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. |
“There is far more involved in the market determining a company’s value, such as a solid history of profitability and success when expanding to new markets.”
Oh I agree there is more than quarterly profit margins involved. That’s my point.
This whole article is FUD because Apple isn’t close to being the most valuable company in the world. Apple has been successful in the past few years with a small number of popular ideas. They’ve yet to show they can convert that into long term growth or market presence. The Gartner report previously mentioned shows the industry doubts they’ll keep their existing share in their flagship market (cell phones).
I, for one, would like to see the Apple threads cleaned up again.
Jim, himself, said the disturpting must stop. For a few weeks the trolls stayed away and everything was fine.
Now they’re back.
Yes, it's time to put an end to this again.
Yes, it's time to put an end to this again.
Only your posts? Swords are much much easier and abundant.
From post 103 - “The quality and tone of these conversations always deteriorates when trying to hold a civil conversation with PugetSoundSoldier and driftdiver. “
It was a personal attack from you towards me. I was and have been civil on this thread. antiRepublicrat has been civil to Puget and myself and he has been treated likewise.
Go cry to the moderators on Swords behalf if you want. Obviously you don’t have the integrity to see the personal attacks he is throwing on a continuous basis. Nor the deflection and lies being thrown out.
If you are going to compare profit margins, then attempt to do apple-to-apple comparisons. Hardware division against hardware division, software against software.
We’ve already shown that Nokia sells far more phones than Apple and I was personally attacked, not once but repeatedly.
All the marketshare in the world doesn't help if you don't make much money doing it. BTW, that share is dropping FAST, has been ever since the iPhone appeared. The company's in a panic now, with calls for the CEO to step down.
Talking overall volume is also disengenuous. Low-cost devices always sell more volume than high-end. Honda sells a lot more Civics than Mercedes sells E-Class cars. That's what suprised me the first time I saw the cell phone profit figure. I thought Apple would have a good chunk of smart phone profit locked up, but didn't think that would be across ALL cell phones. Turns out there's not much profit in commodity phones, just like there isn't in commodity computers.
Apple mainly operates in the following markets: music retail, high-end consumer computers, mid- high-end x86 workstations, mid- high-end media players, high-end smart phones, high-end tablets, and software. If you want to compare, try to compare appropriately.
I will stand by that statement. It is a fact. And that is way we are at this point again where the conversation deteriorates with you and PugetSoundSoldier engaging in ad hominem attacks.
Go cry to the moderators on Swords behalf if you want. Obviously you don’t have the integrity to see the personal attacks he is throwing on a continuous basis. Nor the deflection and lies being thrown out.
You just called Swordmaker a liar. That is an ad hominem attack. If you do this again, I will call in a moderator.
Yes, success matters. And who is more successful? Who makes more money, who has a higher profit margin?
Thank you.
Is this like the original Zune, basically a Toshiba Gigabeat? Or the XBox 360 CPU, ripped off from the Sony/Toshiba Cell R&D? Do you have better examples? Unless I hear better examples, I continue to believe that the last innovative consumer hardware product from Microsoft was the Intellimouse.
RoundTable. Look at any "Office Communicator" compatible telecom device. That's just for starters.
In most cases, Apple has a heavy manufacturing expense. Microsoft and Google do not.
On some products, they do. I spent most of the summer of 2008 in Dongguan working on that heavy manufacturing for Microsoft. Toolings, millings, PCBAs, etc. Deploying multiple anechoic chambers and video test stations for QC.
That they are able to make a HIGHER margin is a testament to the company. Again, results count - who makes more money, who has higher margins? No one seems to be willing to actually STATE it.
Microsoft makes more money. Microsoft has higher margins. Can you say that?
As I've shown you, Microsoft doesn't do all that well when hardware manufacture is involved. And is Google even making any money off of Android yet? Does Google's profit have anything to do with anything that competes with Apple?
Because you're not looking at the big picture. Microsoft makes money off that hardware - it drives more sales of other parts of their product line. Google makes tons of money off of Android - it drives ad impressions.
Compartmentalized thinking is the problem; look at the company as a whole, and whether it's bigger now than when it started a given project. Has the bottom line and profit margin grown? If so, even though that project may "lose" money, as a whole it's better for the company.
Who makes more money? Who has a higher profit margin?
Apple gets to lead the way because Apple controls its hardware and software. Apple can come out with fully integrated products on day 1. Many Android users are still waiting for Froyo on their devices months after its release.
BS, and you know it. App Store came out when? Was it out when the iPhone or iPod was released? When did they finally add multitasking? How about iOS 4.2 FINALLY being available for the iPad, months after its release?
Who's gaining marketshare? Who's holding? Who's losing? The numbers simply do not support the story you're trying to sell...
“You just called Swordmaker a liar. That is an ad hominem attack. If you do this again, I will call in a moderator.”
As long as you report swordmaker for his numerous and repeated posts where he called me a liar then fine, go for it.
But you have a double standard.
And where has Google not shown that? In fact, it's OS already eclipsed iOS for phone market share, and is closing in on number 2 - RIM.
How about Microsoft? Solid history of profitability (they weren't on the ropes in the 90s), and they've expanded in new markets such as consoles.
