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. |
Those figures are NET PHONE SALES REVENUES for the quarter being reported, Puget... not profits. Look at the PROFIT statements for each company. Nokia sells phones... and not much else. Their profits for the entire 2nd quarter 2010 were a paltry $282 million... on their entire revenue. They just fired their CEO for poor performance over the past several years.
No one but YOU is challenging these figures. They seem to have been accepted as factual by people who know how to check these financial statistics... and they have been reported by a lot of other pundits. You are willing to accept Gartner's unsupported predictions for four years from now—based on absolutely NOTHING but wishful thinking—as gospel truth and factual, but are unwilling to accept analysis based on company reports of actual reported profits in audited financial statements? That really doesn't make sense, Puget. One is nose picking, using bias assumptions; the other is reproducible from the same data by other analysts.
I'm reporting facts as published. You are merely speculating.
Your degree in Finance is from WHAT college? You claim to be an engineer... not a Financial analyst... but here you are making stock advice. By the way, Microsoft and Apple both have no debt... tossing that in as though Apple DOES have debt is disingenuous. Nor can you make the claim that Apple's "book value" is about on a par with Microsoft based on that list. That is not the way book value is calculated.
Incidentally, Microsoft has only $36.8 Billion in cash and liquid assets on hand, according to Bloomberg as of yesterday. Apple has around $45 billion, according to their last quarterly report. So that little "factoid" of yours is not true.
As to the ZERO DEBT? Microsoft's BoD has just authorized $6 billion (as of September 13, 2010) in debenture sales to pay their current year dividend and for stock buy backs... hmmmmm. According to reports from insiders, also according to Bloomberg, it is because their cash and short term assets are held OVERSEAS... that's a lot of confidence in the US economy (NOT!) from Microsoft... and they would prefer to borrow than draw down assets??? So that will no longer be true as of this month or next.
IBM's world wide profits in 2009 were slightly more than the profits Apple posted in just ONE QUARTER in 2010. Apple is four times more profitable than IBM... and posts revenues about 2.5 times what IBMs world wide sales are. IBM's sales dropped 2% YoY quarter for quarter... not bad compared to the industry, though. Apple's surged 33%.
They got the data from the respective companies' quarterly reports that are publicly available. Anyone can find it... and it is accurate.
“Your comment is the nonsense. It’s not based on facts.”
My comment is nonsense? I said that “Nokia sold many many more phones than Apple.” Where was I wrong?
I was not referencing revenue. So where was I wrong Swordmaker? I’ll expect a full and public apology.
See earlier links in this thread showing the PC market growing 28%+ per year. Microsoft's holding their share, and that means 28% annual growth just maintaining their share.
where do you see Microsoft growing in order to justify the stock price?
More revenue, more profits, higher margins, billions in cash on hand, a strong dividend - you know, financials that most would consider attractive. Not bubble-driven.
Yep, there are some support bars in there, and the PCB and fans are are screwed to the keyboard tray. The underside - the cosmetic part - is all cover, no real structural value. Much like my old Dell D505 - the case under the keyboard was the carrier (and was a cast aluminum part).
Your comments seemed to be linked... $2 billion resulting in $300 million in profits was what you preferred over Apple's 48% of all world wide cellular phone profits... then you proceeded to commenting the sales of Nokia phones by number. That linked the statistics.
You were making up figures. I provided accurate information instead of fantasies... No apologies from me for correcting your nonsense. . .or calling you on it.
They do (after all, Timmy Geither's a GS guy!), but that's beside the point. Look at what they claim - $11 billion in EBIT for the iPhone. Assume $500 per phone, that's 22 million phones sold with every single dollar being profit.
Apple's claiming about 2.5 million phones a month. To make an EBIT of $11 billion on 30 million phones you'd have to make $366 per phone. Highly unlikely.
Given that it's either this GS data (from when? Note that 2010 is an estimate, so I assume sometime back in 2009) or that single asymco website, and it would mean that the EBIT for every phone is 75% of the sell price, something's not right.
Sorry, I was relaxing on my rubber tree farm in Thailand in mid August. Took a few weeks off to relax and enjoy the farm.
