Five Reasons I'm Long Apple 22 comments
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Apple (AAPL) reported its third quarter earnings last week. As always, it surpassed all expectations and estimates. Apple continues to prove that the recession has had a negligible effect on its amazing performance. COO Tim Cook actually mentioned on the earnings call that they were unable to meet the high demand for iPhones and Macs. Apple sold 5.2 million iPhones - 7 times more than what it sold last year and 2.6 million Macs - up 4% from same time last year. Both numbers were higher than analyst estimates. The growth in Mac sales has outpaced PC sales. The 3rd quarter profit rose 15% from a year ago. The gross margin improved despite rising commodity costs. According to Thomson Reuters, analysts were predicting $1.17 a share on revenue of $8.16 billion. Apple knocked the ball out of the park and reported earnings of $1.23 billion or $1.35 a share on a revenue of $8.34 billion. The year-over-year and quarter-over-quarter growth of Apple continues to remain phenomenal. Apple was trading up 5% after reporting earnings. The next day, Apple was up more than 80% YTD.
That's just this quarter and Tuesday's earnings report. It's become a habit for Apple to beat all estimates - recession or no recession. But I want to talk about Apple as an investment. In my humble opinion, Apple is one of the best growth stories - it has consistently proved that over the last several years and will continue to do so for many more to come. There are several reasons why I am bullish on Apple for the long run. As with any investment, you need to prudently manage the associated risks and protect your profits. I am definitely not recommending rushing out and buying Apple at these levels. If anything, I would recommend booking your profits or at least protecting it. However, I am a fan of Dollar Cost Averaging and Apple is one company I would carefully DCA on.
1. Fundamentals: This is one company with rock-solid fundamentals. As of the latest quarter reporting, Apple has $31.1B worth of cash which is huge. Apple's cash reserves are growing at a very fast pace. Apple would be using this cash as needed towards the research and development of innovative products, enhancing existing products, possible acquisitions, partnerships and of course prudent marketing. Let's take a closer look at Apple's most recent balance sheet. Apple has total assets worth $48.1 B and total liabilities worth $22.2 B. The current assets are worth $35.2 B and total current liabilities are worth $16.7 B. Apple's balance sheet speaks volumes about the stability and cash reserves of this company. As you might have guessed, Apple has one of the largest cash reserves among all companies. Cash is king right now and it further aids Apple to develop aggressive growth strategies and come out with top-notch products.
Apple's P/E (Price to earnings ratio) is 28 which is excellent for a strong growth company. Even better, its PEG ratio is only 1.5 (PEG ratio accounts for growth – its price/earnings to growth). Apple’s gross margin is consistently growing. Apple dominates the smart-phone and music markets. Even though Macs occupy only 9% of the personal computing market share, Apple literally owns the $1000+ computer market. 91% of the high-end and high-priced computing market is dominated by Apple.
2. Management: Apple is unarguably one of the best managed companies in the world. Its legendary CEO, Steve Jobs is often considered as one of the best Chief Executives. Ever since his return to Apple in 1996, this company has seen unprecedented success and phenomenal growth. Just to get some perspective, Apple's stock price in 1996 before Jobs' return was around $5. Apple did take a hit during the tech bubble along with all other tech companies. However, post tech-bubble, Apple emerged as one of strongest technology companies and its stock value soared to new highs. In the last 10 years, Apple’s stock has essentially doubled every single year (1100% return in 10 years). Very few companies were able to stage a comeback from the tech-bubble era. Even big names like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Dell (DELL), Yahoo (YHOO), HP (HPQ) and several others never saw their lofty highs again. After Steve Jobs' comeback to Apple, the company consistently came out with new products and ensured a strong and growing market for itself. The iPod, iMac, Mac OS X, iPhone, Apple TV, MacBook Pro, MacBook Air and practically all other Apple products were released under the leadership and vision of Steve Jobs. Even today Apple continues to enter and dominate different consumer segments. First it was personal computing, then music and now mobile phones.
Sometimes Wall Street and people in general consider Apple a one-man show. Many people believe that without Steve Jobs, Apple will never be the same again. No other CEO attracts so much attention from the Wall Street biggies or moves his company’s share price with a few words. Even his health issues, which should be strictly personal, became a cause of Wall Street debate (or dare I say national debate) and caused Apple's share price to drop significantly. It is agreed that Steve Jobs is a primary reason behind Apple's continued success, however he has assembled a team of brilliant executives and engineers. I am sure no one knows Apple better than Steve Jobs. I am also positive that he has a clear idea about his health, when he wants to retire, who he wants to see as his successor and where he wants to see Apple in the next few years. There are smart Apple executives who are mentored by their CEO. So, Wall Street and investors should quit worrying about what would happen to Apple without Steve Jobs. Apple has never disappointed its investors and it never will. Also, its no secret that Steve Jobs takes a $1 salary. Sure, he gets millions in stock options but that's just it - it shows his confidence in his own company and the performance of its stock. His salary is only as good as the performance of Apple's stock.
