Posted on 09/13/2010 5:16:04 PM PDT by Swordmaker
Apple (Nasdaq: AAPL) will become the most valuable company in the world. Bet on it. In fact, go out and sell all your personal belongings, liquidate your 401(k), and buy Apple stock with every last dollar you own.
OK … on second thought, I wouldn't advise that -- it's a bit rash. But there are ample reasons to believe that the company's rise is just starting and that Apple will continue blowing past expectations.
Big Oil, meet Big Phone
You've heard the standard "bullish" reasons before: Apple has $45 billion in cash and trades at only 12 times forward earnings when netting out cash.
Yet investors are rightfully nervous about the stock. It went from the brink of irrelevance to the top of the tech world in less than a decade. It built its $236 billion market cap by selling to consumers, a notoriously fickle crowd. Investors have been burned in this area before; they watched Motorola (NYSE: MOT) rise to prominence only to be cut down to size as its designs lost favor. People are afraid to hear that "it's different this time." For many, avoiding Apple is the safer play.
This changes everything … again
Well, it truly is different this time. I'll give you four reasons that the iPhone, and smartphones in general, are a whole new ballgame.
1. Software is the new kingmaker
Apple went into one of the most hypercompetitive markets in the world and created a product that was technologically years ahead of all its competitors. It entered a market that everyone knew would have vast potential -- hence the reason telecoms such as Verizon (NYSE: VZ) and AT&T (NYSE: T) built out massive data networks to support smartphones -- and Apple still managed to destroy a powerful group of competitors.
How? By virtue of a sea change within the mobile industry. The only difference between older "feature phones" -- you know, like that old flip phone sitting in your closet -- was hardware. The mobile companies loaded their own software onto the phones and pretty much controlled the software experience.
In spite of the iPhone's phenomenal hardware designs, software created the difference and the lasting competitive advantage. The user experience, the apps, and the iTunes integration were the factors that created Apple's long-term success. Other handset makers can easily replicate the touchscreens and the slim design, but the App Store, the clean operating system, and the iTunes integration? Well, everyone else is still catching up on those fronts.
2. iOS scales
Apple's mobile operating system, known as iOS, is optimized for a mobile experience. However, it scales extremely well for other high-growth markets and creates both a uniform experience and an app market for users. Although many were hesitant about the iPad's potential (me included), Apple is now reportedly cranking out 2 million of the iOS-based tablets a month to meet demand. Furthermore, even though the current Apple TV is underwhelming, it manages to keep Apple involved in the battle for the lucrative home-entertainment market, and future models of Apple TV could easily incorporate iOS to provide better media, gaming, and other apps right into consumers' televisions. The point is that even though iOS started on smartphones, it's now a dominant platform on tablets, and it could make further inroads into the home.
3. Consumer behavior on its side
Smartphones are growing by leaps and bounds, but few take the time to examine the dynamics. How many people would pay the full, non-subsidized $600 average selling price Apple receives from AT&T and other carriers? Obviously, the number of users would be far lower. Smartphones take advantage of consumer behavioral traits; as consumers, we're far more willing to pay a low upfront cost if future payments are obscured. In many markets (the U.S. included), carriers subsidize the cost of smartphones, and doing so artificially boosts sales figures.
Not only that, but smartphones also encourage people to do things like collect a series of apps that work on only one system. And since people like keeping what they've already collected, most who have a proprietary system will stick with the same proprietary system for their next upgrade. Thus, 89% of iPhone users want their next phone to be another iPhone. That figure falls to a mere 42% for users of Research In Motion's (Nasdaq: RIMM) smartphones.
4. Underrated smartphone growth
While consumer-electronics sales are expected to be flat this year, smartphone sales are expected to boom. Last quarter, the smartphone market grew by nearly 50% over the previous year. Researcher Gartner believes that over the next four years, smartphones will see 28% annual revenue growth.
Smartphones clearly present an enormous opportunity, yet there's plenty of evidence that the opportunity is actually underrated. Companies that can profit immensely from the spread of smartphones -- Cirrus Logic, Marvell, and even Qualcomm (Nasdaq: QCOM), to name three -- still trade at pretty low valuations for a field with such tremendous growth rates.
What's more, Apple has growth opportunities in mature markets where it already succeeds. The company sells through just one carrier in such major markets as the United States, Japan, and Germany, but it's expected to pursue a multi-carrier strategy in the coming years. That strategy should assure that Apple secures an even larger slice of the pie in growing markets.
