Yesterday I announced my intent to buy both EMC
Well today's buy recommendation is no different. I'm going with Apple
Why Apple has room to run
First, let's go back and revisit my original buy recommendation on Apple. I highlighted four key themes that should keep Apple outperforming. I'll paraphrase them below:
- iOS Scales: Apple has proven its ability to scale iOS to different devices, which unlocks opportunities in connected living room devices (think Apple TV) as well as advertising.
Software is the new kingmaker: Unlike the age of Motorola's
RAZR when phones were differentiated by slick designs that were easy to copy, phone dominance is now dictated by the software. That's a much more defensible position, especially when Apple controls its App Store and the media platform (iTunes) its users have adopted. (NYSE: MMI-WI)
Consumer Behavior: Apple collects $610 for every iPhone sold, yet consumers normally only pay $200 for the device. The subsidized model of smartphones naturally shifts spending away from devices like PC's to smartphones. Beyond that, it benefits high-end sellers like Apple. Consider, Research In Motion
collects $315 on average for each phone sold, yet the price point difference between Research In Motion phones and the iPhone is often around $100. While the companies cost the carriers a $300 difference in costs, the consumer only has to pay $100 more to receive a much more popular phone with more advanced features. This capping of prices from major carriers like Verizon (Nasdaq: RIMM) and AT&T (NYSE: VZ) at around $200-$300 benefits the high-end sellers the most. (NYSE: T)
- Underappreciated smartphone growth: Last year Gartner projected compounded smartphone growth of 28% (in sales, not units!) between 2009 and 2014. That's a tremendous shift that's still not appreciated by investors. I'll have more on this below.
The amazing transforming Apple, more than meets the eye
Still, a lot has changed from that original recommendation. First off, Apple itself has put on a little weight. It's now $60 billion more expensive, a 22% gain in the company's value.
Am I scared about these continuing gains? Not really. I'd always love to get a stock as cheaply as possible, but at the same time, I don't want run-ups or sheer size to sway me away from a stock for which nearly all signs suggest continued growth.
For example, my original buy recommendation focused almost solely on the iPhone's ability to drag Apple to its current valuation, with the kicker of growing product sales in other areas like the iPad and the Mac able to provide the growth rockets to shoot Apple even higher. Well, just six months later, and the iPad has become a force on its own.
Consider that estimates of iPad sales during calendar 2011 reach as high as 65 million! If that figure actually became reality, it would equal 65% of Apple's revenues last fiscal year. One bit of solace for Apple skeptics, I think that 65 million figures is way overstated. Conceivable, and I've been wrong about the iPad before, but it should prove incorrect.
However, let's consider a more reasonable (or, overly bearish) scenario where Apple sells 20-25 million iPads this calendar year. That would account for between $13-$16 billion in revenue from iPads alone.
The iPhone, still the main event
Now we're going to focus on iPhone growth. Apple managed to grow iPhone sales by 93% in both 2010 and 2009, expanding the phone's sales to $25 billion last fiscal year. That growth has to slow way down, right? Not so fast.
Yes, the law of large numbers and market saturation will begin catching up with Apple, however there's still a long ways to go in smartphone growth. More to the point, since smartphone growth rates recently started seeing explosive growth rates, investors still aren't fully aware of how strong this trend is. Take a gander at this chart showing year-over-year growth for smartphones in general.
Just this week, the Consumer Electronics Association released their projection for 56% growth in smartphones in 2011, that's better than the combined 51% growth seen in 2010. Despite all the hype about smartphones, the segment is growing faster and faster!
Now, there are a couple notes here: shipments of smartphones might be accompanied by falling prices, especially as carriers are swarmed with Android models. However, that was a trend that peaked this year, and Apple not only maintained its premium phone selling prices, it grew them.
Take a look out how Apple's revenue share managed to grow despite its total market share by shipments remaining flat (listed as iOS in the chart).
2009 Revenue Share
2010 Revenue Share
Source: Author estimates, Gartner, Apple, Motorola, Nokia, and Research In Motion security filings.
How'd Apple manage to grow its revenue share from about 28% to 31%? By slightly increasing prices while competitors saw their prices sag.
So, with Apple growing sales 93% the last two fiscal years while shipments of smartphones topped out at 51% in 2010, what's to stop Apple from growing by 50%+ again in 2011 when global shipments are expected to grow by 56% from 2010?
I believe the answer is nothing. Not to discount the threat from Google's Android entirely, it's just that Apple has proven its alternative can stand up against the Android and continue growing. Growing shipments at the industry level would leave Apple with $39 billion in iPhone sales during calendar 2010.
Combined with the iPad, that's around $54 billion in sales. If you assume all other parts of Apple remain flat from their previous year's sales total (a conservative assumption, Mac sales grew 26% last year), that's $89 billion in sales for Apple during calendar 2011. Up from $65 billion today.
The bottom line
Looking at Apple estimates, we see that analysts have predicted that the company's sales will come amazingly close to that total; they're calling for $88.69 billion. What's amazing is that this estimates calls for 1) iPhone sales in line with general trends, which Apple has consistently blown away, 2) iPad sales well below most expectations, and 3) are expecting little growth from Apple's other businesses, which have consistently grown along with iPhone, iPod, and iPad sales (the much talked about "halo effect").
I know people are scared about buying into Apple at this time, since its market cap is almost as much as ExxonMobil's, but as crazy as this sounds, everyone is underestimating Apple! I'm placing such a high conviction behind Apple's continuing strong performance in the year ahead that I'm putting around 14% of my "Bits Portfolios" assets into the company. That's a strong statement on my belief that Apple is the strongest pure play on a trend that I believe will define 2011: the growth of converged devices like smartphones and tablets.
In the coming days I'll continue digging into Apple and taking a bit more focus on its long term prospects as opposed to its strength in the year ahead. If you'd like to follow along please subscribe to my Twitter feed. Along with my weekly Apple columns and information, I post other newsworthy tech information and buys from my "Bits Portfolio."