How High Can Apple Fly?

It's time for Apple (Nasdaq: AAPL  ) to put up or shut up.

Apple reports earnings after market close tonight, and the gadget guru has everything to prove. This stock has been on fire in 2009, doubling in price since New Year's Eve and challenging all-time highs again after recovering from last year's market meltdown. With a $167 billion market cap, Apple has surpassed giant businesses like Johnson & Johnson (NYSE: JNJ  ) and IBM (NYSE: IBM  ) to become the seventh most valuable stock in the United States.

But Apple's business is facing challenges it has never seen before. Amazon.com (Nasdaq: AMZN  ) offers a reasonable alternative to the market-defining iTunes music store. Microsoft (Nasdaq: MSFT  ) has launched a plausible replacement for the ubiquitous iPod called the Zune HD, and the music hardware coming out of competitors like Samsung looks tasty too. Plus, the rule of the iPod is passing; Apple is moving on to a new high-growth market: smartphones.

Plenty of cell phones double as media players these days. The iPhone is still going strong there, but Google (Nasdaq: GOOG  ) is getting its Android army into gear, and Microsoft has updated its own smartphone platform, too. The Palm (Nasdaq: PALM  ) Pre assault may be stalled, but iPhone challengers are now plentiful -- and there's strength in numbers.

Add it all up, and we may be looking at Apple's zenith today. The just-completed fourth quarter saw the same challenges in weaker incarnations. The iPhone 3GS should present record-breaking sales and profits this time around, and a strong back-to-school season probably did the same for the Macintosh division. But come next quarter, we'll see the Android scaling up to challenge the iPhone for real. Will teens and hipsters everywhere keep asking for an iPod for Christmas -- or might their roving eyes turn to new toys?

Apple itself must be aware of these threats, and will probably set its next-quarter guidance on a beatably modest level. Apple has beaten every earnings target since the first quarter of 2003, and it won’t break that streak any time soon. But low-key guidance often drowns out even raucously strong results. The recent run-up in Apple's stock may have set investor expectations impossibly high. This could be your last chance to take some profits off the table -- and buy back again when the market has reset its expectations. Apple is by no means dead in the water, but it may be a while until we see a P/E ratio in the 30s again.

Think I'm wrong? My flame-retardant suit just came back from the cleaner, so feel free to fire away in the comments below. Nodding in agreement is fine too, of course.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Google is a Motley Fool Rule Breakers selection. Apple and Amazon.com are Motley Fool Stock Advisor recommendations. Johnson & Johnson is a Motley Fool Income Investor recommendation. Microsoft is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.


Read/Post Comments (20) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On October 19, 2009, at 12:22 PM, fauxscot wrote:

    Zune HD is a "plausible replacement for the iPod"?

    If Gates drops the price to $0 or if the entire population of California suddenly develops learning disabilities, perhaps.

    That one comment alone and I quit reading. What planet do you guys live on?

  • Report this Comment On October 19, 2009, at 12:31 PM, marv08 wrote:

    Hm, I do not think you have your history in order... Apple was not the first to offer MP3 players (actually they were one of the last ones to enter that game), they were not the first in online music (far from it) and they were positively the last ones to build mobile phones.

    Competition is not new for them. Look at an glaring example: for almost one entire year Amazon was allowed to sell all tracks DRM-free and cheaper than iTunes. In that very year Apple moved from being the number 3 or 4 reseller to number one (despite DRM and higher prices) not loosing nothing to Amazon... Now the playing field is even and that should scare them? Don't see that.

    Android is still a geek platform and already too diversified, the Pre did not take off (still fighting to match the number of iPhone 3GS sold during one weekend), Windows Mobile 6.5 is a joke (only sells with OEM custom GUIs on top of it) and the Storm take 2 still looks like the Soviet iPhone and Nokia/SE loose the smartphone segment at lightning speed... The biggest market for holiday items is clearly below USD 200 and MS removed all Zunes in that segment from the line-up, while the Zune HD is not even where the touch was 2 years ago. Subscription services are not taking off at all (people do not want additional long-term commitments)... etc ad lib

    And: your analysis is based on Apple not moving forward. This would be quite a surprise. New, cheaper consumer Macs will roll out this months, iPhone version four rumors will start no later than February and the tablet should keep us busy in the meantime. Better worry about others :-)

  • Report this Comment On October 19, 2009, at 12:36 PM, airportguy wrote:

    Apple has done something that is very rare in the consumer arena. They have captured the minds of their customers, causing fierce brand loyalty. They have a line of products that are easy to use, stylish, and can "grow". The App Store allows new functionality for your iPhone and iPod Touch. They become more useful over time.

