Apple Inc. (NASDAQ:AAPL) will split its stock seven to one on June 9, and analysts are preparing for the aftermath. Analyst Toni Sacconaghi updated his price target for Apple this week after the stock passed his previous $615 per share price target. His new target is $700 a share, but that goes to $100 a share after the stock split is complete.
Why Apple stock might soar
The analyst gave five main reasons he thinks Apple Inc. (NASDAQ:AAPL) stock has plenty of room to run. He notes that the company’s shares tend to outperform the broader market before it launches a new product. On average, the stock outperforms by around 11%. He predicts that Apple will launch two major new products this year: the rumored iWatch and of course a larger iPhone 6.
He also said it will be hard for “benchmark sensitive managers” to maintain “an active bet” against Apple Inc. (NASDAQ:AAPL) this year. After all, investors who focus on growth companies are rather light on the stock right now and probably won’t get much lighter. Third, he said the June 9 stock split will increase retail interest in Apple Inc. (NASDAQ:AAPL), thus making it easier for its stock price to increase. After all, the increase from $90 to $100 is easier to do than increasing from $625 to $600.
Fourth, he doesn’t think Apple Inc. (NASDAQ:AAPL) will allow itself to miss estimates in the first quarter under a new chief financial officer. He said Apple still has plenty of ways to ensure it doesn’t miss, like by buying back more of its stock.
And fifth, the analyst thinks Apple stock is still inexpensive when compared to other securities that are considered to be “more stable.” He notes that even if Apple hit $700 a share before the seven to one stock split, it would be trading at a 20% discount to International Business Machines Corp. (NYSE:IBM), Oracle Corporation (NYSE:ORCL) and Microsoft Corporation (NASDAQ:MSFT).
What about Apple in the long term?
Sacconaghi likes Apple Inc. (NASDAQ:AAPL)’s prospects for up to the next six months, but he doesn’t like it so much after that. He says it’s unclear whether the company can “sustainably increase its earnings over the next three to five years.” He cites maturity in smartphones and tablets—Apple’s two main end markets—as being big problems for the company. As a result, he expects the company’s gross margins to keep falling rather than improving.
In addition, he noted that the law of large numbers says that even if Apple Inc. (NASDAQ:AAPL) enters new product categories, it’s going to be difficult for them to impact the company in a significant way financially.
Apple, payments, and WWDC
In the more immediate future, Apple Inc. (NASDAQ:AAPL) could be getting into the payments industry, possibly as early as next week. In a separate report, another analyst said Apple has the potential to make a big splash in that industry, posing a big threat to other players. Analyst Victor Anthony of Topeka Capital said he thinks the company could challenge eBay Inc (NASDAQ:EBAY)’s PayPal—the dominant player in the market. As others have noted in the past, he said Apple has a massive database of 800 million credit cards in iTunes that it could use to build its own payments processing service.
Anthony believes Apple Inc. (NASDAQ:AAPL) could announce its entry into the payments business as early as next week at its annual Worldwide Developers’ Conference (WWDC).