It will be difficult to replace Steve Jobs when he does decide to retire – especially his vision. However Apple has some fantastic executives like Tim Cook, Scott Forstall, Phil Schiller, Bob Mansfield and others who probably have learned a great deal from Steve Jobs’ style of leading the company. The bottom-line is I would let Steve Jobs worry about how he wants to steer the company from this point onwards. There is no point in senseless speculation about his health and retirement.
3. Innovation: Innovation is a forte of Apple. The reason why Apple has a cult-like following (and may I say ever increasing following) is because Apple leaves no stone unturned when it comes to innovation. There is a reason why there is so much euphoria surrounding Apple product announcements. Pick any Apple product – one thing you will note is Apple puts in a lot of effort into design and quality. It makes sure it pioneers the development of cutting-edge technology. iPods, iMacs and iPhones – all these products redefined innovation. Everyone else followed. However, it’s not easy to beat the leader and it’s impossible to beat the pioneer who constantly innovates. We see many other companies come out with All-in-one products to mimic Apple’s iMac but none succeeded. iPod is a historical success and every other person you see uses an iPod. Car manufacturers and electronic equipment manufacturers make sure they provide iPod connectivity. Other companies which tried to ride on the success wave of Apple’s iPod were either too late in the game or a complete failure.
But it’s the superb idea behind the iPhone that truly amazes me. When the rumors and subsequently the confirmed news about Apple trying to develop a mobile product hit the news shelves, Apple was ridiculed. Most people were of the opinion that Apple is a computer and music company and should stick to that. Apple’s iPhone was released in June 2007 and the rest is history. Apple put a computer in your hands and did it with style. Of course now everyone wants to make the next iPhone killer. None so far have been a success. Apple is gradually targeting the corporates and there is a very high chance it will be successful at doing that. It’s almost shocking that all the big players in the telecommunication and mobile industry never thought about a smart device like iPhone. Now everyone wants to ride the wave but it might be too late. Besides, people forget the fact that no matter how many competitors come out with a similar product, Apple will always stay a step ahead. Look at Apple’s history. It already did what everyone is trying to do now. Apple will now focus on further innovation and it’s no secret that Apple takes its Research and Development very seriously. As Steve Jobs once famously said, ‘Innovation distinguishes between a leader and a follower.’
4. Products: It’s important to again quote Steve Jobs here because that will give you an idea about the strategy of Apple and thought process of its CEO. “A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets. Apple's market share is bigger than BMW's or Mercedes’ or Porsche's in the automotive market. What's wrong with being BMW or Mercedes?” Apple has never targeted volume. If Apple wanted to do that, it could easily have easily and made several cheaper models of Macs. Apple’s focus has always been quality, design and gross margin. You shouldn’t be surprised to note that Apple’s gross margin keeps on increasing consistently. It’s like BMW sells fewer cars than Toyota (TM) or GM but its profit per sold car is a lot more. Even then, Apple’s market share in the field of personal computers is consistently increasing. As per NPD’s most recent data Apple’s market share in the higher-priced ($1000+) computer market is a staggering 91%.
Apple’s hardware is what has made it so popular. This includes the Macs, iPods, iPhones, Apple TV, server products and accessories. Apple refreshes its product very often (usually annually) and strives to come out with better products each time. There are rumors of an Apple Netbook during the holiday season although Apple’s COO denied the rumors. If Apple does come out with cheaper Netbooks, it will create a huge market for Apple in this area and probably make Netbooks a lot more popular than they are right now. There have been other rumors also floating around from quite some time including Apple’ foray into the video-game world. The iPhone started as a rumor too. With Apple, it’s difficult to predict what product it might bring out next. The point is that Apple continues to dominate every industry it enters - music, computing, mobile etc. which makes this arguably the best growth story of recent times. Apple will continue enhancing their existing products and coming up with new products.
That’s the hardware part but Apple is a leader in software as well and investors tend to overlook that part. Apple’s operating system is one of the most stable and user-friendly operating systems we have today. It perfectly complements its robust Mac hardware. Apple’s iTunes and App stores also generate substantial revenue for Apple. When people buy songs, movies, books, videos, podcasts etc. from iTunes and paid applications from the iPhone App store, Apple makes money. It has made a foray into cloud computing via MobileMe service. If you own Apple products, this is one service you would love to use.
