Why Apple Belongs at $400 Instead of $300

With Apple being up over 200% the past 2 years, it's easy to say that this stock's run is over, but I don't think that's the case. Apple's most recent earnings report showed an acceleration in growth, and the stock is not currently reflecting that. My $400 price has some assumptions, but I still believe they are likely conservative.

First, I think Apple could easily earn 5.75 EPS in their Q1 report as Apple reported 4.64 in Q4. That's a 24% sequential increase in earnings during their strongest quarter fueled by the Holiday season. Apple has seen a larger sequential increases than this, and did not have the product lineup they have now. You may argue that Apple only guided for 4.80 EPS in Q1, but Apple is known to sandbag, and their Q4 estimate of earning 3.44 EPS estimate was clear evidence of this. Apple earned 34% more in Q4 than they guided the markets. Apply that to their Q1 guidance and you get 6.43 EPS. I think 5.75 EPS is clearly conservative even with potentially lower margins.

If we assume Apple does greater than 5.75 EPS in Q1, then the rest becomes basic math. For Q2 it's safe to assume a 15% drop in EPS vs Q1, which is likely overly pessimistic. For Q3 and Q4 I would expect at least 7.5% and 12.5% sequential growth respectively. This assumes an iPad refresh, small tweaks to the iPhone, and a pickup in growth in Q4 due to school shopping. This doesn't even include the positive impact of Verizon picking up the iPhone or any new product launches Apple has up its sleeve. This leaves us with:

Q1 2011 - 5.75
Q2 2011 - 4.89
Q3 2011 - 5.25
Q4 2011 - 5.90
FY 2011 - 21.79 vs FY 2010 15.15           =          44% yoy EPS Growth

Once analysts realize Apple will do greater than 20 EPS for 2011, $400 is not unrealistic at all and I believe Apple could hit this as early as late January 2011. That would leave Apple under a 20 forward p/e with 33-50% EPS growth. This doesn't even include the mountain of cash Apple has which is already around $56 a share or 51 billion.

There are risks to these assumptions such has margin compression, slowdown in the economy, slowdown in the PC market, etc. But I don't think these issues will manifest in the short term. I would be buying the stock here and I personally added a small position of calls to my long position.