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One Analyst Gets Bullish on Apple Inc. (AAPL)

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Raymond James analyst Tavis McCourt seemed slightly fed up. Sentiment for Apple Inc. (NASDAQ:AAPL) stock is “horrible, in the institutional investor community, and ultimately we view this as feedstock for outperformance,” he said. Upgrading his rating from outperform to strong buy, McCourt reiterated his $600 price target for the stock on Monday. Could McCourt be right? After all, $600 is a pretty hefty premium to today’s prices.

Apple Inc. (NASDAQ:AAPL)

What’s next in mobile computing?
McCourt calls it phase two: When the growth of smartphone and tablet markets begins to subside, and smartphone chipsets and ecosystems start invading televisions and automobiles, and gaining “uses not currently thought of for computing devices.” With the help of its vertical integration, McCourt believes that the Cupertino-based tech giant is positioned to take a large share of industry profits as it enters the second phase of the “mobile computing revolution.”

Valuation matters
All of this sounds great, but aren’t there plenty of other companies positioned to benefit from this second phase, too? Vertically integrated or not, $600 is a lofty target.

McCourt’s $600 price target isn’t a random bullish target. In fact, it’s not too far from the average analyst target of about $539. McCourt is simply being objective. The stock is cheap, he argues. He sees the Street’s negative sentiment toward Apple Inc. (NASDAQ:AAPL) as a good thing — poor expectations are mostly already priced into the stock. In order for the stock to take a major hit, he explains, “trends at Apple Inc. (NASDAQ:AAPL) would have to erode meaningfully.”

Just how cheap is Apple?
Using a reverse discounted cash flow valuation, and a 10% discount rate, the growth rate assumed by the market for Apple’s free cash flow going forward is just 1.4%. In other words, at today’s price for Apple Inc. (NASDAQ:AAPL)’s shares, the market expects competition and eroding margins to prevent the business from growing even at the historical rate of inflation.

To add some context, it’s useful to compare Apple Inc. (NASDAQ:AAPL) with another megacap cash cow: McDonald’s Corporation (NYSE:MCD). Ironically, Apple and McDonalds share some common characteristics as stocks. Like Apple, McDonald’s Corporation (NYSE:MCD) growth seems to be slowing. In the company’s first quarter, global comparable sales decreased 1% from the year-ago quarter. Revenue increased just 1%. Furthermore, the stock’s dividend yield just barely tops Apple’s; both are close to 3%.

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