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. |
I actually was getting my dog food by mail in 50 pound bags for around $2.00 cheaper than going to Wal-Mart. Had it shipped once a month for about 18 months before they went under.
I liked the PJ O’Rourke joke about how once Carter passed out while jogging and the country was safe for a little while.
Which would you rather have? 50% of $10.00? Or 14% of $1,000,000.00?
$100 smartphones are coming running Android (watch for Huawei’s Ideos) and I’m worried about my Apple stock.
I’d rather have 30% of $2,000,000,000. Your comment is nonsensical.
Nokia sold 126.9 million phones in Q4 2009 (3 months).
I did say “improving” not surging. And in this case wouldn’t comparing Mac sales to those of other hardware manufacturers and not software manufacturers make sense? In which case from your own link, “The Mac grew at 33 percent, year over year, higher than the wider industry, which grew at 25.8 percent in the same time period.” Apple is one of the top 4 computer makers while maintaining higher margins than Dell and others. I don’t think it is a foregone conclusion that they will have to tremendously lower the margins on the iPhone.
The last time I heard Apple lowering margins is when they moved to machined aluminum bodies in their systems. The method is obviously slower and more expensive than the injection-molded plastic, but the retail prices stayed the same.
Now Apple is moving to LiquidMetal technologies, which allows for less expensive metal cases since they can be injection-molded instead of machined or cast. With that, Apple can let profit margins go back up. And they have an exclusive license for the technology, so it is not likely you’ll see any copycats.
Apple has 48% of global cellular phone profits.
Admit it Sword, he nailed you. You were wrong. Oh wait, you said "before" the recent uptick in sales, so your statement allows for this increase. Nevermind.
The point is that the figures you quoted are relative to the total market. The total number of iPhone's is still increasing in a rapidly increasing market. Apple can't even manufacture enough iPhones to meet demand. They are only available on some days in the week. I went to an Apple store a couple of weeks ago, and there were 60 people waiting in line to buy an iPhone.
Nokia sold 126.9 million phones in Q4 2009 (3 months).
Nokias is the largest manufacturer of phones in the world. So Q4 means 3 months? Who would have known that?
Market share of Nokia has dropped. But the total number of phones they are selling is still increasing.
Did you read the article you linked? It states:
Now comes word that Apple itself owns a 48% share of the global mobile phone market in terms of gross profit.This news comes from asymco, which bills itself as an “app production studio and an industry analysis advisory.”
Without a SINGLE shred of evidence. Just a statement and a pretty graph without a reference, or even an address pointing to the source of the graph. In fact, the only link is back to asymco (an app vendor, of all things), and asymco's statement that claims:
Jointly, Apple and RIM took $8.6 billion and Nokia took $8.8 billion.
Nothing there about earnings or profitability. Nada. A search for EBIT or profits or gross fails - those words don't even exist on the reference!
So yeah, I'm still calling BS. There's no reference, nothing to back up the claim other than a single sentence that appears to have been made up as it doesn't even relate to the source referenced. No data there. It's still empty, and I would have expected a bit more out of you, to at least check your references.
Fair enough, sorry about that!
“The point is that the figures you quoted are relative to the total market.”
Yes, that is true which is why its referred to as ‘market share’. The Gartner study indicates that Apples market share will decrease by 2014.
Market share of Nokia has dropped but they still sell many many many more phones than Apple.
Then Apple should have cast - rather than machined - their aluminum. Die casting would have cut costs, maintained precisions required, and kept yield high. And no, you don’t need LiquidMetal to cast those kinds of parts. Thin-wall/fine-detail casting of aluminum is done millions of times every day, without the LiquidMetal marketing.
My guess is (knowing Chinese manufacturing and how the chain works) that the supplier of those parts was simply given a drawing and a specification, and allowed to make the parts as they desired (quite common). The supplier - having a surfeit of CNC machines not doing anything - decided to put some static capital to work and hog them out. Labor costs are essentially zero in a mass-production situation, and if the machines are not being spun for other needs, then using them becomes the lowest-cost option from the supplier.
The LiquidMetal claims relates to being the only process that eliminates any crystallization of the metal during cooling (a dubious claim to say the least, as most metals can be so controlled with existing processes), so that your metal maintains an amorphous state. Other items stay amorphous, too - plastics and glass and many quenched metals (metal is amorphous when melted). In fact, die casting relies upon the amorphous nature of quenched metals, in that there is effectively zero shrinkage of a die cast part (the metal does not crystallize when cooled, so it does not shrink), making the tool easier to manufacture and last a LOT longer.
Yes, I do a heck of a lot of cold forging, casting, and molding in my job. LiquidMetal doesn’t bring anything new to the table except an easier way to quench a few specific alloys (and those alloys are considerably more expensive than the typical alloys used for computer parts).
It IS a cool name, though!
Same thing is happening with Apple, too - Android phones are eating away at the market share of iPhones, but the total sales of the market are increasing fast enough that iPhone sales are still increasing.
The analyst who would have generated the original estimate on this question would be Brian Modoff, out of Deutsche Bank. His analysis piece in 2009 claimed that Apple and RIMM had outsized profits for the revenues in handsets they had, and that while Apple had only 1% of handset unit sales, the iPhone generated 20% of the handset profits.
I don’t know if he has updated his analysis piece, which originally came out in July of 2009.
I’ll be getting one shortly to replace the blackberry I currently use. Looking forward to the change.
I wonder whether you could get the surface finish desired in the same amount of time/unit with casting processes tho.
I’d also consider that there may be a bubble going on when it comes to Apple’s stock price. A few interesting facts:
Apple’s book value is about on par with Microsoft, when:
- Microsoft has 50% more revenue
- Microsoft has 60% more net profit
- Microsoft has a higher profit margin
- Microsoft has a dividend payout
- Microsoft has more cash and liquid assets on hand
- Microsoft has zero debt
- Microsoft owns its markets (like 85%+ dominance)
- Microsoft’s latest core product is exploding in adoption and sales
From a technical standpoint, there’s no way Apple should be valued equally - let alone above - Microsoft.
Apple’s running on a lot of these “forward looking projections” and assumptions that it’s great run of the last few years will continue ad infinitum. We’re already seeing Apple start to lose market share, and - like you caution - when those really cheap Android smartphones start to ship it will lose even more marketshare.
This analysis by the Motley Fool assumes a completely static picture of products and marketshare over the next 3 years, and assumes that the market worldwide will continue to grow as it has over the last year. I don’t think any of those assumptions are valid, and thus the conclusions should be taken with a huge grain of salt.
When the stock starts to dip, dump it. That’s true of any stock. Don’t ride the bubble back down - definitely NOT a good thing!
Ahhh... That explains it. GIGO (Garbage In, Garbage Out). And of course the famous Motley Fool's approach of 'we never check the veracity of our sources' combines to give you this source article.
Good point. It’s difficult to cast a perfect finish, but many places will cast in volume then surface-prep (usually a quick shot in a CNC) to get the desired look. Many will also claim it’s “CNC” made, since there is a CNC involved at the finishing level.
I know you can get it with cast parts and some good polish wheels, though... You’d be surprised the amount of “machined metal” that is sold in the CE market that is actually die cast, ground down, plated, then polished! Looks as good as solid machined for a lot less money.
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