How iTV and iPad 3 Will Push Apple Inc. (Nasdaq: AAPL) Over $600

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Even with its share price at a lofty $490, Apple Inc. (Nasdaq: AAPL) still has startling upside potential, thanks to the iTV and iPad 3.

These younger iSiblings will provide the fuel to sustain Apple's amazing growth rates, which until now have been almost single-handedly driven by the iPhone.

The next version of Apple's tablet, the iPad 3, is expected to arrive in March.

Apple Stock Price History
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But the product that's been getting the most buzz is an Apple-branded TV - nicknamed by pundits as the iTV. While unconfirmed by the company, most analysts believe the iTV is in the pipeline and will debut before the end of the year.

The added pop an iTV would deliver to Apple's bottom line, along with the iPad's continuing dominance of the rapidly growing tablet market, will make AAPL worth at least $600 over the next year or so.

"If Apple were to sell a TV, we continue to believe its margins and pricing could be industry leading given its vertical integration with content," Barclays Capital (NYSE: BCS) analyst Ben Reitzes wrote in a note to clients.

Toronto's Globe and Mail newspaper set off the latest wave of iTV speculation this week when it revealed that two of Canada's largest telecommunications companies, Rogers Communications (NYSE: RCI) and BCE, Inc. (NYSE: BCE) were in talks with Apple.

The Globe and Mail report added that both companies already had an Apple iTV in their labs.

Numerous rumors out of China in recent months have claimed that Apple's manufacturing partners are already gearing up for production of Apple iTVs.

The only snags appear to be the availability of the display screens in sufficient quantity and deals with content providers, which Apple has been working on for well over a year. But Apple is very good at resolving such problems.

Reitzes calculated an iTV could contribute $5.40 of earnings per share (EPS) to Apple's bottom line in its 2013 fiscal year. Reitzes puts Apple's total estimated EPS for 2013 at $48.46.

When you multiply that by Apple's modest price to earnings (P/E) ratio of 13.26, you get a stock price of $642.58. And keep in mind that the historic average for Apple's P/E over the past five years is 22.6. That math puts AAPL over $1,000.

Reitzes believes the Apple iTV will capture about 5% of the LCD-TV market, which is expected to sell 230 million units in 2012.

The Magic of iTV

Once in the market, the iTV will reshape the TV manufacturing industry, creating the same kind of headaches for competitors as the iPhone and iPad did.

"It appears that mainstream TV manufacturers are likely to be at least six to 12 months behind in the best-case scenario," Jefferies & Co. analyst Peter Misek told the Los Angeles Times. "Many of them lack the software and cloud capabilities as well as the innovative cultural elements to effectively compete."

So what will be so special about Apple's version of television?

For one thing, integration. Integration with the Internet. Integration with Apple devices like the iPhone and iPad. Integration with Apple services like iTunes and iCloud.

"I'd like to create an integrated television set that is completely easy to use," Steve Jobs told biographer Walter Issacson. "It would be seamlessly synced with all of your devices and ... will have the simplest user interface you could imagine. I finally cracked it."

That simple iTV interface almost certainly will be Siri, the voice recognition technology Apple introduced with the iPhone 4S last fall.

"We believe that Siri could be used as a groundbreaking interface for a TV, which could be used as a content hub - glued together by iOS and iOS devices," Reitzes said. "In fact, Apple's eventual television could be so much more than a TV - including gaming, video communication, content delivery, Apps, computing and all the capabilities of the current Apple TV - it is really not fair to compare it to products already on the market."

Don't Forget the iPad 3

With excitement building over the potential for an iTV, it's easy to overlook the iPad. The imminent arrival of the iPad 3 will ensure Apple's dominance of the tablet market at least through 2012.

"We believe this significant refresh will likely help drive higher iPad sales," Sterne Agee analyst Shaw Wu told clients. "We are currently modeling 48 million iPad shipments for calendar 2012. [And that] could turn out conservative."

Accelerating iPad sales means more juice for Apple stock.

In the two years since its launch, the iPad has come to account for 12.8% of Apple's stock price - almost a full percentage point more than the company's venerable Macintosh business.

Sales of the iPad jumped 111.4% year-over-year in the December quarter. Research firm Gartner Inc. (NYSE: IT) has projected the iPad will retain about 50% of the market through 2014, when it estimates 252 million tablets will be sold worldwide.

If that holds true, Apple will sell 125 million iPads in 2014 - a 250% increase.

But two trends hint that iPad sales could go much higher.

For one thing, Apple has made a big push to get iPads into education, a market it long dominated with the Apple II and Macintosh. Its recent iBooks 2 digital textbook initiative with publishers like the McGraw-Hill Companies, Inc. (NYSE: MHP) and Houghton Mifflin Harcourt is designed to lock up the tablet market for education.

But the real wild card for iPad sales is the enterprise, traditionally a very small market for Apple.

The halo effect from the iPhone, which has supplanted Research in Motion Limited's (Nasdaq: RIMM) BlackBerry for many top executives, has helped both the iPad and the Mac.

"iPad continues its unprecedented adoption in business," said Apple Chief Financial Officer Peter Oppenheimer at the company's most recent earnings conference call. "Nearly all of the top companies within major Fortune 500 markets including pharma, manufacturing, hospitality, consumer products, financial services, healthcare and retail are actively using iPad to improve workflows, business processes and customer engagements."

Forrester Research says sales of Mac and iPads to the enterprise will increase 50% this year. And Mac sales overall were up a healthy 26% year-over-year in the December quarter.

When you add the potential of iTV and the iPad's dominance to Apple's thriving iPhone business and reinvigorated Mac business, AAPL at $490 looks like a bargain.

"This business model continues to know no bounds," Brian Marshall, an analyst at ISI Group, told Reuters. "Despite the fact that Apple is going to do $150 billion or more in revenue next year, it's still growing at unbelievable rates."

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