    The growing base of iPhone users is fueling Mac sales as well. People who have used PCs forever are now buying Macs because they love the ease of use. I am waiting for the new generation of the iMac to purchase my first Mac right now. I will run it alongside the other PCs in my house for now. As long as Apple keeps churning out the products that people want and are easy to use, the company will continue to experience strong growth.

    The Zune and the Pre have already failed against the iPhone. Improved versions won't fare much better in my opinion. The Amazon.com site is no comparison to iTunes either. Apple is in an enviable position. People are willing to pay a premium for their products. They also will upgrade fairly frequently as well. How many iPhone users are on their 2nd or 3rd iPhone already? Quite a few. As iPod sales decline, that only means that iPhone sales are increasing that much more. The iPod users are not buying the Zune or anything else in significant numbers. I will hold on to my Apple shares and enjoy the ride.

  • Report this Comment On October 19, 2009, at 12:55 PM, shankhill2 wrote:

    I have been using Mac's (3 of them) for five years. During that time, they have not crashed, frozen, or otherwise glitched on me, not even once. At work, I have Windows machines, and it happens several times a week. I and my wife have iPhones, and we love them. What is the issue here? The Mac products are far superior, and undoubtedly will remain so during various iterations. They continually bring out new technology that works out of the box. Learning curves are not steep. What I don't hear from people is the inevitability of new products, especially related to the huge data farm in N. Carolina. There is a rumor of a new product (not the tablet), that is a deep, dark secret. I am sure it will surprise people, but surprises are not unexpected from this superior company. I will hold my stock until retirement.

  • Report this Comment On October 19, 2009, at 1:26 PM, guiganol wrote:

    What website am I on? Did I fall into TheStreet.com by accident? All these fine articles about the dangers of trying to time the market and how it's best to go for the long haul and then you give us this. Or maybe you're just trolling for comments. (at least I hope that's as far you're trying to go)

    You want growth, how about one word: China. The iPhone just broke into China and they have more than twice as many phone subscribers as we (America) have people. Then just add in South Korea and all the other countries and markets Apple has just entered within the past 6 months.

    Now, the Zune is all nice with all that OLED goodness, but---and here's the big BUT---no SDK and no app store (alright, an app store but with no apps). What's the use of all that power (and that tegra chip really is promising) when you can't do anything with it? And that goes the same with all those new phones that'll have Android on them. And yeah, they'll have developers but Apple left the station 2 weeks ago and it's hard to catch up with that.

    And Apple "will probably set its next-quarter guidance on a beatably modest level" because of new threats? Well, you'll sound like a genius for that first part, but only to the most amateur of investors. Everyone else who already follows the stock knows they always do that. You'll get credit for that "threat" part if it's less than any guidance it's given recently. And I don't see that happening.

  • Report this Comment On October 19, 2009, at 3:36 PM, PSU69 wrote:

    Wow. I must say your article is shallow at best. I strive to avoid negative comments, but your points are so poorly backed up with factual data and you ignored major real growth elements (high margin) in the recent past. Apple is building a global army of loyal multi-product advocates based on tech that delivers the goods day after day. Did the shorts send a check to support one of your favorite charities or what?

  • Report this Comment On October 19, 2009, at 3:48 PM, cathystein wrote:

    The PC sector [read: windows] has been soft yet Intel's numbers just reported were good with forward guidance to the upside. Perhaps the halo effect generated from Apple's continued growth and market share capture?

    Or that intel was pulled along with the strong mac sales?

    Probs all the above. I like AAPL going forward, check out the Jan calls!

  • Report this Comment On October 19, 2009, at 5:22 PM, igor1309 wrote:

    So, it looks like It's time for you to shut up.

  • Report this Comment On October 19, 2009, at 5:33 PM, sat8chfi wrote:

    Apple earnings for 2009 set new record

    Its Over !!

  • Report this Comment On October 19, 2009, at 7:26 PM, rgardner101 wrote:

    In my family 6 ipods and 3 macs we dumped the pc

    and don't plan to go back .

