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. |
“No, that’s not inflammatory at all! Be careful, stripes1776 will be along to report you to the moderators”
I doubt it.
“It’s simple math”
Then it should be easy for you to post.
Yes, it would be easy, practically trivial.
Yeah you’re a saint swordmaker, you never call anyone a liar.
No, he just loves to through out the charge of “spreading FUD” with reckless abandon...
Microsoft makes ZERO notebooks, Puget. They do not "own" that market. . . they cannot "own" that market because they do not even compete in that market. Your claim is false on its face.
There is no "reckless abandon" about it... it always intended and specific and well reasoned with proofs attached... with links to that proof. You spread FUD. I stand on that judgment.
Not a single ounce of integrity. Must be subliminal messages coming over the screen.
iOS changed the definition for a smart phone. We are now in a new market, with RIM and Nokia running on momentum (people are already asking for the Nokia CEO's head, asking when they'll switch to Android). iOS did not enter a market already filled, it entered an empty one for its paradigm and took sales from the existing market. Android succeeded because it was a "good enough" alternative people who wanted a phone using the new paradigm, but didn't want or couldn't afford an iPhone. So now you have the original and the cheaper copy (which is constantly getting better). Where is the room for another inferior copy?
Best Buy does not represent the market. And the laptop and desktop - the PC - market is still growing at 24% annually.
Best Buy is a good representative of the retail market, being the largest in the East and expanding internationally. Your 24% growth figure does not count the iPad, or Android copies (which as you know will sell more due to being cheaper). Face it, tablets are cannibalizing notebooks, and that will only increase. That means Microsoft's market for Windows will shrink.
Let the phone hardware experts do the hardware, let the software experts do the software. NO COMPANY is expert at everything.
Really? Apple makes the best hardware and has the operating systems Microsoft always aims to copy. Apparently one company is capable of it.
Closed, locked-in, non-competitive markets are typically stagnant; dynamic, competitive markets are where you get innovation.
Apple is spurred to innovation because Apple needs to always stay ahead of the copiers or else the company will become a producer of commodity products. Apple begins the death watch when the innovation stops.
Microsoft and Apple are more profitable on a margin basis, and Microsoft is considerably more profitable on an absolute dollar basis as well.
Microsoft's profits will keep rolling on in momentum for quite a long time. Still looking for a solid history of innovation and growth in new markets to support a high valuation. Chirp... chirp....
Have you seen the recent FR post?
"The top five publicly-traded companies, based on full market values, are:"
1. Exxon Mobil (XOM) - $310.45B
2. Apple (AAPL) - $252.66B
3. Microsoft (MSFT) - $219.19B
4. Berkshire-Hathaway (BRKA) - 206.70B
5. Wal-Mart (WMT) - $193.28B
Passing Wal-Mart happened a while ago. Apple hit $200B back in March. $100B was only three years ago. It's only a matter of keeping up the rate, and even a much slower rate would still do it within a couple years. Whether Apple can sustain that kind of growth is the question.
Hey Sword,
How many notebooks ship WITHOUT Windows installed?
Go into Best Buy, or Office Depot. Go to HP or Dell's site. Visit NewEgg. You'll find they come with Windows. Not OSX, not Linux - Windows.
That's called owning a market. You totally dominate the market that you service. In this case, Microsoft is THE market for notebook operating systems.
Give up trying to play cute words games - you really suck at it...
And I stand on the judgment that you are a liar.
Never could admit that Microsoft has higher margins than Apple, could you? Never could admit that Google has higher margins than Apple, could you?
You cannot even acknowledge PROVEN FACTS, can you?
I guess we can change that from liar to delusional liar...
Really? Then why does Microsoft spend MORE on R&D (meaning not copying), and yet still has a higher profit margin than Apple?
Maybe Apple doesn't execute on their ideas very well, and it takes Microsoft to make them profitable and attractive. After all, when you sell 20 copies of Windows for every copy of OSX, you must be doing something right for your customers.
Microsoft's profits will keep rolling on in momentum for quite a long time. Still looking for a solid history of innovation and growth in new markets to support a high valuation. Chirp... chirp....
Hmmm... You hold up Apple as the paragon of innovation and design, and Microsoft as a company that doesn't innovate, just copies. Yet who makes more money? Heck, who SPENDS more money on R&D? Who makes more profit?
Maybe your assumption is flawed - maybe it's not the flashy "innovator" that is a successful company, but the mundane, just-get-it-done company that dominates its markets that is successful?
Bottom line: Microsoft sells more, makes more, and keeps a higher percentage of what they make, as compared to Apple. They're financially more successful than Apple. Can't really deny that at all, can you?
Apple's revenue and margins have not sustained that kind of growth - classic sign it's a bubble. It may inflate a lot more, but it shows all the signs of a bubble, and the pop will be loud and harsh...
Even you admitted you see know sane reason why Apple should be higher valued than XOM, that it should be the most valuable company in the world. If it closes in on that point, it's bubble all the way!
Lower revenue, smaller profit margins, and declining market share relative to its competitors - those aren't the signs of a company poised to take over the world!
Good time to but their stock then eh.
Good time to BUY, not but
I mean they are THE MOST VALUABLE COMPANY IN THE WORLD!!!!!
A good time was in the late 90s when I was thinking of buying as Jobs came back, but I was just starting a family so didn’t put down the ~$2,000 on Apple that I wanted to around $6 a share and several stock splits ago.
Very. Dumb. Mistake.
hind sight and the stock market go hand in hand.
IMO their price is a bubble. They don’t have the numbers to justify that price. Someone is paying it though, probably those that haven’t learned the value of hindsight.
A twelve year long bubble for one company?
Even you admitted you see know sane reason why Apple should be higher valued than XOM
I didn't see how Apple could become higher-valued than XOM. But the market will decide. I've been wrong before.
Lower revenue, smaller profit margins, and declining market share relative to its competitors - those aren't the signs of a company poised to take over the world!
Constant, successful, highly profitable branching out into new markets. Almost constant high growth in profits and sales in all markets year after year for a decade. That is the sign of a company poised to take over the world. Because ONE (and only one) product on one carrier per market isn't growing as fast as usually lower-priced, commodity competitors from several different companies on all carriers is not a reason to worry.
Look at the iPhone's actual competitors. Your great success stories were the Droid X with 150K sales in the first week, the EVO 4g with 150K the first weekend, the Samsung Galaxy with a million in 45 days. The iPhone 4 shipped 1.7 million in the first weekend, 3 million in 3 weeks.
“The iPhone 4 shipped 1.7 million in the first weekend, 3 million in 3 weeks.”
And yet their market share is on the decline.
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