Buy, Sell or Hold: Apple's Cohesive Strategy to Survive and Thrive 17 comments
Horacio Marquez
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Apple Inc. (AAPL) used to rule its niche world and will continue to do so, with lots of room to grow.
As Coldplay’s “I used to rule the world…” played softly on the outside stereo speakers of my sailboat “Southern Cross”, as my family and I pleasantly glided by Execution Rock on a gorgeous Sunday afternoon in the Long Island Sound, I could not stop myself from thinking how the song got there. It was coming out of my daughters’ Apple iPod, interfacing with the boat’s new iPod-ready stereo system. And I was wondering whether it was time to get into Apple’s stock. Yes … even on a weekend sail.
Apple in My Home
I have been patiently waiting to get into Apple for a long time. And now, as the market was tanking, sending good companies’ stock prices down with bad ones to ridiculously low levels, this could be the opportunity I’d been waiting for.
How things have changed. For starters, my three Generation “Y” daughters live connected to the Internet. On the way up to the club, we were listening to a mutually-agreed-to selection of their weeks of music stored in their iPods, which they downloaded from the Apple iTunes store onto their Apple laptop computers, before syncing them into their iPods.
And at home, I can’t move around the house without coming across an Apple laptop left hibernating in the kitchen or living room. They never turn them off and their battery life seems infinite! And they come to life so quickly from hibernation, that whenever I need to consult movie times, I inevitably search them in one of their machines rather than in my top-of-the-line gaming Windows-based one, which I bought precisely to put a premium on speed.
My daughters do their homework on them, consult their school e-mail, download music from iTunes, chat with their friends online and even engage in hour-long free videoconferences on iChat with friends both here and abroad. And when they are not in their Apple computers or doing homework, they listen to music on their iPods while they clean up their rooms.
They even burn CDs with their favorite songs for friends. I thought that this might be a localized phenomenon, restricted to kids in affluent zip codes in the U.S. market. But I found out that my nieces in three other countries are in the Apple loop as well, and when we had my nephew from Germany spending a few weeks with us, he was keeping in touch with his friends in Frankfurt and Italy through the Macs as well.
Talk about a globalized world and a connected generation!
One night, while I diligently worked to keep my personal Windows-based laptop up to speed and secure with the latest anti-virus and software patches, my eldest daughter walked by and vehemently proclaimed, with an air of superiority: “Macs don’t get viruses! I don’t even need an anti-virus program.”
With my daughter’s verbal gauntlet still hurting, I set to prove her wrong. Human nature is such that I cannot believe that hackers would somehow not step up to the challenge of hacking into the Mac’s operating system – even just to get bragging rights under their screen name.
Precisely as I am researching this, the anti-virus program in my PC is mysteriously disabled. I would not dare to be connected to the net for a second without an anti-virus program. I am really tired of seeing serious hack attempts being flagged by my firewall, coming from all regions of China, South Korea, Japan, Russia and other exotic countries and even from reserved Internet addresses. I try to enable the program, but it requires a reboot. When I reboot, I update my anti-virus in the background, while working on this article - and then the anti-virus program tells me I need to reboot once more. I save my work and reboot right away. When I reboot the second time, the anti-virus program launches a full scan and somehow my access to the Internet is slowed to nearly nothing. I am forced to rest my modem. It’s taken me a big chunk of time and much aggravation.
Back on the net, while I find few articles about Mac viruses, I also discover an article about an executive at one of the huge Windows-based anti-virus software leaders that runs his own computing on his Mac – without anti-virus software! And I also find articles showing how few Macs have ever been compromised. Apparently, hacking into Macs is high cost and the benefit of doing this is low, because of the low market share they have (around 9%), since most users tend to be individuals, with a preponderance of students and teachers.
That brings me back to my “Buy, Sell or Hold” investigation into Apple Inc.’s shares.
Strong Results
A few days after my family’s sailboat outing, I saw that Apple had posted its strongest results ever. The Cupertino, Calif.-based company said that it’s launching its next generation of Apple computers at higher prices – justified, as usual, by the uniqueness and hard-earned “coolness” factor that’s inherent in Apple machines.
