Apple heading back to $700 days

In September 2012, Apple was hailed as Wall Street’s darling due to the stock’s impressive climb from about mid-$500’s to low-$700’s. However, after that speculation regarding Apple’s innovation drove the stock back to the $500-range.

As of Friday (July 25th), AAPL traded for $97.67, therefore when that number is multiplied by 7, the result is a price of $683.69. For those who have been aloof on Apple, the company announced a 7-for-1 stock split earlier this year,  and that is why I multiplied the stock price by 7.

Irrespective of that, there a few key factors that are allowing Apple’s stock to hit new all-time highs. Of course, positive investor sentiment, coupled with the recent quarterly earnings (which Apple beat) and a strong product-pipeline have propelled the stock to new highs. However, there a two, relatively unknown, factors that guarantee Apple’s journey to a $100+ stock.

R&D Spending

Apple has escalated its R&D spending drastically over the past seven years.

This is a solid argument against the bears who argue that Apple is not innovative anymore. Furthermore, expecting a company to release “ground-breaking” and “game-changing” products periodically is rather ridiculous.

Regardless, in the last quarter, Apple spent $1.6 billion in R&D spending, which represented about 4.3% of Apple’s Q3 revenues.  This is the most Apple has ever spent on Research and Development, and is a positive indicator that Apple has been investing to bring new innovations to their products. Furthermore, it may also indicate that Apple is planning on releasing another new product-line.

See for yourself:

RD DOLLAR
Source: SEC Filings, Motley Fool

 

RD PERC
Source: SEC Filings, Motley Fool

Apple’s Buyback Program

Apple has allotted $130 billion for their capital return program, out of which $90 billion is allotted for buying back shares.

However, $51 billion dollars of those $90 billion have already been purchased. Apple has been extremely aggressive in purchasing shares, and it does not seem like they will stop.

Furthermore, in the past June quarter Apple  purchased $5 billion worth of additional stock. They bought about 58,661 shares at an average price of $85.23 thorough the Accelerated Share Repurchase program.

When Apple began the share repurchase program in early 2013, the stock was dropping and hitting new lows. However, the company kept on buying shares and at, relatively, cheap prices ($55 was the lowest price the stock hit, accounting for the split). Therefore, when the shareholders were selling the stock, Apple was the buyer willing to buy them all.

Apple through the ASR program, and open market purchases, has spent a great deal of cash on buying back stock, and currently has $5.989 billion in outstanding shares.

Although, this may seem impressive, individuals may be wondering how can Apple sustain such costly operations.  Well, keep in mind, that Apple has an extremely lucrative business model. The company’s cash holding was $121 billion when the program was announced, and has then increased to $164 billion this June.

Furthermore, Apple nets about $48.1 billion in free cash flow. Free cash flow is, essentially, the money that remains after expenses and all other operating costs are accounted for. Now, since Apple has a dividend program which amounts to about $12 billion, Apple still has a whopping $36 billion dollars left in free cash flow. Also, given current projectiles, those reserves are not expected to reduce anytime soon.

This buy back program, and how aggressive Apple has been in doing so, displays that the company is extremely confident in the future of the company. Also keep in mind, the company has invested $51 billion, which is a huge amount.

Best of both worlds 

Therefore, the company’s current dividend payout coupled with the buyback program alone make the stock extremely attractive.

Moreover, given the elevated levels of R&D spending, and the numerous firms Apple has been purchasing to recruit talent, shows that the company will also strive to bring innovation to their products.

Eddy Cue, SVP of Internet Software and Services, has also announced that the current pipeline of products is the best it has been in 25 years. In addition, Apple has also asked for massive orders of 4.7″ and 5.5″ iPhones to suppliers; the company is seeking between 70 to 80 million units, combined, of both the iPhones.

Lastly, analysts from all walks have also upgraded outlooks for Apple. Analysts at Susquehanna have raised the prices from $104.00 to $115, Citigroup has raised the price to $110.00 with a “buy” rating; Goldman Sachs has raised the price target to $107.00. To see more analysts upgrades, click here.

Therefore, with all these factors considered buying Apple might be a wise idea, and the stock may be headed back to its $700 days.

I currently have a “BUY” rating on Apple with a $109.75 price target.

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