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. |
Not when they can make up words that you never posted, and then rail against you for their flights of fancy...
And Apple has about 4-5% of that "growth" market, too... Just like the general PC market. If you want to claim 24% annual growth is flat-line, be my guest!
And remember, for every Mac sold, for every iPhone sold, Microsoft still gets a chunk of change (ActiveSync license, among other things). I wonder what Microsoft licenses from Apple that is in every Microsoft product?
“I would say that has to assume Apple doesn’t pull any game-changing tricks, which is not likely to be correct knowing Apple. “
Thats a fair assumption. I’d also expect their competitors to make changes as well.
“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”
Do you expect Apple to be in the same position 10 years from now?
The counter to your statement was that Microsoft doesn't get revenue from all that growth, since it includes OS X and Linux.
And remember, for every Mac sold, for every iPhone sold, Microsoft still gets a chunk of change (ActiveSync license, among other things).
I'm sure there's a lot of cross-licensing going on. For example, Apple licensed font technologies to Microsoft. Given that Apple holds something like 400 patents on the iPhone, much of it for the basic touch and multi-touch tech, it's likely Microsoft is licensing Win7 Phone tech from Apple. And don't forget, Apple is hardware too, with all those patents on phone and tablet hardware to collect on.
Hmmm, non-Apple game changers in the consumer tech market in the last ten years. It should be one company and its device, technology or service that started a firestorm and even became ingrained into the culture. Bonus points for people using the name as a generic (like Band-Aid™). Thinking, thinking...
Probably. Apple is doing well because they seem to know what will work with the majority of the consumers, what they will fork over cash for in mass numbers. Apple is of course willing to massively invest in high-end R&D to make it happen.
The only area where Apple doesn't seem to have a handle on that is delivery of video content. They're doing okay in that arena, but with Netflix doing movies and Hulu taking care of most TV, Apple doesn't seem to have much of a chance of becoming a major player. The Apple TV, while a nice device, doesn't really excite much either. I wouldn't buy one if you gave me the cash for it.
Out of the whole thing one thing I find interesting is the publicity model. Many companies, like Microsoft, feel the need to announce vaporware years in advance in hopes of stemming the tide of consumers going to the competition, or as some "me too" face-saving measure, or maybe just trying to keep the stock up. For example, Microsoft's recent announcement that it will have something awesome in the tablet field -- in three years! Such practices aren't the sign of an innovation leader.
Conversely, Apple only announces anything after the product has been pretty much finalized and will ship soon or even on that day. Apple is highly secretive until then, working on that innovation. PSS derided Apple a while back for putting out "a line of marketing propaganda" over the exclusive licensing of LiquidMetal alloys, even accused me of parroting Apple's statements concerning it, when in fact Apple had made no statement at all. It's not their style. The license was only publicly known at that time because it was included in a required SEC filing by LiquidMetal.
So you only consider Apple and Blackberry as providing any innovation in the cell phone industry?
I didn't say that. You asked where Microsoft's growth is, and I said the PC market as a whole. Please do not lie about what I said.
Apple spends a lot less - in absolute dollars and as a percentage of revenue - than Microsoft, or even Sony in terms of R&D.
They do have great marketing, though!
Gartner "GUESSES"... no trends to back that up... none.. zilch... nada. One month in one quarter of flat sales as people wait for the latest model to come out... and Gartner uses that to distort a trend line. BAH! Any statistician worth his salt would tell you that is bad statistical modeling. Look at the chart they generated with a sudden downturn in Apple iPhone sales as of the date of their release of the report to their paying client... DOWN... with no justification. No explanation in the body of the report. IT'S WISHFUL THINKING. Sell what the client wants to see.
No, driftdiver, it is an observation of the tone of conversation... and frankly true. Neither of you can EVER admit the points of the opposition.
Stripes1776 posted a hypothetical question, a perfectly legitimate debating technique: which would you rather have: X or Y?
His post mentioned nothing about Nokia. YOU made it into a specific about Nokia, a Logical Fallacy, and distorted the figures, not Stripes1776.
I merely corrected your figures so that your attempt to make Nokia's profit picture look better—which was what this thread was about—was correct to fact, showing the true picture of Nokia and Apple, which demonstrated that the #1 maker's profit picture was truly pathetic; so much so that Nokia is firing its CEO this week. Remember, that was the profit YOU told Stripes1776 you'd prefer to have?
And YOU want integrity and honesty? Start at with yourself.
No one has EVER been forced to buy an Apple product. Look around... do you have any? Is Steve Jobs pointing a gun at your head, reaching into your pocket?
Is that why Nokia's CEO is on the unemployment lines and Apple's is not? Perhaps you better rethink your claimed adherence to Capitalism and your presence here on Freerepublic and maybe check out membership in Democrat Underground... you might be better suited for membership there. This is the Free Market at work, driftdiver.
"When Apple’s iPhone 4 was nearing production, Foxconn and Apple discovered that the metal frame was so specialized that it could only be made by an expensive, low-volume machine usually reserved for prototypes. Apple’s designers wouldn’t budge on their specs, so Gou ordered more than 1,000 of the $20,000 machines from Japan’s Fanuc Ltd. Most companies have just one.
"Terry is a strong leader with a passion for excellence," says Tim Cook, Apple's chief operating officer. "He's a trusted partner and we are fortunate to work with him." The Longhua plant now produces 137,000 iPhones a day, or about 90 a minute. "
Terry Gou is a fascinating character.
“Gartner “GUESSES”... no trends to back that up... none.. zilch... nada.”
Guesses? Is that why thousands of companies in multiple industries use them for research and guidance. Billions of dollars change hands based on their recommendations.
Their opinion carries a lot more weight than the author of this article.
Oh, gee, Puget... juxtaposition words like "Apple" "stock values", "bubbles," and "ride it to the ground" and "collapsing" stocks... in the same paragraph... and NO OTHER STOCK mentioned... sure... you mean XYZ stock. FUD. I know your game. You know your game... and again you call me a liar. What other stock are you referring to????
Dollars wisely spent vs. dollars wasted I guess. How many billions did MS waste in Vista development before the restart? In any case, the proof is in the products.
It was a personal attack. You made a mistake, attacked me for what you thought I said, and now refuse to apologize or admit your mistake.
You equated MS growth with the growth of the PC market, but used statistic that included non-Microsoft products in that growth. No lie from me. You need to find a statistic showing the growth of the Windows market, hopefully accounting for the one-time Win7 bump that represented eight years of pent-up demand due to the Vista disaster.
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