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. |
You can’t throw a rock in the tech industry without hitting a liberal. He does do a better job of playing the capitalist than most.
I think he’s in some sort of post yellow-and-blue-overload shock...;) Not too coherent, but the number now makes more sense.
Things weren’t passing the sniff test: there are about 20 million laptops sold each month, and the original claim would have Apple selling over 20 MILLION iPads a month, which I think even Apple would consider a fantastic year, not just an average month!
No, I tend to skip over most of it because it's handwaving and cheerleading (like that asymco report which has only itself as a reference and source - an unsupported report, as a result), and you buried it in the middle of a long paragraph after already calling it a strawman.
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.
No, I said you're delusional over ignoring/denying this fact. I retract that. You're a liar claiming that I implied Apple had debt. So that label still sticks.
So, you're just a liar, not a delusional liar. My apologies for the delusional label.
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.
Profit share is what counts... giving away your product when no money sticks to your fingers is a BAD THING...
- Swordmaker
Someone who claims to have a minor in economics says that profit share and - implicitly - profit margin is important, it's a good thing. So why wouldn't profit margin be one of the measures of a company?
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?
Because of the OTHER factors I've constantly mentioned! Like total revenue, total profits, market share. You conveniently ignore those, and thereby lie about my position ONCE AGAIN.
You've confirmed you love to twist my words and position and assign words to me I never said or implied. That makes you a liar. Provably so.
As I said, profit margin comparisons across industries and markets are irrelevant. I rest my case!
BS, and you know it. I've not made profit margin comparisons across industries, and here you are implying I did. LIAR!
Who in their right mind would consider Apple, Microsoft, and Google NOT in the same industry? They're ALL tech companies, part of the IT sector! Are you going to now reassign markets to those companies, too? You're lying again by trying to imply they are in different markets.
Yes, the title of liar fits you... Unless you'd like to apologize to me for this, and also refine/correct your statements here about profit margin's importance in market valuation (you try to say it has no impact, and earlier implied it has importance), and industry grouping of Google/Microsoft/Apple?
Words mean things and I am very precise in choosing the words I use.
Yes they do, and your precision means you are quite deliberate in your deception - a careful liar, we could say.
I do know what I am talking about, Puget.
Wait, do profit margins matter or not for valuation of a company?
If they do, then why would the LOWER PROFIT MARGIN of Apple give it a higher valuation than Microsoft or Google?
If they do not, then why do you keep TRUMPETING the margins and "high value" nature of Apple?
You're wanting it both ways, and that simply means you're either being deceptive or you do NOT know what you're talking about.
Your choice.
Now, about that apology?
Done. You're not delusional.
And I know better than to ever expect you to offer one back for your lies about me... A list added to right here.
Still pretty bad. See the trend? Notebooks cannibalize desktops, netbooks cannibalize notebooks, tablets cannibalize netbooks. As the lower devices become more capable they steal from the higher ones.
A tablet is all someone needs who watches movies, emails, surfs and does the social networks.
Everything is moving away from Microsoft’s cash cow.
Please read this link and learn:
IDC reports impressive year-over-year growth for global PC shipments of 27.1% in the first quarter of 2010... netbooks are no longer driving the volume as much as in recent times.From IDC's site: PCs include Desktop, Notebook, Ultra Portable, and Mini Notebook PC, and do not include handhelds.
It's not netbooks - which is where iPad is supposedly eating - that is driving the growth. It's desktops and laptops. It's not iPads and tablets, it's real computers - laptops and desktops. Devices where 95 out of 100 ship with Windows. And a SOLID 27% increase in market size. How that is "moving away from Microsoft's cash cow" is mystifying - there's ZERO basis for such a conclusion. None.
The ONLY trend here is Apple LOSING market share in the phone market. A proven trend, and one that all but Apple fanatics expect to continue and accelerate.
Apple remains the undisputed industry leader in the app software aftermarket, a market that you are obviously ignorant about. None of the other hardware vendors have a deep intrastructure for apps and content like Apple, although they will make some feeble attempt to imitate Apple.
My three-year old iPod touch can run circles around the latest crap-phones from Android and Blackberry, because Apple has the best app store, distributing the best apps.
For people want a mobile phone that is actually useful for something beside endless yakking, the iPhone remains the best choice.
Yes the iPhone share of the market continues to drop...
Funny about that, huh?
The growth is mostly portables, the first to be cannibalized. You Microsoft fanatics can’t see a world where Microsoft isn’t dominant.
Apple users know the iPhone can’t be dominant as one company vs. many large, heavily established players in the market.
I didn’t think of that. I have a 1 gen Touch and the UI is much more responsive than the Android I bought earlier this year.
Yet the facts are otherwise. Can you provide any facts that show the PC market is being cannibalized by the iPad, such that it’s not growing? That Microsoft’s market space is shrinking?
The only liar here, is you. You've done it across markets and industries. Repeatedly.
Who in their right mind would consider Apple, Microsoft, and Google NOT in the same industry? They're ALL tech companies, part of the IT sector! Are you going to now reassign markets to those companies, too? You're lying again by trying to imply they are in different markets.
Only every expert economist and educated financial analyst in the world. You want to make technical definitions sloppy so you can make a point and win an argument with me. It just doesn't happen that way. Apple does have divisions that at first glance potentially or actually DO compete with both Microsoft and Google in some markets, but overall, it does not.
Because of the OTHER factors I've constantly mentioned! Like total revenue, total profits, market share. You conveniently ignore those, and thereby lie about my position ONCE AGAIN.