  • Report this Comment On October 19, 2009, at 8:27 PM, marv08 wrote:

    Hehe, boy, look at the reported laptop sales numbers. Not a single analyst dared to ask about "netbooks" even once during the conference call :-)

    This would be just the right time to re-assess the effectiveness of those "laptop hunters" ads. Another "rounding error" Bullmer?

  • Report this Comment On October 20, 2009, at 12:44 AM, beetlebug62 wrote:

    Wow, Anders it is time to put up or shut up! Woops, is that silence?

    There is so much rubbish in your post, I don't know where to start!

    I'll just pick one snippet. You wrote "Apple itself must be aware of these threats, and will probably set its next-quarter guidance on a beatably modest level. "

    Apple set revenue guidance at $1.2B to $1.5B higher than its highest ever recorded revenue. How is that "modest"? Is any company out there setting revenue guidance levels at all-time record levels?

    You write as if Apple is only just beating its own lowball guidance. It actually is beating Analyst estimates, handily, and yes, analysts adjust their estimates knowing that Apple lowballs its guidance.

    As for your flame-retardant suit, maybe you should put on the flaming retard suit instead?

  • Report this Comment On October 20, 2009, at 4:40 AM, fauxscot wrote:

    That Zune HD is eating Apple's lunch, huh?

  • Report this Comment On October 20, 2009, at 6:29 AM, elbrombo wrote:

    I have never seen a MS Zune player or a Palm Pre and wouldn't recognize and Android phone if it was left in the toilet.

  • Report this Comment On October 20, 2009, at 7:04 AM, luckyIguess wrote:

    Let's not overlook Apple's pipeline. iPhones and Macs aside, none of us know what Apple will come up with next. We do however, know that it's going to be a groundbreaking invention. They routinely make electronics better and more fun than anybody else. Simply because we don't know what the next device will be doesn't mean Apple isn't already working on it. I regret not having more money to buy when the stock was back in double digits, but I'm hanging on to what I've got.

  • Report this Comment On October 20, 2009, at 12:47 PM, mikecart1 wrote:

    AAPL > MSFT

    Game, set, and match. This is like revenge from Steve Jobs to Bill Gates. I love it!

  • Report this Comment On October 20, 2009, at 12:58 PM, TMFZahrim wrote:

    Okay -- Apple did indeed "put up" on demand, and didn't lowball the next quarter the way I expected.Kudos all around. Now let's see who's right about the coming quarter.

    Anders

  • Report this Comment On October 20, 2009, at 2:06 PM, theinfamoushw wrote:

    you don't even mention the rumored tablet which is due out in mere months. Now while it's questionable the market recovery will last that long, I think you have a much better argument to make that the high water mark.

    I kind of agree with you on the mp3 player front. No one really needs another iPod. The idea of paying $200 to listen to music all the time is less appealing and novel than it was five years ago.

    However, the iphone, combined with the new tablet, and all the mac products marks a complete set of every size computer product around. If apple can say we make the best computer, netbook (tablet), ereader (large size iphone), laptop, highend laptop, and smartphone, this is still a good company. But alas I expect the tablet to disappoint and be too expensive to catch the netbook market, unless it's just an ereader which would be a major disappointment.

  • Report this Comment On October 20, 2009, at 5:25 PM, Dani4Owen wrote:

    I have nicknamed PC', "piece of crap", and for good reason. Since getting my Mac's 3 years ago, I have never looked back. We have 5 IPOD's and will be getting my 13 year old a new one for Christmas as his is 5 years old and the original! Have you guys been in an Apple store lately? They are the only store in the mall that is consistently packed. In fact, on Sunday mornings there is a line waiting for them to open! This, in the deepest recession we have seen since the Depression and a tech store too boot. I will keep my shares of Apple. They are the only ones in my portfolio not in red!

  • Report this Comment On October 24, 2009, at 9:41 AM, burlybull1 wrote:

    Apple's zenith? I doubt it. I sold my stock after this last quarters report & have been fretting ever since. User loyalty approaches rabid and judging from the comments here it continues. My wife and I have 2 MacBooks and 1 Dell. The Dell sits unused. In the last year we have had 4 crashes. Previously with the Dell & XP there were "considerably" more. My only concern is Steve's health. Apple will continue to shine, and I will be re-buying the stock.

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