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Catalysts Driving Apple to $800 by Year End; Psst Facebook Does Not Have Them

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I have published on (and bought)  Apple all the way down in the $590s, $580s and $560s.  I bought more Apple at $532.  Buying Apple on unexplained stock dips (ie, $85 in 2008) has proven fortuitous.  I believe that today, with Apple in the $530-$540s, represents the same opportunity.  Zig and build a position in Apple, while the rest of the (media) world is zagging and focused on Facebook.  What does Apple have going for it?

China:  Revenues in China were up over three-fold year-over-year to $7.9B, representing the biggest quarter for Apple in China in the company’s history.  Apple has just four stores on mainland China and one in Hong Kong.   And, so far, the iPad is not yet available in China.  The potential for China remains large with the growth in the sheer size of China’s middle class.  The middle class in Asia Pacific is already larger than that of the US:  525M vs 338M.  And by 2020, Asia Pacific’s will grow by three times while the US will remain roughly the same, resulting in enormous purchasing power.   It is no secret that the Chinese market likes branded, Western goods, with purchasing in China driving higher end apparel, jewelry and auto sales.  Apple will benefit, as already demonstrated in the last quarter.

Facebook faces challenges in China with decelerating adoption.

Enterprise:  Historically, the enterprise has been a difficult market for Apple, with the exception of graphics design departments.  IT departments supported WinTel…that is, until the iPhone came along.  iPhone’s rapid adoption by enterprise-insiders forced IT departments to follow suit, much like the Palm Pilot did way back.  But the adoption within enterprise of the iPhone pales in comparison to the iPad.  As of the last earnings report, the iPad had 95% support within the Fortune 500 and 75% within the Global 500.  The iPad has had the strongest adoption into the enterprise of any product, because it has features that are compelling to its users.

Most enterprises frown of use of Facebook at work.

Mobile & Revenue:  Apple has over 250M iTunes accounts.  Over 25 Billion apps have been downloaded in less than four years.  iCloud installed base reached 125M at end of last quarter, since launch in October.  Over 275M iPhones and iPads have been sold.  iPhone and iPad related revenues and services exceeded $29B in the last quarter.  Apple can monetize mobile.

Facebook has 483 mobile users and its growth is increasing.  However, Facebook hasn’t figured out how to monetize mobile, nor has any other ad-based revenue model.

Products:  Forrester estimates that 375M tablets will be sold in 2016 (vs 56 M in 2011), or a 6-fold increase.  Of these, 53% of the installed base, or the products being used, is expected to be Apple.  Similar to the above mobile argument, Apple makes money on product sales, and ongoing app sales.  Moreover, Apple also makes money on software for the iPad (ie iWorks) and accessories.

Earnings Momentum:  The second fiscal quarter has seasonally been Apple’s weakest.  This is the quarter that just reported with the second highest earnings of any quarter in history.   Apple made $12.30 per share.

Facebook just reported its second quarter and earnings went down.  Moreover, analysts are estimating that Facebook will earn $2 per share in 2013.

Disruptive Technology:  Apple gave us iPods, iPhones, iPads and flash-based memory laptops.  Apple disrupted how the music industry operates with iTunes and how the carrier industry operated with iPhones and Apps.  Apple has created its own “social network” of Apple users through Ping on iTunes and iMessage on the iPhone (a private, Apple-based text service).

Facebook brought us Social Networking enabling us to stay connected with our friends and family.  Ultimately, though, it is dependent upon an ad-revenue model that is still being developed for its largest growth segment, mobile.  This could be construed as reminiscent of the “eyeball” days when companies were valued on the number of eyeballs that came to the site.  It did not play out well.

Increased Penetration:  Apple sells iPods, iPhones, iPads, Macs, as well as accessories and software.  The average Apple device owner has 2.6 devices.  The “Halo Effect” is alive and well that once one buys one Apple product, the user experience is so compelling that one buys another device.  There are rumors of an Apple tv by the holiday season, adding yet another must-have product to the distorted reality of Apple products.

Facebook is approaching market saturation with its installed base.  Moreover, it sells ads and can generate transaction revenue through third parties on its site.  It does not the same type of opportunity to sell more products into the market.

Valuation:  Apple is trading at 8x forward earnings; Facebook priced at 50x forward earnings, 20x revenues!   Most analysts have between a $750 to $1000 price target on Apple, representing a 62% appreciation from the midpoint.  This is not to say that Facebook and Apple are mutually exclusive.  It is to say, look at all the hype around Facebook, and sit back an think about sustainable earnings potential and how that may translate into stock appreciation.  Depending upon the range that Facebook opens and trades today, it may be a challenge for Facebook to provide the reward-risk opportunity that Apple does.