Some figures to toss around
In the following table, I've created a set of iPhone growth assumptions, all of which point to a company with significant upside. In the past 12 months, Apple has generated nearly $21 billion in revenue from iPhone sales and products related to the iPhone. If the company can merely match anticipated industry growth rates, its iPhone line should generate more than $56 billion in revenue by 2014. In the past 12 months, Apple's revenue as an entire company was $57 billion.
So let's make some assumptions about the future profitability of the iPhone. Gross margins are estimated using industry estimates, and I'll shrink them in part to reflect a declining average selling price. Operating costs and the effective tax rate come from companywide figures.
Source: Capital IQ, a division of Standard & Poor's, and company filings. Gross-margin estimates from researcher iSuppli and industry analysts. R&D=research and development. SG&A=selling, general, and administrative expenses. If Apple matches industry growth rates, the iPhone alone would produce $23.8 billion in pre-tax profit by 2014. On a post-tax basis, that's still more than $15 billion in profits. However, that's still not all! The phone also drives a "virtuous cycle" for Apple. As more users buy iPhones, they upgrade to Apple's other products. Even though Apple controls up to 90% of the market for computers costing more than $1,000, the company keeps growing Mac sales at industry-thumping rates. What does that mean? It means Apple is creating a new class of users willing to spend more on its computers. The more iPhones it sells, the more crossover sales it gets to other products. For investors, the ka-ching of cash registers at Apple Stores is music to their ears. Bottom line For instance, it's almost impossible to do an Apple write-up without mentioning Google (Nasdaq: GOOG). If we see a reduction in the relevance and use of apps over the next few years, Apple could get burned while Google's model of free distribution continues growing like wildfire. In addition, as smartphones gain increasing penetration rates in developed countries, much of the continued growth will come from emerging markets. Even if the smartphone market grows at the stunning 28% rate I mentioned earlier, Apple might not be able to keep pace as consumers reach for lower-end offerings. The natural beneficiary? Again, Google. Since Android can scale down to extremely inexpensive phones, it should do well in emerging markets. But hey, every investment has its risks. Apple may not be the king forever, but the next few years should just keep getting better for Jobs & Company. |
Given the Gartner group report, it was nonsensical. Especially when the original post was about how Apple’s big market share (which is steadily dropping) is the reason they’re going to be the most valuable company in the world...
Talk about completely missing the point. You did it.
What I’m saying is that “The Motley Fool’s” sort of stock analysis is vapid, at best. They haven’t changed their analysis of tech stocks much since the dot-bomb era, and this piece they just did on Apple is fatuous, at best.
As for the rest of your response, I’m going to let it go. Either go back and re-read what I wrote, or just let is slide man.
PugetSoundSoldie:Given the Gartner group report, it was nonsensical.
The quality and tone of these conversations always deteriorates when trying to hold a civil conversation with PugetSoundSoldier and driftdiver.
So calling a statement nonsensical is an insult? I’ll keep that in mind, I guess...
What should we call a statement that is not logical, nor related to the discussion at hand - Fred?
I have no crow to eat... YOU posted the phony numbers, not me. I merely called you on your falsehoods... again. YOU have a fine dinner of crow, Driftdiver. Higher Revenue numbers make Nokia's pathetic profits on that revenue look FAR WORSE.
Puget, there are other reports from other sources quoting profits from the previous year showing Apple with 33% of the world wide cellular phone profits... You choose to ignore ALL sources. ASYMCO used data that checks out from company quarterly reports for the seven companies that produce 95% of the world's cell phones. That data is NOT in question. They reported reported the factual data and compiled it. NO ONE BUT YOU SEEMS TO BE QUESTIONING IT? Why is that? Perhaps because it is true?
When has Apple started COLLAPSING? Puget. Again you are spreading deliberate FUD... You are claiming a non-existent BUBBLE... it seems to be the latest talking point from the troll crowd. At least it is popping up in various places from the usual suspects. "The value of Apple stock is a bubble." "Dump it at the first sign of a dip!" PANIC! SCREAM AND SHOUT... The "Sky is Falling!"
It just so happens I DO have a degree in Finance... from where doesn't matter. It certainly trumps your ignorance of the subject you have been spouting on here.
Yep, my data was a few days old. Sorry about that. Of course, Microsoft's been giving the money away to their owners, the shareholders, in the form of a dividend...