Additionally, Apple just got Best Buy Co. Inc. (BBY) to start selling its popular iPhone in its chain of Best Buy electronics stores. And with Apple currently sitting on a $25 billion cash hoard, and having no debt, the speculation now is that Apple will launch a huge stock buyback. After all, given Apple’s uniqueness and innovation excellence, there is little out there that could complement the company and it has a history of eschewing acquisitions.
At Friday’s closing price of $98.24, Apple shares are down about 52% from their 12-month high of $202.96. The stock is trading at 20 times earnings, but with its consistent high earnings growth, the company’s Price/Earnings/Growth Rate (PEG) ratio is less than 1.0, meaning the shares are right now priced at bargain levels.
If those consistent, predictable earnings continue, this stock is an absolute steal. But that raises the question: Will those predictable earnings continue?
For now, at least, the company seems to have all its “ducks in a row.”
While Dell Inc. (DELL) and other PC makers are suffering, Apple is on a roll. The iPod continues to rule the MP3 player market and has given birth to an entirely new, higher-end, higher-margin product, the iPhone. The iPhone – and to a lesser but still-important extent, Apple computers – have each been a tremendous success.
In the last quarter, Apple sold nearly 7 million units, more than five times the number of phones in the same quarter last year. This points to major market share gains from the estimates as recent as May. For a look at these market-share estimates, let’s take a look at Chart I:
Chart I: Wireless Phone Market Shares (By Brand)
56% Symbian (primarily Nokia (NOK))
13% Windows Mobile
12% RIMM Blackberry
9% LINUX
7% MAC (iPhone)
2% PALM
1% other
Source: Industry statistics, Money Morning Staff Research.
More importantly, Apple has recently been selling more units than the king of the enterprise-mobile phone segment, Research in Motion Ltd. (RIMM). The mobile phone market is huge and has been almost doubling in size year after year. And although growth is expected to slow a bit in the future, the profit possibilities remain huge. Could these market growth numbers and Apple’s share gains be maintained?
To get a better idea, I started by studying the worldwide market-share sales projections for the “smartphone” market. Admittedly, these statistics date back to before the current financial crisis really took hold in the past month or so. Still, it’s a good starting point. Let’s take a look at Chart II:
Chart II: Projected Global “Smartphone” Sales
The year-by-year and projected annual breakdown of global smartphone sales between both the high-end consumer and conventional corporate users (in millions of units):
Year Corporate High End Consumer
2006 12 + 39
2007 21 + 77
2008 40 + 134
2009 74 + 219
2010 111 + 300
Sources: Industry Statistics, Money Morning staff research.
The Competitive Landscape
To make some sense of the competitive landscape the Apple iPhone is facing, I called my friend Brenda Lewis, principal in Transactions Marketing, Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones. I wanted to validate the industry forecasts for growth in “smartphones” – both for high-end consumers and for enterprise users. I shared my forecasts and what I heard from Brenda was eye-opening.
“These forecasts for the high-end consumer are far too high now, especially given the lack of personal discretionary income in most markets,” she told me.
Of course, she is right. Personal discretionary income has likely gone negative in the U.S. market because of high household debt and the need to replace lost retirement savings. But it’s also severely reduced in Europe and Japan because of lower trade flows and job losses due to the global downturn.
Even so, there are roughly $5 trillion worth of stimulus packages that have been committed to the overall global economy by various governments around the world. And we can expect to start seeing the benefits of those liquidity infusions very soon.
So the picture and slowdown we are feeling right now will “surprisingly” improve in about six months. In the meantime, economic numbers will be very tough, since the financial freeze brought the economy to an abrupt stop and unemployment is likely to spike – even from the already-increased levels we’re seeing right now.
Economic inertia is hard to shift quickly.
So until the economy turns around, it’s wise to consider other possible catalysts. For instance, what about the possibility that corporate users could adopt the Apple iPhone? My hopes for being the discoverer of that as-yet-unknown-by-Wall Street catalyst were likely dimmed by Brenda, who said that corporate chief information officers (CIOs) “will likely use the downturn as a reason to reduce the number of devices permitted for enterprise use and to consolidate central CIO control of current business unit devices, a continuation of a trend of the past five years.”
Again, the enterprise-market segment, which she knows intimately, has two main concerns:
- Total cost of ownership, which includes the initial price for the phone, as well as the service and, very importantly, the maintenance.
- Data security.
