{"id":68660,"date":"2015-02-26T06:08:47","date_gmt":"2015-02-26T11:08:47","guid":{"rendered":"http:\/\/countingpips.com\/?p=68660"},"modified":"2015-02-26T06:32:35","modified_gmt":"2015-02-26T11:32:35","slug":"three-catalysts-driving-apple-to-1-trillion","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/02\/three-catalysts-driving-apple-to-1-trillion\/","title":{"rendered":"Three Catalysts Driving Apple to $1 Trillion"},"content":{"rendered":"
February 26, 2015<\/div>
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By WallStreetDaily.com<\/span><\/a> \"Apple:<\/p>\n

By Louis Basenese<\/a>, Chief Technology Analyst <\/em><\/p>\n

Add another record to Apple\u2019s<\/strong> (AAPL<\/a>) list.<\/p>\n

Shortly after announcing the world\u2019s largest quarterly profit of $18 billion, it\u2019s now the world\u2019s first $700-billion company.<\/p>\n

Its market cap sits at $763 billion \u2013 greater than the GDP of all but 23 countries in the world, based on CIA estimates.<\/p>\n

It\u2019s an incredible mark, considering Apple was flirting with financial ruin in the late 1990s.<\/p>

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But even after the record-setting run, billionaire shareholder, Carl Icahn, believes the company is actually worth way more<\/em> \u2013 $216 per share, or about $1.3 trillion, to be exact.<\/p>\n

While I don\u2019t agree with Mr. Icahn\u2019s math, I do believe Apple is a \u201cmust-own\u201d stock \u2013 and is destined to become the world\u2019s first trillion-dollar company\u2026 under three conditions\u2026<\/p>\n

Does Apple Really<\/em> Trade at a Discount?<\/h2>\n

I\u2019ve been banging the table to buy Apple shares ever since January 2014<\/a>. Back then, the stock traded at a split-adjusted price of roughly $70.<\/p>\n

Fast-forward to today\u2026 and it\u2019s rocketed up by nearly 90%. That makes it a bit harder for me to be as optimistic.<\/p>\n

As for Mr. Icahn? Not so much.<\/p>\n

His $216 price target implies another 63% upside from here. And he explained his rationale in a recent open letter<\/a> to Twitter<\/strong> (TWTR<\/a>) followers:<\/p>\n

\u201cIt seems to us that the market is somehow missing a very basic principle of valuation: When a company\u2019s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P\/E multiple.\u201d<\/em><\/p>\n

While his logic is sound, there\u2019s a minor problem.<\/p>\n

Apple has grown faster than the market for years.<\/em> Yet the stock has seldom commanded a premium market multiple.<\/p>\n

In fact, since 2011, it\u2019s actually traded at an average discount<\/em> of 20% to the S&P 500 P\/E ratio. And if we strip out Apple\u2019s cash, the discount is even more pronounced.<\/p>\n

What gives?<\/p>\n

Simply put, investors realize that Apple\u2019s colossal size makes it that much harder to move the earnings\u2019 needle. It\u2019s the law of large numbers at work. Accordingly, they\u2019ve assigned a discount <\/em>to the shares, not a premium.<\/em><\/p>\n

And I\u2019m afraid there\u2019s no valid reason for investors to suddenly start valuing the company differently, no matter how much Icahn tries to convince them otherwise.<\/p>\n

So how much is Apple reasonably worth, then?<\/p>\n

Three Key Drivers to $1 Trillion<\/h2>\n

I\u2019m with Barclays\u2019 analyst, Ben Reitzes, who says Apple\u2019s stock is easily worth $150 \u2013 15% higher than today.<\/p>\n

His calculations are based on the fact that Apple\u2019s enterprise-value-to-free-cash-flow ratio is cheaper than almost any other stock in the market.<\/p>\n

As Reitzes says, \u201cWe believe Apple can continue to nudge higher, despite its large market cap.\u201d<\/p>\n

But to reach the $1-trillion valuation, Apple needs to do more than \u201cnudge\u201d higher. It needs to shoot approximately 30% higher, to $172.<\/p>\n

And that\u2019s possible in the next 18 to 24 months because of three powerful catalysts\u2026<\/p>\n

Apple Catalyst #1: iPhone Sales<\/h2>\n

Apple blew the doors off all estimates last quarter, selling 74.5 million iPhones, versus expectations for 66 million.<\/p>\n

And the stage is set for the momentum to continue. Here\u2019s why\u2026<\/p>\n

Upgrades<\/strong>:<\/strong> Only 15% of consumers have upgraded to the new iPhone 6 or 6 Plus, according to Canaccord Genuity analyst, Michael Walkley. That means there are another 343.4 million potential upgrades still to come this year.<\/p>\n

Converts<\/strong>:<\/strong> Beyond upgrades, Apple is also gaining new converts. As Tim Cook noted, the majority of iPhones sold last quarter (about 85%) were to people who owned Android phones.<\/p>\n

Overseas Expansion<\/strong>:<\/strong> This is Apple\u2019s biggest sales potential. Consider:<\/p>\n