On Monday, official news of an Apple (AAPL)-China Mobile (CHL) iPhone deal sent shares of Apple soaring. We had highlighted initial reports of the announcement December 5, and we fully expect the new business to be a strong fundamental catalyst for the iPhone maker. China Mobile is the largest mobile operator in China by users, and even a low-single-digit conversion rate to the iPhone will move the deal at Best Ideas portfolio holding Apple. The iPhone 5s and iPhone 5c will be available in China Mobile and Apple stores across mainland China beginning January 17, 2014.
We think consensus estimates for Apple’s earnings through the middle part of this decade are too low (on the basis of this transaction), and the company’s committed entrance into China bolsters the sustainability of the firm’s long-term earnings stream, offering support for our estimate of its cash-flow based intrinsic value (see its 16-page report). Though pricing information will be provided at a later date and competition from Google’s (GOOG) Android phones in China will be fierce, we fully expect the needle-moving agreement to benefit the bottom line over the long haul (particularly as Chinese consumers gain discretionary wealth). Shares of Apple gained nearly 4% on the trading session to close at over $570 per share.
Facebook (FB) also was favored by investors during Monday trading. The social networking giant made headlines recently that it will add video advertisements to its suite. We think the move will be a huge earnings driver, given the size of the TV advertising market, and while there may be some user backlash, the breadth of the firm’s reach will make it a very compelling proposition to advertisers (despite the steep pricing rates). We maintain our view that shares of Facebook are poised to rocket higher in the coming months, and we hold a call option on the company to capture our expectations of upside (see Best Ideas portfolio). Facebook closed up 4.8% at nearly $58 per share.
Valuentum’s Take
The Best Ideas portfolio continues to be well-positioned to capitalize on broader market trends (and individual valuation mispricings), and the Valuentum Buying Index, our stock-selection methodology, continues to help maximize returns. Though we have had nearly a full position in Apple in the portfolio of the Best Ideas Newsletter for some time, the Valuentum Buying Index offered conviction to add to the position at $442 per share in July 2013 and open up a full new position in the Dividend Growth Newsletter. Members that capitalized on this information have made their membership dues back many, many times over. We continue to believe Apple’s shares are worth north of $600, with upside to over $750 on the basis of the high end of our fair value range.
We estimate Facebook’s intrinsic value to be roughly $80 (see its 16-page report), and the shares have rocketed higher towards that level in recent months. The company continues to roll out endeavors that represent new revenue streams, and thus far, it has been able to recover from its very rough start as a public company. Though the call option on Facebook’s shares may expire worthless, we’re expecting further upside in shares and are levered to that expectation. We don’t expect to make a change to our actively-managed portfolios as a result of Monday’s positive trading performance.