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Piper Jaffray Cos
PetroChina Co Ltd
Reed Elsevier NV
It’s the most intriguing investing question of our time: How high can Apple’s (AAPL) stock go? Answering that query has propelled the career of Gene Munster, a research analyst at Minneapolis brokerage firm Piper Jaffray (PJC). For the better part of a decade, Munster, 40, has consistently urged investors to put money into Apple, and he’s been right: The shares have gone from $16.25, when he first recommended them in June 2004, to $628 on April 10. In 2012 alone, the stock is up 56 percent, adding $208 billion to Apple’s market value. At almost $600 billion, Apple is by far the most highly valued company in the world.
Now Munster is upping the ante, calling for Apple to reach $1,000 a share by 2014 and become the first U.S. company worth $1 trillion. (Beijing-based PetroChina (PTR) crossed that mark for a day in November 2007.) His case rests on both the company’s product prowess and his belief that investors will take money out of other tech stocks and rotate those dollars into Apple. “Investors, especially the big institutions,” he says, “will come to realize that Apple increasingly represents where tech is headed.”
Munster has seen his own stock rise along with Apple’s. To stand out in the crowded field of more than 50 analysts covering the company, he says he tries to position himself as a clearinghouse of rumors and information. He often fields calls from Apple’s rivals and business partners who are looking to glean information about the iPhone maker. And as any watcher of Bloomberg Television or CNBC (CMCSA) knows, Munster is always game when the red light goes on. A LexisNexis (ENL) search turned up 230 instances of him being quoted since the beginning of the year, about two per day. “Our goal is to be part of the fabric of the industry,” he says. “There are different levels to that. One is having investors trust you by doing the real research. Another level is to be somebody who is known in the space, and the media helps with that.”
As Munster sees it, increasing his public profile is more than just self-promotion: The exposure helps him gather clues on new products and other developments. In February 2009, Munster was among the first to predict that Apple would be introducing a television. “Somebody close to Apple said we needed to be doing more work on the television and that started it all,” he says. “You start with these crumb trails, then it turns into a dirt road, and now it’s a paved road.” The iTV, which Apple watchers say will connect to the Internet and may feature the voice-command Siri software, is widely expected to debut by next year. Trevor Moreno, a technology analyst with Wells Capital Management, which oversees $333 billion in assets, credits Munster for prescience on the iPhone. “He was telling me about the opportunity 18 months before it ever launched,” he says. “It helped us build and keep a big position going into it.”
Munster, who’s single, lives in a Twin Cities apartment filled with Apple gear. Part of a three-person team that also covers Amazon.com (AMZN), Yahoo! (YHOO), and Google (GOOG), he says he produces about 350 research notes a year, an output that he claims is about double that of many analysts. He travels three or four days a week, and may hold 250 meetings with investors and 125 sessions with companies, including Apple suppliers in Asia, in a typical year.
Piper Jaffray was Munster’s first job after graduating from the University of St. Thomas in St. Paul, Minn. He says he had his Apple epiphany at the end of 2001 when he received an original iPod as a Christmas present. Back then, one needed a Mac to load it with music, and Munster didn’t have one. So he got permission from Piper Jaffray to spend nights at the office’s graphics department—sometimes sleeping on the floor—so he could use a Mac to rip all his CDs to the gadget. His devotion to the music player altered his view of Apple. “I saw a different company than a PC maker,” he says. “I just knew this had the makings of a great consumer device company.”
When he finally bought his own Mac, a “light bulb” went off, he says: He saw that the iPod was going to drive sales of other Apple products. Munster went to gyms and quizzed iPod users on treadmills. He flew to New York to stalk Grand Central Terminal for commuters sporting Apple’s white ear buds. “I’ll talk to anybody,” he says, adding that he’s been kicked out of malls for pestering customers. His research made him appreciate hard-to-quantify selling points—including ergonomics and ease of use.
In April 2004, Munster issued a note titled The Apple Option—Predicting Another Revolution. The report was prescient. “Apple’s early success with the iPod will be a catalyst for transformation,” he wrote, “to an Apple with a core focus on the ways in which the market for peripheral devices can be expanded.” He rated the company a “market performer.” Two months later, with the stock at $16.25 (adjusted for a subsequent split), he made his first buy recommendation. An investor who bought 1,000 Apple shares on that day and held them would have a stake worth more than $1 million today.
Now, Munster sees another quantum leap. “Where will the next $400 billion in market cap come from?” he asked in an April 3 note. His theory is that a lot will come from other tech stocks. Since 2008, Apple has gained $400 billion in market value. Munster calculates that half of that came from investors adding dollars to the tech sector, while half came from investors shifting money from Apple rivals. He expects that pattern to continue as Apple adds another $400 billion in the next two years.
Apple’s impressive financials, he believes, will be the draw. He estimates the company will increase its share of the smartphone market to 33 percent in 2015 from 19 percent last year. That will help boost earnings to $80 a share by 2015. The stock now trades at 12 times next year’s expected earnings. Applying that same p-e ratio to his “conservative” projection for earnings, Munster says, would put the stock at $960 in 2014—and that’s without factoring in any contribution from potential new products such as Apple TV.
The biggest risk is that Apple won’t sustain its pace of blockbuster innovations. That’s “the fundamental barrier between shares at $600 and $1,000,” he wrote. Walter Piecyk, of BTIG in New York, sees a different risk. On April 9 he downgraded his rating on Apple from buy to neutral, citing the threat that wireless carriers would cut their subsidies of iPhone purchases. Of the other analysts covering the stock, 48 rate it buy, seven say hold. Only one says sell.
Predictions like Munster’s are risky: In March 2000, when Cisco was worth almost $550 billion, a Credit Suisse analyst wrote that it “could be the first trillion-dollar market cap company.” Instead, Cisco plunged 89 percent over the next 28 months.
Does Munster, a self-proclaimed Apple fanatic, have what it takes to turn negative on the stock when—if—the time comes? “People say we’re always going to be positive on Apple,” he says. “That’s not true. We want to be right. The right thing to do over the past eight years has been to be positive. When that breaks, I want to be the first guy to get it right.”
The bottom line: Munster believes Apple’s market value will grow by $400 billion as the company takes a bigger share of the smartphone market.