The latter one is a killer for the iPhone in the enterprise market, since corporate IT departments cannot remotely shut down iPhones that are lost or are stolen as they are able to do with Research-in-Motion-made Blackberries. In addition, the locked nature of the iPhone makes it very difficult for IT departments to customize solutions for company use.
So, while the iPhone is superb from the consumer standpoint for its “coolness” factor and functionality, and for the fashion statement they make for those who wear them in visible locations, Blackberries actually accomplish many more business-critical functions for corporations, and at a lower cost. This means that Apple’s traditional consumer focus – a niche that it dominates – is shrewdly placed.
Competitive Threats for the iPhone
What about risks to the Apple iPhone’s success in its own turf – the high-end consumer?
Well, for starters, Apple faces many brewing challenges: For instance, Wal-Mart Stores Inc. (WMT) is starting its own online music-download service, and will undercut iTunes prices by about 25%.
Wireless phone heavyweight Nokia Corp. is operating a similar story overseas, and it is unclear how long it will take them to come to the U.S. market. More ominous is the ultra-secret plans of Internet-search behemoth Google Inc. (GOOG), which has launched its own branded Google Phone, which will be sold by Walmart at a discounted price of $148 (compared with a price of $199.99 for the Apple iPhone at Best Buy, for example).
The Google Phone is revolutionary and appeals to the spirit of the U.S. “techie” crowd: freedom. It is designed with an operating system, called Android, that’s been tagged with the marketing slogan – “apps (applications) without walls.” The whole goal of the device is to speed up users’ ability to access and surf the Web via a mobile phone – all too often a very slow process right now.
The Google phone also emphasizes the hottest trend in phones today, with the ability to provide “location services,” such as customized weather forecasts, directions and listings of nearby businesses and attractions. Finally, the operating system is, unlike Apple’s, “open source.” This means that it will be extremely easy for anyone to develop new applications for the phone and for corporate IT departments to create customized applications for their employees to use on the phones. There’s even an alliance of software developers – called the “Open Handset Alliance” – whose chief goal is to encourage such custom developments.
As if this new threat were not enough, Nokia, the king of the mobile consumer market, announced its Nokia Tube (5800). Research in Motion is adding to its Blackberry lineup with a newly launched iPhone competitor called Bold. And Samsung Electronics Ltd. (SSDIF.PK) is coming out with its entrant, Instinct, a touch-screen phone with some features that are not available in the iPhone, like streaming TV.
And even Garmin Ltd. (GRMN), the ruler of the GPS device world – and the topic of a recent “Buy, Sell or Hold” feature here in Money Morning, has launched its nüvifone, that, unlike the iPhone, gives you turn-by-turn directions.
My conclusion is that Apple’s iPhone business will continue its strong growth, but that the growth won’t be as strong as Wall Street recently projected. There will be market growth concerns in the near future, and with rivals ganging up on the successful iPhone, some of the market-share-gain momentum that we’ve recently seen will be blunted a bit in the future, although Apple will keep gaining absolute market share.
What about their computers? Enjoying the synergistic “halo effect” from its iPod, iPhone and iTunes strategy, Apple keeps gaining market share in the computer market. Another Apple hit was its adoption of Intel (INTC) chips that can run the Mac OS X, Leopard, and Windows Vista operating systems in the same machine, even simultaneously, with virtualization software.
I am encouraged by these machines, but not exuberantly so. Apple now faces very serious price competition from Windows-only systems. But on the other hand, the segmentation of the market is critical and the ease of use, maintenance, fast recovery from hibernation, advantage in graphic-intensive tasks, intuitive use and virus-free environment make a Mac irresistible for its traditional constituents, provided they will keep paying the very steep Mac premium pricing.
The conclusion is that, moving forward, with 41% of sales coming from abroad and very small absolute market shares in its key iPhone and Mac businesses, Apple is very likely to be able to continue to gain market share, albeit at lesser pace. Also, given its consumer-centric focus, as the consumer gets hit in developed countries, sales growth will wither, while growth in emerging markets can actually accelerate.
Apple is not a pure computer company any longer, but is instead a consumer products company – and one that possesses a very cohesive strategy. That’s what will allow it to continue to survive and thrive.
