Apple in 2013: Stickiness, Cheapness, and Cash

Morgan Stanley analyst Katy Huberty provides three interesting takeaways from her meeting with Apple (NASDAQ: AAPL  ) CFO Peter Oppenheimer in her research note last Friday. In 2013 she expects:

  1. Further development of new services to compliment Apple's "sticky" ecosystem.
  2. A lower-cost iPhone.
  3. More cash for Apple shareholders.

Stickiness
Though Huberty's expectations for new services shouldn't come as a surprise, it's a nice confirmation for Apple investors in light of the enormous progress in competitors' services over the last 12 months.

Google (NASDAQ: GOOGL  ) and Amazon (NASDAQ: AMZN  ) , for instance, have rolled out a plethora of new services to increase the stickiness of their offerings. Both Google and Amazon launched a "scan and match" service in 2012 to compete with Apple's iTunes Match service. While Amazon's service has similar pricing as Apple's, Google's matching service sets the bar even higher, offering users' free matching for up to 20,000 songs from their own music collection. Now the The Wall Street Journal claims that Google is in negotiations with music publishers to develop its own Spotify-like subscription streaming music service.

Lower-cost iPhone
Huberty's expectations for a lower-cost iPhone are well justified. She points to three factors to support her thesis:

  1. Approximately 50% of iPad Mini purchases in fast-growing markets, China and Brazil, were new Apple customers.
  2. China has a very large market for lower-priced smartphones but Chinese customers prefer Apple's latest iPhones, not discounted previous versions.
  3. Huberty's analysis of Apple's iPad Mini points to upside in the company's overall gross profit dollars, despite cannibalization.

In short, Huberty expects a lower-cost offering to both expand Apple's customer base and increase overall gross profit dollars in light of the iPad Mini's success and Chinese purchasing behavior.

Though Apple's efforts with the iPad Mini have marked substantial progress for Apple at lower price points, Google and Amazon are already on a tear. Both companies may have shipped fewer tablets than Apple did iPad Minis during the fourth quarter, but reported tablet web traffic data from Chitika provides a convincing case that Apple still lost about 5% market share in the US and Canada -- down to 81% from 86% a few months earlier. Chitika data shows that this market share loss is mostly due to increased sales of cheap tablets from Amazon, Google, and Samsung.

More cash for shareholders
Finally, Huberty expects Apple to return more cash to shareholders. Greenlight Capital's David Einhorn's recent case for Apple to pay out more cash to shareholders no doubt puts further pressure on Apple to act soon. As fellow Fool Evan Niu, CFA, recently noted, Apple likely has the earnings power and cash hoard to triple its dividend yield. Furthermore, in a recent article, I proposed that Apple could potentially be one of 2013's best dividend stocks.

Though these three takeaways aren't groundbreaking, they offer soft confirmation of Apple's strategic direction in three hot topics, which could play a large role in making or breaking Apple as an investment in 2013.

There's a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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