The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Apple (Nasdaq: AAPL ) .
Apple by the numbers
Here's a quick snapshot of the company's most important numbers.
Result (Most Recent Available)
|Revenue (TTM)||$142.4 billion|
|Net Income (TTM)||$38.6 billion|
|Market Cap||$540 billion|
|Cash and Investments||$110 billion|
|Dividend Yield||1.9% (beginning in fiscal fourth quarter)|
|Key Products||iPhone 4S, The New iPad, Macbook Pro|
|Key Competitors||Microsoft, Samsung, Google, Amazon.com|
Sources: Yahoo! Finance and company releases.
It's crazy how fast Apple has transformed itself from a struggling company in the late 1990s to the incredible powerhouse we see today. What's even crazier is that despite returning 52% annually for shareholders over the past 10 years, the stock is still an incredible value. When you strip out the company's $110 billion cash hoard, the stock trades at just 11 times trailing earnings, all from a company that grew revenue 58.9% last quarter.
The death of Steve Jobs certainly takes some shine off the company, and I'm never a fan of buying into one of the biggest companies on Earth, but somehow Apple keeps on growing, and there doesn't appear to be any end in sight.
Apple has also managed to create a network effect of its own by creating products that complement and augment each other. I started as an iPhone user who made the switch to a Mac three years ago because integration was so smooth between the two. Now I've adopted the iPad and Apple TV because music, movies, picture, calendars, and many other things sync seamlessly between the devices with iCloud. What started as a simple smartphone purchase has sucked me into Apple's vortex, and I'm sure the same story has been repeated millions of times around the world.
With those positives out of the way, there are two things that concern me about Apple. First, Apple really has only three significant product lines -- Mac, iPhone, and iPad, a very small number for a company of this size. That means one mistake can be extremely painful to the company, so there is little room for error with these three products.
Second is a threat to Apple that people fail to account for, and that's Apple's outsourced production. Few noticed reports that found Samsung was the only supplier that had been qualified to make screens for the new iPad and what it means for Apple. This is a key suppler as well as a major competitor in the smartphone and tablet space. Apple is essentially teaching Samsung how to make its products, and some would argue it's doing a better job than Apple with the new Galaxy S III.
So yes, there are risks, but Apple's value is more than enough for me to give a thumbs-up on its stock. I think Apple will continue to stack up cash and release great products for at least the next few years, possibly even cracking the $1 trillion market cap number.
Even though I've taken a bearish look at how a post-Jobs Apple might play out, I can still recognize that Apple isn't Research On Motion (Nasdaq: RIMM ) , nor is it likely to suffer the same fate as Nokia (NYSE: NOK ) in the near future.
For one thing, Apple has a complementary ecosystem (through iPads, Macs, and its TV set-top box) to lock in customers for the long haul, something that RIM and Nokia didn't consider until it was already too late. That ecosystem is what's drawn in a majority of mobile developers. A mobile device without killer apps isn't much use to anyone, so as long as Apple's iOS remains the platform of choice, it will take a truly titanic effort to dethrone it.
The iPhone remains Apple's bread and butter and ought to be its flagship product as long as the smartphone boom continues. How many smartphones have been sold each year, against the total number of phones sold?
Total Mobile Phones Sold
Smartphone Share of Mobile Phone Market
|2007||1.15 billion||122.32 million||10.6%|
|2008||1.22 billion||139.29 million||11.4%|
|2009||1.21 billion||172.38 million||14.2%|
|2010||1.60 billion||296.65 million||18.5%|
|2011||1.77 billion||472.74 million||26.7%|
|First Quarter 2012||419.11 million||144.40 million||34.5%|
Smartphones have still only penetrated about a quarter of the total global phone market, and that number should only increase over time. Apple's current share hovers around 20% of the total smartphone market, and even if it should slip to 15% in 2012 (which seems unlikely based on first-quarter sales figures), it's conceivable that Apple might sell nearly 100 million iPhones this year. Since the company's sold only about 180 million iPhones since the 2007 launch and is still positioned in the sweet spot of high-end smartphone adoption, it seems absurd to think that Apple will be slipping this year, or even next year.
The company's greatest threat may not be from Google's (Nasdaq: GOOG ) Android phones, but from a new Google form factor. Just as the iPhone redefined the notion of a mobile phone, Google's Project Glass could redefine mobile communication entirely. But it's not here yet, and adoption will take time. There just aren't any genuine threats to Apple's cash machine in the near future.
Apple ... yeah, I think I've heard about this company once or twice before.
The biggest factor that will determine whether Apple heads higher is whether it remains a trendsetter rather than a trend-follower. RIM is learning the hard way what happens if you fail to innovate. Worse yet, RIM may still be overvalued despite losing more than 90% of its market value from its all-time highs.
Apple has been a revolutionary product designer, introducing the world to iPods, iPads, and iPhones. The death of Steve Jobs, as Travis mentioned, does take some of the wind out of the company's sails. Luckily for shareholders, the company has an army of diesel-powered engines to fall back on if the wind really slows down.
Those engines are working on Apple TV, which users can expect perhaps as early as this Christmas; a major upgrade to Siri, the vocal communications device currently found in the iPhone 4S; lighter and redesigned MacBooks the release of an iPhone 5 (or whatever Apple wants to call it) sometime within the next few months; the forging of a relationship with Facebook (NYSE: FB ) that'll integrate its Apple iOS with Facebook's social platform; and the prospect of a higher dividend given its massive cash hoard.
Plainly put, Apple is the king of the hill in both innovation and execution. Under Ron Johnson (now the CEO of J.C. Penney), Apple opened roughly 300 retail stores that boast the highest retail per square foot of any retailer ... by a mile!
Even after Apple's considerable move higher, the stock is still very reasonable. Even if Apple's growth were halved, it would only be growing in line with the industry average. With greater than $100 billion in cash and a forward P/E under 11, Apple lets you simply click the buy button, sit back, relax, and let the dividends stream in while occasionally checking the closing price on your fancy new iPhone.
The final call
There you have it, a rare consensus between the three of us that Apple will outperform the market over at least the next year. We've added an outperform call on Apple to go along with the rest of our picks, which are now beating the market by 55 points. Check back next week for another debate.
In the meantime, take a look at our brand-new premium research report on Apple. Inside, you'll receive exclusive analysis on all-things Apple from our top technology analyst Eric Bleeker. Better yet, you'll receive a full year of updates to go with it. Claim your copy today.