The stock – with a PEG ratio of less than 1.0, is a bargain right here. But in this highly volatile environment, wait for weakness to start accumulating it, and take your time. Apple’s results are much less dependent on the iPod today, and thus the soon-to-be revealed disappointing Christmas season is nowhere as important as it used to be. So I would buy two-thirds of my position prior to year-end and the remaining third over the subsequent three months in the first quarter, as the bad news over the economy keeps trickling in.
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This article has 17 comments:
Also, mentioned AAPL as a solid candidate due to all the forced selling: www.marketfolly.com/20...
I really enjoyed your description of the windows user experience, especially with regard to something like checking movie times. Leaders like Gates are always looking ahead to a day when it really is convenient to check movie times on a computer - they even think it's here. Sadly, it's not here because the computer takes over and does things like update AV software and prompt with questions you don't want to be asked - interfering with your task.
Computers seem to know when we want to check one thing, or worse yet, print one thing, before we run out the door. Which plays into the hand of the iPhone.
The iPhone lets you check as you walk to the car. And for tasks like weather, movie times, a glance at email - it beats opening a laptop. With the iPhone in your pocket there's no need to print.
I think about the user experience you describe all the time, how computers still fall just short all these years later. Apple is better than MS in this regard, but not perfect. Many times I've tried to sync an iPod before running out the door. Many times I've been punished.
You hit the nail on the head with your description of real-life user experience. Apple and MS still have plenty to aim for.
It is NOT an appropriate comment at all. Why?
- Macs ARE priced appropriately for their quality. Why?
- Apple do not make junk to compete for cheaper equipment. Why?
- Because the others all fight there - and they have no unique selling points because they depend on Microsoft Windows - which is been discounted due to its poor performance compared to Mac OSX.
It is NOT an appropriate comment at all. Why?
- Macs ARE priced appropriately for their quality. Why?
- Apple do not make junk to compete for cheaper equipment. Why?
- Because the others all fight there - and they have no unique selling points because they depend on Microsoft Windows - which is been discounted due to its poor performance compared to Mac OSX.
Further, Mac bashers love to say they won't pay for a pretty case. They condemn a new advance like the unibody. If Apple didn't make these advances, nobody would. These people remind me of the patent office guy who said everything had been invented already.
I'll pay for a unibody. It adds value. So does a magport power connector. So does a built in camera and a magnetic latch that's not as vulnerable to failure.
Stupid you say? You might change your mind when you're without your computer for 3 days while the latch is repaired.
Many Mac bashers haven't used a Mac. And again, the Mac is far from perfect. But its user experience - for the way most people use a computer at home - is far superior to Windows. Steve Ballmer will tell you that too.
I think the netbook market would be better served by a tablet twice the size of an iPhone. More portable.
Netbooks could catch on, but I think it's more of a fad or an in-between product to tie us over to tablets that truly deliver. For what you describe, even a netbook is overkill. And it still runs Windows. Yes - some run linux. That's a whole other set of issues for non-technical users. Unless it's TOTALLY built and presented like an appliance.
That said, for Apple to ignore the netbook would be a mistake.
Jaguar and Porsch do not use Yugo parts or cheap seat covers and Apple does not use low end components or cr*ppy software. The days of having to be a geek to run a home computer are gone. Nobody wants to be nagged about it either, thus the great failure of Vista. Apple computers are easier to use, more productive, and more user friendly and fun than any others on the planet.
The real story about APPL is about how more and more people worldwide are finding the money to buy a premium computer at a premium price. So far, regardless of economic conditions!
Question, your Chart 1, is that the installed base market share figure or is it the one year sales figures? Cause you state that Apple sold more than Rimm, and yet, Rimm is at 12% and Apple at 7%. A little disconnect between the chart and what you are talking about.
Data security - unless Apple is doing something different than what they announced in March at their press conference, I'm quite sure there is a "remote wipe" feature for IT departments. And, Apple announced a special program for corporations to allow custom app solutions. How is the cost, "lower"? You don't say. Is it because Apple's email server is more expensive than Blackberries? Oops, Apple doesn't sell a email server.
WalMart? You do know that WalMart has tried to sell music before, at 88 cents, and failed. What makes you think they'll succeed now?
Nokia's Ovi? It only comes on a couple of their handsets.
