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Apple the Most Valuable Company in the World? Bet on It.
The Motley Fool ^ | September 12, 2010 | Eric Bleeker

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.

Metric

Today

2014

iPhone Gross Margins

Estimates vary between 55% and 65%

50%

Apple R&D and SG&A

11.7% of sales

15% of sales

Apple Effective Tax Rate

27.2%

35%

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
Apple is the king today, and I don't see it being displaced. During the next two or three years, I have little doubt that it will keep soaring. However, in the longer term, there are still some concerns.

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.



TOPICS:
KEYWORDS: apple; ispam
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1 posted on 09/13/2010 5:16:07 PM PDT by Swordmaker
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To: ~Kim4VRWC's~; 1234; 50mm; Abundy; Action-America; acoulterfan; AFreeBird; Airwinger; Aliska; ...
The Motley Fool predicts that Apple will be the most valuable corporation in the world and lists the reasons why... PING!

Please!
No Flame Wars!
Discuss technical issues, software, and hardware.
Don't attack people!
Please! Don't reply to the Trolls. Ignore them!


Apple Soon to be Most Valuable Corporation? Ping!

If you want on or off the Mac Ping List, Freepmail me.

2 posted on 09/13/2010 5:18:38 PM PDT by Swordmaker (This tag line is a Microsoft product "insult" free zone!)
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To: Swordmaker

Oh, I’ve seen this type of “analysis” before.

It doesn’t end well for the stock holders.


3 posted on 09/13/2010 5:21:43 PM PDT by NVDave
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To: Swordmaker

Oh, I’ve seen this type of “analysis” before.

It doesn’t end well for the stock holders.


4 posted on 09/13/2010 5:21:48 PM PDT by NVDave
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To: Swordmaker

Basing financial decisions on forward looking earnings projections is like planning your retirement based on what Congress will do 10 years from now...


5 posted on 09/13/2010 5:22:21 PM PDT by PugetSoundSoldier (Indignation over the Sting of Truth is the defense of the indefensible)
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To: Swordmaker
There are far better values in the days immediately ahead.


6 posted on 09/13/2010 5:22:24 PM PDT by MrEdd (Heck? Geewhiz Cripes, thats the place where people who don't believe in Gosh think they aint going.)
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To: Swordmaker

It is amazing to think that this company was on the brink of death not too long ago and now is one of the best run companies in the world.


7 posted on 09/13/2010 5:25:10 PM PDT by DemonDeac
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To: NVDave

There was a recent Gartner study which predicted a significant reduction in market share for Apple in the smartphone market. By 2014 they were predicting it would be down to about 14% (somewhere about there).


8 posted on 09/13/2010 5:27:36 PM PDT by driftdiver (I could eat it raw, but why do that when I have a fire.)
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To: NVDave

Motely Fools did the saem analysis for Enron before it imploded. Apple will hold up but Motely Fools got payola on their radio show when they had Ken Lay on years ago and 10,000 cheering employees/kool air drinkers.

Lay and the “fools” were talking new pardigm BS.


9 posted on 09/13/2010 5:30:56 PM PDT by Frantzie (Imam Ob*m* & Democrats support the VICTORY MOSQUE & TV supports Imam)
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To: driftdiver

Even if they maintain market share, the onslaught of Android phones is going to erode margins. ie, to maintain market share, the typical trade-off is lower margins.


10 posted on 09/13/2010 5:39:24 PM PDT by NVDave
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To: Swordmaker

Without any doubt at all.


11 posted on 09/13/2010 5:44:40 PM PDT by RachelFaith (2010 is going to be a 100 seat Tsunami - Welcome to "The Hunt for Red November".)
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To: Swordmaker

It has really been surging this week!


12 posted on 09/13/2010 5:47:11 PM PDT by BunnySlippers
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To: PugetSoundSoldier
Basing financial decisions on forward looking earnings projections is like planning your retirement based on what Congress will do 10 years from now...

Noone's life, liberty, or property is safe while Congress is in session...

13 posted on 09/13/2010 5:47:23 PM PDT by Swordmaker (This tag line is a Microsoft product "insult" free zone!)
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To: driftdiver
There was a recent Gartner study which predicted a significant reduction in market share for Apple in the smartphone market. By 2014 they were predicting it would be down to about 14% (somewhere about there).

Mostly nose picking based on the flatlining of iPhone 3Gs sales at the end of Quarter 2 as the buyers awaited the release of the iPhone 4... Seeing as how Apple has sold 11 million iPhone 4s since then, Gartner's conclusions on that report seem a little dated.

14 posted on 09/13/2010 5:50:59 PM PDT by Swordmaker (This tag line is a Microsoft product "insult" free zone!)
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To: NVDave

From this thread - http://www.freerepublic.com/focus/f-bloggers/2586715/posts

Which is about how Android is going to gain market share at the expense of others.

Symbian 30.2

Android 29.6

Research In Motion 11.7

iOS 14.9

Windows Phone 3.9

Other 9.6


15 posted on 09/13/2010 5:52:08 PM PDT by driftdiver (I could eat it raw, but why do that when I have a fire.)
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To: NVDave

I don’t think they have lowered their margins much if at all on their computers, which have also been improving in sales.


16 posted on 09/13/2010 5:53:23 PM PDT by Mr. Blonde (You ever thought about being weird for a living?)
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To: Swordmaker

Gartner makes its money by being right a fair percentage of the time. I’m only saying there are other opinions out there that seem to be from more reputable and unbiased sources.


17 posted on 09/13/2010 5:53:29 PM PDT by driftdiver (I could eat it raw, but why do that when I have a fire.)
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To: NVDave
Even if they maintain market share, the onslaught of Android phones is going to erode margins. ie, to maintain market share, the typical trade-off is lower margins.

Before Apple's latest uptick in iPhone 4 sales, they already had 47% of ALL global cellular phone profits! Apple is not much worried about "market share." Profits are good enough. They are not in a race to the bottom of the barrel, and never have been.

18 posted on 09/13/2010 5:54:23 PM PDT by Swordmaker (This tag line is a Microsoft product "insult" free zone!)
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To: Swordmaker

I can’t fault their logic here. I’m not an Apple fan, but I recognize what they’ve done well, and like the return I’m getting. Ever since the Apple II they’ve capitalized on open systems, not it’s Apps, and it’s a valid point that once they get you, they’ve got you for the future as well. Good stock.


19 posted on 09/13/2010 5:55:14 PM PDT by bigbob
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To: NVDave

Apple is somewhat contrarian when it comes to margins, witness what they’ve done with desktops and portables. I look for Android to grow at the expense of other OS more than Apple, due to the change costs associated with existing apps. Since the hardware platform cost is roughly comparable, if it comes down to iOS vs. Android, there’s not a lot of reason to cut margins just to keep/gain share. Since Apple makes the hardware, owns the OS and makes money selling the apps, they could turn loose of some margin and still be highly profitable. But I don’t think they’ll even need to do that, just ride the technology curve.


20 posted on 09/13/2010 6:00:28 PM PDT by bigbob
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