OH, BS! Puget... backpeddling as fast as you can... "a few days old..." is pure bullsh!t! Apple announced their holdings almost 2 months ago... and Microsoft's last dividend was booked June 16th... and is not included in their cash on hand since then... it became an obligation to be paid to the stockholders and was no longer liquid. I will grant you it was paid out on September 9, 2010. That dividend payout was only a little over $1.1 Billion... so even if we ADD that back, that still totals $37.9 billion and change. $7 billion less than Apple's holdings in cash and liquid assets. Quit trying to make it seem you were telling the truth, because Microsoft GAVE IT AWAY to the stockholders, only a few days out of date,. You are again HOIST on your petard.
Smart move again. Get low interest loans right now, leverage the cash you have and lock in to historically low rates. It's not like you need the cash for operations, but if you can get it at a cheap rate, why the heck not?
Borrowing money to pay DIVIDENDS??? That's sort of like borrowing money to put in savings... That is usually frowned on by regulators... and stockholders. That's the kind of thing management does to appease stockholders when things aren't really going too well. They are tossing the stockholder's a bone from borrowed money. If the money is "overseas," and "not readily available" to pay dividends, it is really NOT liquid... and that is worrisome.
It appears that Puget is making it up as he goes along, Anti. Whatever sounds good for the moment to make the argument flow. So many of his claims about his involvement with Apple just don't seem to jive with our experience and knowledge, you have to wonder. This is just another one.
Facts are facts... I accept them for what they are. Wowsers! Whoop-de-doo... Microsoft Stock value has been flatlined for years.
All right. I am sorry that driftdiver posted false figures and that I had to correct them. There. Public and full apology.
No Swordmaker I did not post phony numbers. Sad to see nothing has changed.
Gartner estimates Apples market share of the cell phone market will drop to around 14% by 2014.
“The quality and tone of these conversations always deteriorates when trying to hold a civil conversation with PugetSoundSoldier and driftdiver.”
yet another personal attack.
PugetSoundSoldier
Ya know its sad. Stripes1776 posts fake numbers grossly understating Nokia’s market share and sales while overstating Apples market share. I use an example to illustrate how off his numbers are and yet I get personally attacked.
Then “I am the one causing problems”, and I am the one spreading nonsense. Is there a single ounce of honesty or integrity in people anymore?
“Higher Revenue numbers make Nokia’s pathetic profits on that revenue look FAR WORSE. “
Apples higher revenue numbers only show that Apple customers pay an exorbitant markup on their products. Barnum Bailey was right once again.
Desktops used to be almost all computer sales, but now they are well below half, replaced by notebooks where most of that growth is, and where Microsoft has more competition. Tablets, where Microsoft isn't a player, are taking over from notebooks. Anybody who can see long term knows Microsoft needs successful diversification. Unfortunately for Microsoft, the attempts to do so have not been very successful, or cost billions in losses just to get to be a solid (but non-dominant) market player as in consoles.
That is why Microsoft's stock is relatively flat. There's not much expectation from the company for new, lucrative revenue sources. Just ten years ago Apple was a bit player in the computer market, nothing else. Now Apple is very successfully into music players, phones, tablets and music sales, and has grown its computer business faster than any other company. This history of successful dynamic expansion and growth is why the stock is so high.
and the growth of specialized products such as all-in-one PCs
So iMac clones are the source of growth. Oh wait, that includes iMacs.
Yep, Apple's sales are counted in that PC growth statistic, including Apple notebook sales which are at a higher percentage than their PC sales. It would also include all those Linux netbooks. So not all money goes to Microsoft. Also remember that Apple makes far more money off of a Mac sale than Microsoft does from a Windows system sale.
With all that cash it’s a wonder Apple didn’t just buy ARM. I’m betting they were worried about anti-trust issues. Too bad, as one of the founders of ARM, and a current major investor in ARM, it would be a perfect fit given Apple’s mobile concentration.
I would say that has to assume Apple doesn't pull any game-changing tricks, which is not likely to be correct knowing Apple. There was the iPod in 2001, the iTunes Store in 2003, the Intel switch in 2005, the iPhone in 2007, and the iPad in 2010. Another's due before 2014. It probably also assumes Apple sticking to a single carrier past 2012, which is not likely.
Of course what Apple could do to increase market share is just make more iPhones. iPhone 4 supplies are still constrained months after the release.
Lies again, Sword. You're reading into it what you WANT to read. Quote where I stated Apple has started collapsing. Please. Or admit you're lying.
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