The Time Is Ripe for Apple

 | Apr 23, 2013 | 3:00 PM EDT  | Comments
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nflx

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hp

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dell

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msft

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On Tuesday morning, Netflix (NFLX) reported quarterly numbers that positively surprised analysts. The shares jumped by as much as 24% on the news that company had gained 2 million new customers in the first quarter of 2013. Most analysts expected 1.8 million new customers. A year ago today, Netflix shares were trading at $52. This morning, the  shares were trading above $215 in the premarket -- a new 52-week high. What's amazing about Netflix is that it has managed to achieve that rarefied feat in business: execute a successful, technology company turnaround.

The technology industry today is littered with names of companies hoping for a little bit of that Netflix magic. Many value investors are betting on turnarounds for Hewlett Packard (HPQ) and Dell (DELL). For years both companies have continued to struggle with the process of reinventing themselves. For what it's worth, both business appear to be undervalued relative to their cash flows and future growth potential but Mr. Market clearly wants to see that potential not just hear about it.

BlackBerry (BBRY), formerly known as Research In Motion is another tech company that almost seems to have it figured it out. The shares are trading at $14, up from a low of $6 a year ago. BlackBerry has a significant shareholder in Prem Watsa, who is the chairman of Canadian insurance conglomerate Fairfax, and a highly respected businessman and investor. Advocates of Watsa should know that his average cost in BBRY is approximately $16-$17 a share, so he clearly sees significant long-term value in the company.

Yet everyone seems only to care about Apple (AAPL) and when it will have its turnaround moment. Notice I said "when," not "if." That's a very important distinction because nearly everyone opinion on Apple is that it's merely a matter of when it happens, not if it happens. I do think Apple and Netflix share some common traits that perhaps bode well for Apple.

First, both Netflix and Apple sell desirable consumer products. Dell and HP are focusing on the corporate market, while PCs and printers are not considered "must have" gadgets. Second, the potential for growth is tremendous. Nearly 5 billion people are still without smartphones. And Netflix still has tens of millions of people in the U.S. and hundreds of millions outside of it who are without its services. Plus, the global consumer is making a historic shift to being more and more mobile. Third, Apple, like Netflix, remains the most iconic mobile brand in its industry -- at least for now.

Unlike Dell and HP, Apple is not facing growth constraints, but, instead, greater competition. The market is still there, just as it was for Netflix. You can bet that many sophisticated investors today are looking at Apple trading at $400 a share. The company trades for less than 8x forward earnings -- a lower multiple than Microsoft (MSFT) -- and almost certainly stands a chance of delivering more profits and cash flow that Microsoft does.

Apple's earnings report is going to be huge. I believe the stock will surge like Netflix or experience another wave of selling from the remaining loyalists who are hoping to have their faith in the company reassured. One thing is clear: It's tough but not impossible for a technology company to have a turnaround that takes the stock price to a new. And Apple clearly has all the ingredients to make that happen.

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