No, you've been repeatedly focusing on the profit margin. Challenging me, no baiting me, and, as you said ignoring my explanation of those very other factors that are far more important in valuing a company. . . So you can once again LIE about my position because, as you admitted, you SKIPPED OVER WHAT I WROTE. No, again, you are back-pedalling to try and make it seem you were right all along. You cheat. You are a sloppy debater, and an obvious liar. I am done with you. You are completely dishonest in everything you post.
I agree. However, it wouldn't require Apple to sell that many. Just for customers to say they were deferring their purchases in consideration of buying an iPad instead. . . Whether that was the reason or not. That would still constitute the iPad causing the affect... But I think others are picking up on Dunn's inarticulate lack of communication skills. The clarity was, shall we say, completely lacking... And his clarification only succeeded in muddying the waters. It should be interesting to see what happens now that all 1600 BestBuy stores will have stacks of iPads near the check out stands.
I said the places where MS is dominant with Windows will be eaten by mobile devices. The iPad just came out, and decent Android competition is coming soon. We haven’t even seen a full quarter of numbers yet. But any rational person can see the trend over the last several years of desktop growth being eclipsed by more portable devices.
I thought it was a joke.
NOT TRUE!!!!!! In fact PC growth rate is projected to decline in the last half of 2010 and Intel is cutting back processor production.
I was wondering why you've been using the First quarter stats so much, instead of much more up-to-date figures. Now I know. You are Cherry Picking your data... AGAIN!
By selecting the first quarter 2010, you can exaggerate the growth because of the massive DROP in demand for PCs in the first Quarter 2009 which allows you to quote the ~24% and now IDC ~27% Increases in growth for PCs... Which, by the way, also incorporate Apple Mac growth percentages. However, there ARE more up-to-date statistics available on worldwide PC growth. The latest statistics are not quite as rosy as you want every one to believe. They're still not bad... But no where near the 27% you are crowing about (read lying) that you want us to believe!
Did you really think we don't check? From the ping list alert notice I just posted:
World wide PC shipment increased 19.2% Year-Over-Year according to a report from Gartner for the first half of 2010 — Apple's audited financial reports show that their Worldwide sales and shipments of Macs was up 35% Year-Over-Year for the same period, which are included in the overall Gartner figures.
Before you call me a liar, again, the various percentages come from Gartner for total Worldwide PCs, and from Apple's 10Q for the 3rd Quarter 2010, an authoritative, audited source.
And, of course, First Quarter 2010 sales information is absolutely meaningless to prove ANYTHING about what impact a device released in the SECOND Quarter of 2010 is having on the sales of net books or notebooks in any subsequent Quarter except to perhaps provide a baseline. Even then, I'd be looking at same quarter previous year for baseline data...
Please clarify something; first Apple is going to be the ‘most valuable company in the the world’. Then its ‘the most valuable tech company in the world’.
Next its stop comparing Apple to Google and Microsoft as they don’t compete in the same markets. Apple is a hardware company and all that.
Now suddenly Apple competes with Google and Microsoft.
Can you please keep your stories straight?
Was it a joke? Its so hard to tell these days. I try to post anything resembling a joke and you guys are all over me.
My stories have been straight all along. My minor is in Economics. My major is in Business Administration with a concentration in Finance. I understand exactly what I am stating. You and PugetSoundSoldier were or are obfuscating the issues all over the place.
What is so hard to understand. driftdiver. Right now, by Market Capitalization... the number of outstanding shares times the current market value per share, these are facts:
You can compare companies all you want... but you have to know WHAT about those companies you are comparing. Economists spend a lot of time paring things down to make sure they are comparing LIKE to LIKE. Simply taking the aggregate net profit margins after taxes of companies and comparing them is useless to make any comparative judgment about them. That's why I asked Puget what XOM's net Profit Margin was... and it was lowest of all of them we were discussing... yet XOM is the Number ONE most valuable company in the world, with a margin less than half Apple's margin that Puget was criticizing as a reason that Apple should not be able to become the most valuable company in the world. Puget was making it seem that the level of profit margin must be very important in making a judgment as to which should be most valuable. It just simply is not.
As to Apple competing with Google and Microsoft: Reread what I explained in a previous post. I am not going to repeat it. It is a very good primer on WHY you can't simply claim they are in the same industry or market and compare aggregate profits and margins or anything about the companies as a whole. EACH segment has to be extracted and compared separately... To do otherwise is simply wrong. That is what PugetSoundSoldier and you are doing.
Asking ME to keep MY stories straight is trying to make people think I am the ignorant one. I could teach both Finance and Economics. You can't.
How about you LEARN something before you foam at the mouth and accuse those of us who KNOW what we are talking about that WE "should keep OUR stories straight."
As a power user who’s tried out the iPhone, the iPad and its Android competitors, do you see the Android products making a dent in the market share of both of these Apple products?
A dent? Yes. Taking it over? No. Apple will keep it’s core of hard-core loyal users, but that will cap out. They’re already losing total market share, and there are more Android phones being sold than iPhones. Apple catered mainly to the Apple faithful, and didn’t make much of a dent elsewhere.
The battle for the smart device market will end up between Nokia (who’s just a giant), Android (who’s got support from plenty of companies, including the budget builders in China), and Microsoft (who’s decided they want this market, meaning they’ll throw billions at it to get market and mind share).
Apple’s already being pushed out...
So, combine a falling market share with a lower profit margin, and I’m not sure how it’s corporate valuation is supported by other than hype - meaning, it’s in a bubble.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.