It would take an unprecedented disaster from here on for Apple’s growth to slow down. Sure, the stock itself could fluctuate with the overall market but if you have a few years horizon, an Apple investment could reap rich rewards for you (strictly my personal opinion with a disclaimer that I have positions in Apple).
5. Sales: Apple has a very strong fan following. But the important point is that the loyal Apple following is increasing exponentially. With exciting new products like the iPhone, Apple has ensured that it pioneers in innovation. This in-turn has attracted people from all walks of life and all over the world. It's evident from the long queues you see outside Apple stores during a new product launch. The hype that Apple events generate and the consistent buzz in the Media/Blogosphere about this company and it's exciting products further fuels the exhilaration surrounding this company. This ever-increasing Apple user base is one reason why Apple earnings continue to baffle the pundits and the skeptics. Numbers like 5 million iPhones and 2.3 million Macs sold in the last quarter almost makes you feel that many people are saving money so that they can spend it on these products. People don't want to wait for the economy to turn around to buy Apple products and that's one reason why this company dodges recession.
The Mac sales are outpacing PC sales and this might keep continuing as more people turn to Mac. A very high percentage of existing Mac users upgrade their operating system when Apple comes out with a new OS. This will happen again when Snow Leopard is released in early Fall. iPhone sales are going through the roof. Apple has made the iPhones available in several countries across the world and it's increasing its user-base by leaps and bounds. The iPhone sales also get a huge boost from a very large percentage of existing users who want to own every new product refresh. The iPhone hasn't penetrated the corporate world much but that might start happening gradually. Apple has made an excellent move by targeting the consumer first and it will surely aim the corporates next. The iTunes store and the App store are another huge revenue stream from Apple. You cannot ignore the positive impact of the App store on Apple's profit when more than a billion Apps have been downloaded. Apple is also generating steady gains out of its other hardware products like Apple TV, xServe and software products like Final Cut Studio, iWork etc.
Some analysts became worried that the iPod sales have declined since last quarter. That's because many people opt for the iPhone instead. That works out even better for Apple when you factor in gross margins and revenue sharing with telecom service providers around the world. Also, iPod sales should be a lot better this quarter and next with back-to-school season and the holiday season.
The bottom-line is that I stay bullish on Apple as of writing this. With the recent run-up I am cautiously bullish but would still Dollar Cost Average on significant opportunities. The last quarter is not usually one of the most exciting quarters for Apple and even then Apple blew the earnings estimates. The next two quarters should be even more exciting since Apple would get a tremendous boost from the back-to-school and holiday seasons. There are also other exciting things lined up this year including new operating system, product refreshes and possible new products.
Disclosure: Long AAPL
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Apple will dominate for several years. Let's see : $31m in the bank w/no debt,Strong product line & a bright future w/its strong bench with or w/o Steve Jobs. Yes, we will see 200 this calendar year & who knows for next year when we slowly but surely come out of this global recession. Good luck on DCA,though. Should have pulled the trigger a long time ago for that to work out for you. Go Apple!!!!
Pre? Zune? Whatever!!!!!!!
On Jul 27 03:04 PM Camden wrote:
> Mauneel, I think you make some good points and do a pretty good job
> of explaining many of the positives Apple has going for investors.
> I suggest you write a bit more concisely and stay away from making
> exaggerated comments like "the loyal Apple following is increasing
> exponentially", which it clearly is not. Nice article.
he does a good job of finding the positives, and using statistics to make the stock look good.
I have a problem with Mauneel Desai comments. He is certainly not objective in his comment, he puts a positive spin on his article. The is no objectivity to the comments. He tell us the stock is up 80% year to date, however ignores the fact that with the rebound to date, the stock is still only 80% of its former high. He also ignores the fact that Apple is slowly moving from the computer business to the novelty electonics and aps. business. Novelties are just that, and if your novelty doesn't keep changing it will loose its following or some other company will come up with "the must have new item". With 31+ billion dollars in cash, its obvious the company can not effectively make its product line grow and has matured. This company should be rewarding its shareholders for hanging on to the stock by paying a dividend. He also point out the 28 P/E ratio, calling it "good", in this market its twice most other companies in it field, and way to high for a maturing operation. DIsclosure: no current position in Apple.
On Jul 27 03:01 PM Prudent Man CFA wrote:
> What do you do with a stock that everyone loves?
On Jul 27 03:35 PM Techtrader10 wrote:
> Sell, as soon there will be no one left to get into the stock, and
> then it will be a race for the door before your pofit is gone. <br/>
are just scratching the surface.Being an envious Apple hater is not a very endearing quality,Techtrader 10.