You talk about integration, and whole systems, but want to break it down to individual parts? Sorry, maybe the definition of "integration" goes beyond just "this phone fits with that dock" level of integration. Maybe cross-platform sales and market presence in multiple channels leads to better sales for the company as a whole.
We're talking about the valuation of the ENTIRE COMPANY, not just one division or group. So look at it that way...
What reason - other than hope for future growth - can you give for Apple being more highly valued than Microsoft? Why is Apple's future brighter than Google's future?
If you want an echo chamber, and no dissenting viewpoints, then why don’t you push to have the Apple posts become part of a caucus, like religions?
What facts are we wrong on? I stated why I thought the Motley Fool’s prediction was wrong, and Sword jumped all over me. Apparently dissent is not tolerated in the Apple camp?
Think Different, indeed!
“All the marketshare in the world doesn’t help if you don’t make much money doing it. BTW, that share is dropping FAST, has been ever since the iPhone appeared. The company’s in a panic now, with calls for the CEO to step down.”
Yes Nokias market share is dropping, just as Apples is although their sales volume is increasing. But we’ve already discussed that.
“If you want to compare, try to compare appropriately.”
The thread is that Apple is the most valuable company in the world (or soon will be). Therefor any comparison involving a specific market or division of a company is is failing to compare apples to apples.
Few years? Apple's growth strapped on a jet pack about twelve years ago. A formerly failing one-horse company now owns the portable media player market, is among the top 10 PC OEMs, is the biggest music retailer in the country (surpassing Wal-Mart in 2008), has a strong presence in the smartphone market it reinvented, and single-handedly created the consumer tablet market. This article is a bit dreamy, but it is within the realm of possibility.
The Gartner report previously mentioned shows the industry doubts they’ll keep their existing share in their flagship market
Ignoring 1) that Apple won't be carrier-exclusive forever and 2) that Apple keeps coming up with game-changing surprises that reap massive profits.
I remember when iPhone rumors stirred for about the year before its release. Everybody, the normal Apple watchers, the industry, the pundits, the rumor sites, EVERYBODY got it completely wrong. Mock-ups abounded and they were all completely off-base. Nobody had any idea what Apple was about to release or how popular it would be. I remember Ballmer saying it would be a failure, and now Microsoft is scrambling like mad to remain relevant in the market it's lost to Apple because of that "failure."
I have one standard. It is the standard that all valid argumentation adheres to. Stop the ad hominem attacks. Stop the name calling.
You also said that I don't have integrity. That is an ad hominem attack. It's time for these ad hominem attacks to stop now.
If you want to compare overall, then Apple easily wins. Apple is clearly the most dynamic, innovative company with a solid track record of not only growing fast in its current markets, but of wild success in new markets.
You can dissent if you have a well-reasoned argument. But you cannot engage in ad hominem attacks. There is a huge difference between the two.
PugetSoundSoldier: You called Swordmaker a liar and a shill. That is an ad hominem attack. If you engage in ad hominem attacks one more time, I will call in a moderator.
Now, back on the focus of the original post:
What reason should Apple be more highly valued than Microsoft? They make less revenue, less profit, a lower profit margin, do not dominate their core markets like Microsoft, and are losing marketshare to new offerings.
What possible sound, technical reason is there for Apple being the most valued company in the world?
I can think of just one: hope for the future. Even though things are sliding down in market share, it's hope for the future.
Isn't that what defines a bubble? Irrational hope for big returns in the future, when there aren't any technical indicators to support the valuation?
For that matter, why would Microsoft or Apple be more highly valued than ExxonMobil? Modern society CAN function without smartphones! It ran fine without PCs up until the mid 80s. But remove oil. No cars or planes. None of those container ships to bring those iPhones over. None of the polymers and plastics to MAKE those iPhones.
XOM has massive sales - $310 billion. They have $19 billion in profits. They sell a fundamental product REQUIRED for 2nd or 1st world life, everywhere around the world.
I can see Microsoft being close to the same valuation as XOM - they make about the same product, and much of modern life everywhere in the world revolves around a PC and computer systems.
Apple? Way down in profits. Their profits are driven by smartphones and media players - neither of which are necessary in the least for modern life (there's a reason Nokia sells 260,000 phones a day - they're reliable, they make great calls, they last forever on a charge, and they're durable).
So XOM sells a base commodity that is REQUIRED for modern life. Microsoft dominates the core (the OS) of information technology around the world. Apple sells a dwindling share of smartphones and media players.
And Apple is going to be the most valuable company in the world?
Signs of a bubble to me, much like the tech bubble in 1999/2000. Companies taking 1-2 years (or less) of growth, projecting forward, and asking for insane valuations based upon that growth.
“If you want to compare overall, then Apple easily wins.”
Most valuable company? There are many many companies that are more valuable.
According to this story - http://money.cnn.com/2010/03/29/technology/apple_valuable_companies.fortune/index.htm
Apple is the 4th most valuable in the US. Behind Exxon, Microsoft, and Wal-mart. Apple might be able to take over Walmart if their stock price shifts. They have no chance to take over Exxon.
Valuations can be fleeting though. As per this article AOL was work $163 Billion 10 years ago and is now work $2.7 B
Should be:
I can see Microsoft being close to the same valuation as XOM - they make about the same productprofit, and much of modern life everywhere in the world revolves around a PC and computer systems.
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