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. |
That's one long bubble.
When compared to dozens of cheap, low-margin phone models, yes. I'm a good example of how Android is surging. I got a buy-one-get-one-free for Android phones, and the first one only cost $50. Nobody made much money off of me for the sale. There is little competition with a $200 phone. We know cheap PCs far outnumber Macs too, yet Apple continues to sell more, and make more profit, year after year (Apple has 35% of the PC profits).
I wonder how the iPhone is doing in its own premium smartphone market segment. Given the sales above, quite well. Apple is right where Apple wants to be.
You're exaggerating... It's been about 3 years that it's had this run, not 12.
“When compared to dozens of cheap, low-margin phone models, yes”
Android is expected to have double the apple market in cell phones by 2014. They are at the same price point as the iPhone.
Just because something is cheaper does not mean its bad. I find your implication that anything other than a apple product to be cheap crap to be offensive.
Most PCs are cheaper than Macs and they work fine for 90% of the user population. Gamers are really the only people that need a higher end PC. I bought a high end laptop because I run a lot of security scanning tools. It was still cheaper than a mac.
Great if you love your mac. Freedom of choice is great. I just object to propaganda and the tendency to stifle any dissenting views.
Actually about six years. I was thinking about the history of innovation that supports the stock price. Notice the stock didn’t really shoot up until Apple had established a solid history of profitable innovation.
So Verizon isn't offering the Moto Devour for FREE? T-Mobile isn't offering the Samsung Behold II for FREE?
Just because something is cheaper does not mean its bad. I find your implication that anything other than a apple product to be cheap crap to be offensive.
Cheap doesn't necessarily mean crap, but it does mean that you will sell far more cheap widgets than expensive ones. The expensive widgets never dominate the market share.
Gamers are really the only people that need a higher end PC.
Video, graphics, CAD, 3-D modeling, etc., require more computing power than a gamer needs. I'm getting really tired of the long wait to render and export video on my 2.4 Ghz dual-core. A hot quad-core gamer system would do better of course, but I wish I could afford a dual-six core Xeon Mac Pro. iLife makes it very easy for the average Mac user to create pretty complex HD videos.
Stupid Bill Gates should have said If you want to run our operating system you have to buy our computers.
“Stupid Bill Gates should have said If you want to run our operating system you have to buy our computers.”
Nope, no anti-microsoft posts are ever made.
If you weren't so sloppy with your use of words, perhaps it wouldn't be necessary. But I hold that precision in saying things IS the essence of accuracy. . . And honesty. Your sloppiness in reading allows you to slop over the precision of my statements and assume I'm as sloppy as you so you can ignore the precise truth I wrote and declare me a liar because somewhere, if I was as sloppy as you, there might be an exception that allows you to claim what I said is not quite completely accurate... If you are allowed to ignore the precision of my statement or take it out of context.
Why do I need to "admit" an obvious fact? In fact, I have. Facts are facts. I just have pointed out that it is an irrelevant strawman argument YOU have raised that has absolutely NOTHING to do with the valuation of the stocks in different markets. You've been told this by others in this thread, yet you keep beating this dead horse. You just cannot read plain english. I have no problem with different companies having higher margins because, as I explained, there are reason having to do with the different economic inputs. My minor was in economics You have never bothered to even address those points. You probably don't even understand what I am talking about.
Your claim that I have not admitted something so obvious is another ad hominem, and a lie. You are pushing and baiting me deliberately. Something Jim Robinson told you to not do. Why do you think you can get away with this behavior? Apparently you are being allowed to again by the admin moderators.
I thought you denied you dished out ad hominems?
Can you show me where? I know you immediately dodged and ran to a "strawman" defense, but when talking about the VALUE OF A COMPANY, profit margin means a lot. Even though you now claim it does not. I thought someone with a minor in economics should understand that...
So, what are the technical reasons that Apple should be more highly valued than Microsoft? Lower revenue, lower profits, lower margin, losing marketshare...
What's the reason?
The truth is not an ad hominem. Accusing someone of saying words they never did is the mark of a delusion; when they refuse to acknowledge their error, they are in fact a liar. Nothing ad hominem about it.
And if you want to run and cry to the moderators, feel free. I’m sure they have more important things to do than attend to crybabies who dodge straight-up questions and cry when called on their lies and delusions.
Sure, but WHY is the capitalization larger? What is the reason for it?
Just wanted to follow up on this... Apparently it's NOT cannibalizing 50% of notebook sales, but 50% of netbook sales. A VERY different thing than 50% of notebook sales (netbooks were about 10% of notebook sales, or about 5% of the total PC market).
Thanks for the link to the very unclear clarification of the unclear statement. I read it... then read it again... after which I read it again... and scratched my head and said "WHAT?" It's an excellent example of how to say something without saying anything at all. Not a hard number in the house... or apparently anywhere in the neighborhood... not even a fuzzy percentage... or even a cloudy one... Which leaves what he said... well... unclear.
I think, however, you are probably right.
Apparently can't read accurately for comprehension. . . Or is it that you just don't bother to read what I post? Here is where I admitted that irrelevant fact:
All three of those companies are in different industries. The margins of profit between companies in different industries are different and not comparable for a host of reasons... primarily because the economic inputs that make up their products are completely different. Apple's is lower than both Microsoft's and Google's. So what? The costs involved in manufacturing goods are completely different than the costs involved with publishing software which are completely different than the costs involved with running a search engine and selling advertising. Why should that bother me? Or anyone else, for that matter. Of course, the numbers don't lie... but the reasons why are more important than are the raw numbers.
As to "what's the reason?" we don't have the time, and I don't have the patience to teach you a course in Economics and Finance.
When can I expect your written abject apology for your calling me a "liar and a delusional liar" over claiming I never admitted this. I've told you I am not a liar. I told you I did. I also told you it was irrelevant. It is.
You make assertions that are not true, such as "profit margins are very important in talking about the value of a company." Tell me: What is the profit margin of XOM? Is it larger or smaller than Apple's? Microsoft's? Google's? The corner drug store's? Why should it matter that much? It doesn't.
By the way, XOM's profit margin after taxes is 7.2% for their last fiscal year. So if it's so damn important, why are THEY the #1 Market Cap company in the world?
As I said, profit margin comparisons across industries and markets are irrelevant. I rest my case!
Words mean things and I am very precise in choosing the words I use. I do know what I am talking about, Puget. Now, about that apology?
too bad steve jobs is a liberal.
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