On Jul 27 03:33 PM Techtrader10 wrote:
> I love cheerleader comments and articles. User 461707, would you
> be so happy if you had purchased the stock in December, 2007 as it
> approached 200? You would still be out 20% if you had. I don't even
> have to comment on "isellapple", he says it all. As for Mauneel Desai,
>
> he does a good job of finding the positives, and using statistics
> to make the stock look good.
>
> I have a problem with Mauneel Desai comments. He is certainly not
> objective in his comment, he puts a positive spin on his article.
> The is no objectivity to the comments. He tell us the stock is up
> 80% year to date, however ignores the fact that with the rebound
> to date, the stock is still only 80% of its former high. He also
> ignores the fact that Apple is slowly moving from the computer business
> to the novelty electonics and aps. business. Novelties are just that,
> and if your novelty doesn't keep changing it will loose its following
> or some other company will come up with "the must have new item".
> With 31+ billion dollars in cash, its obvious the company can not
> effectively make its product line grow and has matured. This company
> should be rewarding its shareholders for hanging on to the stock
> by paying a dividend. He also point out the 28 P/E ratio, calling
> it "good", in this market its twice most other companies in it field,
> and way to high for a maturing operation. DIsclosure: no current
> position in Apple.
OK I pick Apple TV? how did that work out, Lisa anyone?
>>>>>it’s impossible to beat the pioneer who constantly innovates<<<
What you talking about, impossible? That is just silly over the top talk. You apple fans are sounding more and more like the MS kids did just before the court cases started.
... on for your life!
(It's a rocketing roller coaster.)
I don't think "novelty" means what you think it means, Techtrader10. Apple designs serious objects and software for serious uses. Since you couldn't get that fundamental fact right, the rest of your commentary on Apple is unsound at best.
Can it actually be possible that making money and fanboyism are mutually exlusive?
I firmly believe the larger strategy is that Apple wants to become the undisputed leader in mobile computing... period. In their About Us statement they claim to have "ignited the personal computer revolution"... well maybe they are trying to "ignite the mobile computing revolution"? I can certainly envision a day when they add such a phrase to their About Us statement. The iPhone was just the starting point.
Consider this very feasible engineering idea... which BTW I am surprised more seasoned Apple watchers are not really talking about or even speculating about... what if the iPhone, iPod Touch and supposed iTablet are all just appetizers for the main course... which is to integrate a 3G WCDMA chipset into the 13" MacBook Pro? Here is my theory... for what it is worth...
One could argue that the acquisition of PA Semi was really for a much larger strategy than just a processor for the iPhone, iPod Touch and iTablet. Apple probably could not get Intel to engineer a processor that would be able to handle all the power requirements of a 13" MacBook Pro with an integrated 3G (or even 4G LTE) chipset without compromising battery life. The entire hardware engineering for such a product would probably have to be "from scratch" if Apple did not want to compromise on anything... which is typical... so they bought PA Semi so that they could have full control across ALL their mobile products (including laptops). The end goal is having total vertical integration and control across all their products.
I also believe that Apple's experience over the last few years dealing with the Tier 1 Telcos has been an eye opener. Tim Cook has said on numerous occasions that Apple does not know how to build a great laptop and sell it for $499 and make a healthy GP. However, what Apple DOES KNOW is that if they could integrate a 3G/4G chipset into their 13" MacBook Pro, they could have their Telco partners sell the laptop for about $499-$599 and subsidize the rest! All of a sudden, Apple is competing squarely in the netbook market with a product it can be proud of!! If consumers don't want to tie themselves to a Telco, then they would still be able to buy an Apple laptop in the $1000+ range.
If you believe as I do that Apple's real mission is to become the undisputed leader in mobile computing, with 3G/4G enabled across all their products (iPhone, iPods, iTablet and MacBook Pros), and will probably execute on a product strategy such as this within the next 1-2 years, then why not be long?? RIMM, NOK, GOOG, DELL, HPQ and certainly MSFT would all have a hard time trying to achieve a similar goal with a similar product lineup.
"the loyal Apple following is increasing exponentially"
is very true.
The positive press Apple receives, and the decline in Apple detractors, is testament to the rise in people who are Apple-positive. And it correlates of course with the numbers that are Microsoft-negative.
great article!
Long APPL
Do you know what "exponentially" means?
On Jul 27 03:17 PM reagan wrote:
> Sorry, Camden. That's hardly an "exaggeration".Get a grip.
On Jul 28 02:50 PM Camden wrote:
> reagan,
>
> Do you know what "exponentially" means?