Google's G1 comes thru T-Mobile. They are #4 in a 3 carrier market. They have 3G service in how many cities? 20? AT&T has 3G in something like 280 cities. No matter how good the G1 is, the sellable market is virtually nil. How is the G1, "revolutionary"? Because it mimics the iPhone? You do realize that Android is built around a browser that uses WebKit. Who developed WebKit? Apple. As for "location services", you do realize that the iPhone has it, and many more apps that use it.
Open source means nothing to the consumer. If it did, Linux would sell better. It is just as easy for anyone to develop for the iPhone and the proof of the pudding is in the eating. The iPhone has over 5500 apps already. The G1? 50? More?
You mention the Tube, Bold and Instinct. The Tube is a joke, it doesn't use a capacitance touchscreen. The Bold's screen is too small. Did you see Sprint's latest numbers? I don't think people are buying the Instinct.
The Nuvifone was "launched" where? In a vacuum? I love Garmin, but the last I heard the Nuvifone was delayed until next year. And, turn-by-turn directions, apparently, TomTom and Garmin have developed apps for the iPhone, but are waiting for Apple to lift their restrictions on it.
In other words, you don't really know your products very well, otherwise, you wouldn't have cited a whole slew of criticisms that just don't hold very much water.
For an analysis that recommends buying, your conclusion is rather negative. Read some of Andy Zaky's analysis on SA for comparison. Also, read Roughlydrafted.com for some insight into the actual product side.
"Again, the enterprise-market segment, which she knows intimately, has two main concerns:
* Total cost of ownership, which includes the initial price for the phone, as well as the service and, very importantly, the maintenance.
* Data security."
"The latter one is a killer for the iPhone in the enterprise market, since corporate IT departments cannot remotely shut down iPhones that are lost or are stolen as they are able to do with Research-in-Motion-mad... Blackberries. In addition, the locked nature of the iPhone makes it very difficult for IT departments to customize solutions for company use."
First, with the new OS update, you can set the phone to erase all data if someone enters the wrong passcode 5 times in a row. Further, if using MS Exchange (which is in most enterprise installations) the Exchange ActiveSync Mobile Administration Web Tool can be used to initiate a remote wipe of a lost or stolen device and view the status of a remote wipe request.
Secondly, as to customizing the phone for corporate use, the SDK receives rave reviews for its ease of developing custom apps - This is not a "closed system" as stated in the article, but a superior solution compared to other offerings.
Lastly, when calculating total cost of ownership, this article fails to realize the dramatic increases in productivity that can be achieved by the iPhone.
This statement is incorrect, and now belongs in the garbage bin of urban myths.
It has been shown by independent PC organizations, and published in PC computer magazines, that there is virtually NO Mac premium pricing.
When equal hardware and features are compared between PCs and Macs, the Mac is similar in price to the PC and, in some instances, the Mac is even LOWER in price. Any manufacturer can leave out hardware on a PC and then claim to be lower in price, but, in this case, the PC is also lower in capability and the end user gets cheated, because the lower price did NOT show the features that were left out on the PC.
And, this does not include the benefits of the Mac operating system, ease of use due to the Mac GUI, reduced Mac maintenance, upkeep, and overhead.
On a total cost basis, acquisition charges plus upkeep and maintenance, Macs, in general, are the ABSOLUTE LOWEST COST to an individual and an organization.
In addition, the look and feel of QUALITY pervades the Mac product line.
they do NOT cost more than other computer, smartphone pricing plans, etc., for what you get included: software, no need to PAY for virus protection, online, on phone and in person tech support better than anyones.
IT departments are not needed to customize computers or iphones... the Apple store will do it for free or for $99 a year...lots cheaper than a huge IT department.
the data plans for all the smartphones are pricy...but people will buy them anyway and at those prices, they might as well buy the most reliable and innovative one....the iPhone.
There are going to be a lot of iPhones and iPod Touches in holiday wrappings this year...i think Apple is in for a blow out season.
this is a great article and exactly why Apple is so well regarded...plus, no debt, lots of $, lots of smart people and innovation.
And...for people stuck with having to use Windows...it really does work twice as fast on a Mac.
i'm long APPL (could you tell?:))
I just convinced both my sisters in the last month to purchase new Mac's and they are both very happy. No problems and very fast.
One returned her brand new HP laptop for the more expensive new Macbook. I had expected to do a question and answer period of how to use a MAC and to my surprize neither one had any problems or questions. Neither one had ever used an Apple product previously.
I am adding to my Apple position at these prices.