This Might Be Apple's Biggest Opportunity Yet

Going by the numbers, we can safely presume two things about Apple (Nasdaq: AAPL  ) right now:

  1. The stock is priced for very little growth. My own estimates say just 6% annualized improvement in free cash flow over the next five years, followed by just 3% yearly growth thereafter, in perpetuity.
  2. Virtually none of that growth includes Apple TV. The Mac maker doesn't specify sales of its set-top boxes. While the iTunes Store is on track to be an $8 billion business, only a portion of sales is attributable to movie and TV downloads. Apps and music also account for a fair or even majority portion. Overall, the business accounted for just 5.5% of revenue in the latest quarter.

Admittedly, 5.5% isn't much of Apple's pie. But is it really fair to value the Apple TV business at zero? That's the only reasonable conclusion I can draw when the current price presumes the combination of iPhone, iPad, and Mac businesses -- arguably the greatest combined growth machine in Silicon Valley history -- will never again produce double-digit cash flow gains.

But that's crazy. Not only do I believe Apple is cheap on the strength of its current businesses, but I also believe the Mac maker could be one of the biggest benefactors of efforts to remake the television.

What's the TV disruption worth? Answering that question requires defining what role Apple would play. I see the iEmpire as a content distributor with the potential to destabilize the major incumbents of the cable television industry. Here's a closer look at who's at risk, what they collect in terms of revenue, and the values Mr. Market assigns to their efforts:

Company

Current Market Cap

Revenue (TTM)

Cablevision Systems (NYSE: CVC  ) $3.41 billion $6.70 billion
Charter Communications $6.79 billion $7.26 billion
Comcast (Nasdaq: CMCSA  ) $79.21 billion $58.59 billion
DirecTV (NYSE: DTV  ) $32.25 billion $27.95 billion
DISH Network (Nasdaq: DISH  ) $13.87 billion $14.41 billion
TOTAL $135.53 billion $114.91 billion

Sources: Yahoo! Finance, S&P Capital IQ.

Say Apple claims just 25% of the available revenue as consumers shift to Apple TV's more attractive on-demand model. That's roughly $29 billion in new sales, or about half the size the iPhone business is today.

We don't know what multiple investors would assign to a more comprehensive Apple TV -- we're projecting, after all -- but companywide the market is pricing each dollar of Apple sales at $3.75. Here, that same multiple would value Apple TV at about $108 billion.

With Apple TV representing just a fraction of Apple's upside, the stock still appears to have considerable upside. In our recent premium research report, our senior technology analyst lays out exactly why he thinks Apple still has room to run, so grab your copy today. Want to look beyond Apple? We understand. Our top pick for 2012 has bested the market so far this year. If you want to find out exactly why this stock looks like a real winner, get the full report, which is available for a limited time.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple at the time of publication. Check out Tim's Web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On May 18, 2012, at 10:55 AM, Archaeologist77 wrote:

    I think the article underestimates the real value of iTunes which is not quantifiable only in terms of revenue from digital downloads, but in the marketing of the perceived value of Apple.

    Look at Apple stock charts and I think we observe a correlation.

    In May 2003, Apple stock rose to $8.9750/share and began a steady rise that has continued to the present day, with the exception of a dramatic fall and rise in the period between August 2008 to July 2009.

    What corporate event before May 2003 can explain this rise?

    Not Apple retail stores which opened May 19, 2001 with little change to the share values.

    iTunes Music Store opened on April 28, 2003 and the rise in share values began.

    What about the rise that began in January 2009?

    At Macworld December 2008, Apple announced iTunes movie rentals and many saw this as the step towards Apple TV. Again, iTunes likely caused the rise.

    iTunes is what brought Apple back to life, in my opinion not merely because of quantifiable direct financial contribution to Apple revenues, but because of what iTunes represented to Apple customers and investors.

    I'd say don't underestimate the role of iTunes, and if Apple TV is finally introduced, it will continue the steady climb of perceived and actual value of Apple to customers and investors.

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