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. |
Apple targets its R&D spending... Microsoft throws money at it. Apple gets results. Microsoft? Well, the results seem to speak for themselves.
Yes, they are guessing... and some guesses are worth money. Sometimes they are not. This one is NOT backed up.
Yes, they are guessing... and some guesses are worth money. Sometimes they are not. This one is NOT backed up.
By the way... Gartner's guesses have been way off the mark on guessing Apple's financials in EVERY Quarter for the last three years... way off. They've been off even two weeks out... guessing way low.
WOW! disagreeing with Driftdiver and Pugetsoundsoldier are the equivalent of personal attacks... requiring apologies and admissions. You have an exaggerated opinion of your opinions. In a word. NO.
I'm not just talking minor innovation, which happens all the time in the tech industry. I'm talking about game changers, and RIM and Apple are the only two companies I can think of who have done that in the last ten years. Suggestions are welcome, of course.
BTW, to be fair, I should mention the Apple failure in phones, the Moto ROKR. That's Apple's fault for doing a product in a non-Apple fashion, basically pulling a Microsft Zune and slapping their name and services on someone else's existing product. Correcting for the ROKR disaster resulted in the iPhone.
Funny, you claim to support capitalism and the free market and then attack anyone who doesn’t worship apple.
This article is FUD, nothing more.
It is really sad. Microsoft was a great company. Everybody used their BASICs, Xenix rocked, and the OS/BASIC combo for the TRS-80 Model 100 was just fantastic. I was a Microsoft fan. I think things started going downhill with Gates stopped coding and started managing full-time.
“This one is NOT backed up. “
You’re right, the content of this article is not backed up and is pure FUD.
OH BS, driftdiver... how can claiming a company that has been climbing, is continuing to climb, and is now the #2 company in the world is going to continue that climb and over take the #1 company in the world (that really has no place to continue to climb)) be claimed to be FUD (Fear, Uncertainty, and Doubt)???? This is merely recognizing a continuation of a five year trend. Your denying it and calling it FUD is your pure unadulterated Apple Derangement Syndrome.
Also, Apple is willing to take big risks. The iPod was heavily criticized when it first came out, people said the tablet market never worked and never could, and of course the retail stores were supposed to be a really dumb idea. The iTunes Store was supposed to fail because nobody would pay for online music when it could just be downloaded free P2P. All of those have been immensely profitable, but should have flopped according to conventional wisdom, costing Apple dearly.
I guess it helped that Jobs went from startup (Apple) to startup (NeXT) to buying a tiny young company (Pixar) and never lost that culture. Gates sat at Microsoft for about 30 years. He got fat and slow, and so did the company.
I keep thinking of new things. There is another reason Microsoft spends more, and it’s not bad, but shows how the R&D doesn’t necessarily equate to better Microsoft products.
Microsoft does a lot of XEROX PARC kind of work that may never be used for profit, but still is quite interesting. Take PhotoSynth for example. I’ve done 360 degree panoramas for a long time, taking multiple pictures, carefully stitching, etc. PhotoSynth took it to a whole new level. I wonder how much that R&D cost. Microsoft also develops a lot of things in conjunction with universities, so a bunch of the R&D money may be going there too.
Microsoft is a better member of the community than Apple, for sure. That isn’t really what investors are looking for.
#2 company in the world? BP spent more on the oil spill than Apple had total revenue.
BP claims to have spent over $8 billion on the cleanup so far. Logically, that would mean under $9 billion, otherwise BP would have stated over $9 billion.
Apple had $15.7 billion in total revenue in just the third quarter of this year.
We do check these claims, you know.
Hey if Sword and Stripe can make up numbers so can I.
I have made up absolutely NO numbers—nor has Stripes1776—I have sources for every one of the figures I posted. I always do. He offered a hypothetical question, which YOU changed to a specific company. Only you have made up numbers. You do it as though what you posted are real facts and expect us to accept your falsehoods as real for the debate. That's called a straw man argument and is a logical fallacy. You do it repeatedly.
Yes and you are never wrong and you never make personal attacks. Unicorns really exist too!!!
Remember what I said about honesty and integrity starting at home... Look at your self, driftdiver. YOU ARE THE SOURCE OF THIS DISHONESTY.
ARBITRARY CODE EXECUTION
You did see that adobe based attack last week. The one that also impacted Mac.
BTW, defamation of character and slander. Watch for the knock on your door.
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