Then there are primary reports:
Everything points back to that single asymco report. Can you show anything that doesn't? Even the TeleComAsia.net article is sourced from asymco.
Like I said, it all seems to come from a single website, that contains no references to anything other than itself and it's other writings, and uses its own articles to as circular references.
I was responding to made up numbers to make a point. The only number that was off was the $2 Billion, the real number is actually much much higher. Why don’t you go challenge that person and then apologize and eat your crow.
I know, which is why I called BS on the asymco data! That's the ONLY data they had on that post that Anti linked! It wasn't even profits, it was revenue! Yet apparently it was supposed to be proof of some claim about 47% of the EBIT of the industry...
No one but YOU is challenging these figures.
Which is interesting, because they simply don't hold up. It would be interesting to see what data created those numbers, because EVERY LINK PROVIDED by anyone else used this asymco data as the source. And asymco doesn't say where it got the data.
Hey, if you want to suck down random, unverified data on the Internet, be my guest!
Then by all means ignore my advice and ride any bubble down to earth - Sword says so! Good lord, are you being argumentative to be argumentative? What did I say that was wrong? When a stock starts dipping, when the bubble starts collapsing, dump.
But I guess that's not the Swordmaker School of Finance? Let me know where YOU got your degree in Finance and I'll make sure and steer clear!
Incidentally, Microsoft has only $36.8 Billion in cash and liquid assets on hand, according to Bloomberg as of yesterday. Apple has around $45 billion, according to their last quarterly report. So that little "factoid" of yours is not true.
Yep, my data was a few days old. Sorry about that. Of course, Microsoft's been giving the money away to their owners, the shareholders, in the form of a dividend. I guess Steve wants to keep his so he can swim in it like Scrooge McDuck...;)
According to reports from insiders, also according to Bloomberg, it is because their cash and short term assets are held OVERSEAS... that's a lot of confidence in the US economy (NOT!) from Microsoft.
Smart move! Where do you think the opportunity for growth will be in the next few years - the US or Asia/South America? But then, I already jumped out of the US - economically - two years ago, and am much better for it.
and they would prefer to borrow than draw down assets??? So that will no longer be true as of this month or next.
Smart move again. Get low interest loans right now, leverage the cash you have and lock in to historically low rates. It's not like you need the cash for operations, but if you can get it at a cheap rate, why the heck not?
Microsoft's all grown up, acting like a member of the DJIA. Wait - it is...;)
No support bars, and you do realize the keyboard is part of the structure, right? Have you seen what a normal laptop disassembly looks like? Metal plates and supports everywhere within a plastic case that still creaks when twisted. This is monocoque, an aluminum shell that the computer parts attach to, no other support. They keyboard side is where most of the stuff attaches. The back is a shell that screws onto the keyboard, providing protection and stiffness.
Then you must LOVE Microsoft...;) 50% more revenue than Apple, TWICE the operating income, and 224% higher net profit. Wowsers!
Would be nice to see...
No, where do you see Microsoft growing? The PC market will not survive in its present state. People are already ditching PCs for phones and tablets. Say your Android tablets take off, which they will. That will eat into Windows notebook sales, and probably desktops too. Desktop is not the future for growth, but that's the only thing Microsoft really owns. Even phones these days are faster than desktops with the Vista logo on them at launch. Does everybody need a computer when their phone is that fast?
Microsoft was a contender in mobile, but no more. Microsoft has a reasonable position in consoles, but nothing special like Nintendo. Tablets based on Windows were DOA just on iPad rumors. Where do you see Microsoft expanding? Apple has shown time and again they can make major profits without a loss leader in any market they aim at. Microsoft, not quite so successful, requiring billions in loss leaders and seven years to make a profit in a new market like game consoles.
Really? Would you call a 24% growth rate a dying market? Most would consider a doubling every 3 years to be a healthy market. Oh well...
driftdriver was the first to tell me that I was talking nonsense. Does not driftdrive owe me an apology first?
For what? For pointing out your percentage and dollar value were nonsense?
Hold your breath.
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