Take Another Bite At The Apple: Shares Should Reach $800

Forbes.com, Fall, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

Have Apple (AAPL) shares topped out? Is it time to take the money and run? Perhaps even short Apple?

Absolutely not: I think Apple share will surpass $800 by the end of 2013, a 35% gain from current levels.

There are several contributing factors to this very bullish outlook. I believe companies that increase revenues and maintain or increase their profit margins will significantly outperform the market in 2013.

Apple has already begun to demonstrate its ability to do so. On Monday November 5, Apple announced that in the first weekend available, it sold more than 3 million iPad minis, doubling the previous record of 1.5 million third generation iPad sales set a few months ago.

Sales of the iPhone 5 and Mac computers are also strong. All in, look for revenues to rise to $196 billion in 2013, a 25% increase from this year. Cash-flow from operations is also expected to rise at a similar pace, all the while price-to-earnings and price-to-sales ratios are dropping–2013 consensus P/E for Apple stands at 11.5.

Apple shares have sold off in recent weeks on concerns that the “law of large numbers” will rein in the companies’ growth rate, and that competitive pressures will impact sales. To be sure, these are valid concerns, but as the chart below shows, this past weekend’s iPad mini sales alone outpace Amazon’s entire Q3 tablet shipments.

The law of large numbers will inevitably apply to Apple, but for the time being, I don’t see an issue here. Revenues are expected to grow from $156 billion in 2012 to $196 billion in 2013 and $230 billion in 2014; while margins are expected to remain steady and cash and equivalents are likely to rise above $135 billion by 2014.

There is no question in my mind that Apple shares will remain volatile and stomach churning for some investors. Nonetheless, I expect new highs, above the $800 level, to be set sometime next year.