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. |
Yawn.
Motley Fool doesn’t have all that great a track record in picking tech stocks. In the 90’s they pushed Iomega as the be all end all. Then, they pushed AOL, AOL, and more AOL.
I wish they’d leave Apple alone. I don’t like them.
"GOING TO GAIN" is pie in the sky in the future. A prediction is nose picking, nothing more.
I found it interesting that the chart shows the iPhone taking a decided 25% nosedive on the chart from the date of the report—which the private release to the client closely coincided with the release of the iPhone 4—as though some event occurred on that date that would impact the quality or salability of the iPhone to a far greater degree than other phones. Nothing could be further from the truth—it's not based on evidence or fact—it is mere wishful thinking, apparently placed there to please the purchaser of the study. Such "predictive" turns based on nothing historical are ALWAYS twaddle; there is NO justification for their inclusion except bias. That makes the quality of the entire report suspect.
The actual study said that Android's greatest gains would come in the low-end, commodity "feature phone" market where Nokia's Symbian would lose big unless Nokia could step up it's game.
The study also ignores a recent survey of Verizon customers that found that better than 60% of its smartphone customers would dump their current smartphones in favor of an iPhone as soon as their contracts expired if Verizon offered the Apple product over an Android offering. Similar surveys have shown similar results on Sprint and T-Mobile...
Apple has historically maintained approximately a 30% margin target on its products.
“”GOING TO GAIN” is pie in the sky in the future. A prediction is nose picking, nothing more. “
I’ll remember that when you post predictions on how Apple is going to perform. Kinda like this thread.
Wishful thinking my FRiend.
Teh Goggle are comparative noobs to the game, and only so much mileage can be had from me-tooism. Barring an unforeseen paragigm shift, Android will be matching a dated benchmark repeatedly. Apple is not a stationary target. They have an entire ecosystem of sorts with very impressive synergies. the strategy is all of one piece, and it’s been building layer upon layer since iTunes. The so-called computer industry doesn’t get it and the so-called cellphone industry doesn’t get it, they don’t exist anymore as separate industries. Consumer perception has altered profoundly in that regard over the course of just this past year.
In the '90s, Iomega was a great stock... with it's Zip removable HD Technology it was ubiquitous as a backup media. Iomega became superfluous with the development of the Flash Thumb drives and failed to move quickly to embrace them. Iomega still exists, but their stock languishes now after a being a good stock for a while. Those who invested in Iomega and got out right, made a killing... those who rode it down, didn't. The key was knowing when to jump ship into something else... Apple's big advantage is that it is a big company that behaves like a nimble start-up... creating new products and remaking old ones in ways others have not thought of.
If I had liquidated everything I had when I bought my first Apple stock (at $64 per share), I would be a paper millionaire today (and evil in the eyes of the Obama administration). Alas, I didn’t. Hindsight and all that.
I've got a better track record being optimistic about Apple than all you naysayers, my friend... :^)>
Just a few years ago they recommended buying Garmin stock when it was at $90. Soon after their recommendation, it fell to about $25.
In the computer market, Apple can demand the additional margin. Their products work due to the tight integration between their hardware and software.
The additional factor of their competition is that Microsoft isn’t a hardware company and the hardware companies for commodity PC’s are perfectly happy in a race to the bottom of a barrel filled with poop.
So Apple can demand high(er) margins for their laptops and desktops and people will happily pay them. The relationship is between Apple and their consumer.
In the phone market, however, there’s a third party at the table: the wireless carriers. When the carriers are offering handsets with a “X year contract,” there’s some margin being surrendered by the handset company to the carrier in order for the “X year contract” to make sense to the carrier. The Android handset guys are in a cutthroat contest just within the Android marketplace, and they’re going to ramp features at the same time they offer more software features against everything else in the market.
That’s where the margin erosion is going to come from.
Yeah... I'd like to see that reference that states such. I don't think that's anywhere near accurate.
On that we whole-heartedly agree!
Going from 3.4% in Q1 2009 to 3.6% in Q1 2010 really shouldn't qualify as surging...;)
If it does, then Linux going from 0.9% to 1.2% over the same time is a tsunami, and Win 7 going from 0% to 20% is absolutely earth-shattering!
And using forward-looking projections and static share assumptions for stock valuation isn't? Losing market share - even if overall revenue is up because the market is exploding - isn't usually considered a good thing from a financial standpoint.
Yes but they make up for it in volume.
In the 90’s, just about any “tech” stock was a great stock. Profits? Business plan? Margins? Pfah! None of that mattered. It was the “New Economy!”
Hell, there were even startups that went public who had, as their business model, “We will ship you kitty litter by mail!” For a short time, kitty-litter by mail was a great stock too.
Every generation get to see a stock bubble, and the dot-bomb era was ours. TMF confused a huge bull market for expertise in stock analysis.
BTTT
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