely heavily on rigorously analytical, probability-based algorithms.   I was writing about the high probability of Apple stock reaching $1,000 long before Apple began it's manic run from below $400 earlier this year.

Lately, a race had developed between analysts to see who had the guts to increase their target on Apple to top the other guy’s target. I have previously written that I find this race troubling.  A reader may ask, “What is the difference between your $1,000 and other analysts' $1,001 or $1,650?” (Please see: The Road To $1,650 A Share: How Apple Can Keep Growing)

A large number of recent pronouncements on Apple have been very definitive.  ‘Apple will hit $1650’ or ‘Apple will go to $1001’ are examples to illustrate the point.  In my book the word ‘will’ connotates a definitiveness that I have never seen occur in the stock market.

In their eagerness to beat their competition with a higher target, sometimes analysts fail to see the forest for the trees.  Let us do a qualitative analysis.  In other words, to keep the analysis easily understandable, this article will simply approximate the major numbers and ignore the minor numbers.

As an example the $1650 target on Apple is based on 2.5 time sales.  Apple has 941,572,000 shares outstanding on a diluted basis.  At $1650 per share the market value of the company will be $1.55 trillion.  At 2.5 time sales, this means Apple sales will reach $621.44 billion.

Computers, iPhones, and iPads constitute 86.69% of Apple sales.  Models of some analysts assume 83% of future revenues will be from iPhones and iPads.

Looking at demographics, I  conclude that 250 million potential regular customers is the top number for MACs, iPhones, and iPads.  This means that each potential customer will buy from Apple about $2500 of goods and services every year.

You be the judge.  Can you see Apple selling to 100% of its potential customers and each one of those customers spending about $2500 each and every year on Apple products and services?  This is the forest.  The trees are analysts’ imaginations running wild and calculating numbers device by device without regards to the boundaries imposed by the big picture.

Apple fans will certainly try to poke holes in this simple analysis.  Such attempts will simply point to the absurdity of some of the Apple stock price models that are out there.

As an example, Apple fans may contend that Apple already has 250 million credit card numbers from its customers, so the potential number of customers is higher than the number used in this article.  A vast majority of the credit cards Apple has on file are from iTunes.  These are low-dollar purchases.  For the sake of simplicity I have excluded iPod, iTunes, peripheral, and software sales from the above analysis as they respectively constitute only 5.46%, 4.37%, 1.65%, and 1.82% of revenues.  When the relatively small amount of sales from these items is included in the analysis, the conclusion does not change.

Pounding the table with certainty about ever higher targets brings business to analysts, talking heads, newsletter writers, and media outlets.  It is certainly good for them, but can work to the detriment of investors who are trying to generate decent returns.

My methodology focuses on risk adjusted returns, i.e., achieving returns higher than those commensurate with risk.  I always give risk a higher priority over reward.

If you own Apple, you should be selling some of your position as the stock goes higher.

Talking heads always come up with reasons after the fact.  The latest swoon in Apple stock is no different.  The reasons for the swoon being advanced include the potential reduction of carrier subsidies, iPad estimates out of control, and rumors of a mini iPad with lower gross margins.

The real reason for the swoon is that the stock is over-owned, sentiment is too bullish, and there are jitters over upcoming earnings. Plus, don't laugh off the idea that people need money to pay taxes and might just be lightening up on a big winner.

About Me: I am an engineer and nuclear physicist by background. I have founded two Inc. 500 companies, and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report, which publishes four newsletters to help investors profit from change. Please feel free to write me at Nigam@TheAroraReport.com. You can follow me here and get email notification when I publish a new article.

Full disclosure: Subscribers to The Arora Report are long Apple from $131 and have taken partial profits at $360, $525 and $629.