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Three Reasons Apple Is Headed to $600

By: Wyatt Investment Research
Posted: 10/29/2013 9:21:00 AM
Referenced Stocks: AAPL

Apple ( AAPL ) has taken a lot of flak on Wall Street in the last year. Slowly but surely, however, the stock is making a comeback - and it may only be the beginning of a longer rally for the world's largest technology company.

Apple shares have shot up 33% since dipping below $400 in late June. The turnaround was long overdue. The stock had been in a nine-month tailspin entering June, falling all the way from $700 last September. Now the stock has finally gotten out of its funk. Apple's latest earnings are one of several reasons the stock has plenty of room left to run.

The company reported earnings per share of $8.26 after hours yesterday, beating analyst expectations by 4.2%. That's boosting Apple shares by more than a percent in early trading today. It's the fourth straight quarterly earnings beat for Apple after the company had a couple a rare misses last year. If nothing else, that gives the company its mojo back in the eyes of investors - even if the earnings were down 8.6% from the same quarter a year ago.

Over the long term, earnings growth will perhaps be the biggest potential driver of Apple's stock. In the short term, Carl Icahn may be more important.

The billionaire activist investor has been credited with re-energizing Apple's stock in recent months. Icahn bought up shares when the stock was trading below $400, and increased his position by 22% earlier this month. Icahn now owns a whopping 4.7 million Apple shares, or 0.5% of the company.

Icahn's confidence in Apple is encouraging. What's more important is his influence.

Icahn has been imploring Apple CEO Tim Cook to unlock some of the company's massive $147 billion cash stockpile in the form of a share buyback. Doing so, Icahn believes, would result in an immediate 33% increase in Apple's earnings per share. Icahn's recent investment in Apple was interpreted as a show of confidence that Cook will listen to his buyback proposal. As a result, some Wall Street analysts project that the stock will rise above $600 by year's end .

A third potential catalyst is the company's latest iPad Air . No, investors haven't been wowed by the new product yet, as evidenced by the radio silence on Wall Street after last week's iPad Air unveiling. The real question is: will consumers dig it?

Apple's latest iPad will be released this Friday, Nov. 1 - just in time for the holidays. The lightest and fastest version of an iPad yet, the iPad Air is sure to be a big seller the next couple months. The question is how big. If Apple sells more units this quarter than the 27 million analysts are expecting, that should make for another strong quarter.

Earnings growth, a share buyback and new products are three potential catalysts that could drive Apple's stock in the coming months. But I doubt all three of them need to happen for Apple's recent run to continue.

The stock is trading at just 12 times 2014 earnings. Even after a 33% gain in four months, Apple shares still appear undervalued. At such a depressed valuation, it won't take much to convince more investors to jump back on the Apple bandwagon. All it needs another push.

Any one of the aforementioned catalysts could be all the push Apple needs to keep this rally going. If all three happen, then $600 by year's end seems quite reachable.