How Apple's Market Share Will Propel Stock to $500, Part 2

Back on December 5, 2007 I sent the following note to investors (economictiming.com):

The rate of change of economic data is worsening so it’s time to short the following group of downside leadership: Financial Sector SPDR (XLF) at $30.60, MGIC Investment Corp (MTG) at $23.75, Amabac (ABK) at $23.70, Countrywide Financial at $10.45, Freddie Mac (FRE) at $33.30, Beazer Homes (BZH) at $8.13, PMI Group (PMI) at $12.65, and Citigroup (C) at $33.40.

At the time, it was difficult to imagine that group of stocks dropping even further but did they ever! The economic direction dictated the trade. Today we find ourselves at the opposite end of the spectrum. Economic data is improving and my new list of upside leadership includes: Apple (AAPL), Amazon (AMZN), Cisco (CSCO), IBM, Intel (INTC), Google (GOOG) and Baidu (BIDU). The tech sector is flush with cash and poised for growth. The only thing that can derail it is another economic drop, so watch the economic weather carefully as you position your portfolio.

The leader of this leadership group is Apple. They are in the best position to take advantage of the mobile Web. Still in its infancy, Apple already dominates the 3G wireless spectrum. AT&T’s brand has suffered because of the stress this one product puts on its entire system. My favorite piece of anecdotal data was the Google report from February that said Apple’s iPhone produced 50 times more search requests than any other mobile handset. Google initially thought they had made a mistake in tabulating their data so they made their engineers check the logs again and found that yes, iPhone use was surging. Since February, the trend has continued. In its September mobile metrics report, AdMob discovered that the iPhone OS increased its global market share up 7% to 40% while Nokia dropped 9% down to 34%. Mobile Web browsing will continue to grow and grow. In August there were 10.6 billion worldwide requests representing a 9% increase from the month earlier.

In my article ‘Apple’s Greatest Idea Yet’ I argued that the App Store is more important to Apple than the Mac, the iPod, or the iPhone. Then in another article, ‘The App Store Changes Apple’s Mission’ I forecast that in the future, Apple will excel as they build innovative products to take advantage of mobile apps. Because of the closed software/hardware Apple ecosystem, this company is better positioned for growth than any company in the history of technology. 100,000 apps available through the App Store makes it difficult for competitors to outdo the iPhone. New products like Motorola’s (MOT) Droid are supposed to surpass the user experience of existing products but they are unable to do so because they lack the seamless ecosystem. Tech has become so complex that consumers now demand a user experience that is intuitively simple. Google’s Android will try to emulate the Microsoft ‘open’ success of the past but that clearly was a different era. We no longer tolerate the bugs that come from mixing software with multiple hardware manufacturers. The mobile era is all about convenience and Apple delivers.

What size market are we looking at for the iPhone? Since we’re talking about simplicity I’ll make this easy, there are 6.795 billion people in the world and more than 50% own a cell phone. The global cellphone market sold 291 million phones in the Q309 with Nokia selling 37%, Samsung selling 20.7% and Apple volumes rising to its highest ever of 2.5%. iSupply estimates that the smart phone market is now on its way to invading the old school cellphone market share. They estimate that the smart phone market will increase from 184.2 million units in 2009 to 235.6 million units in 2010 (28% growth) to 334.1 million units in 2011 (42% growth). Smart phones make up 15% of the overall mobile handset market; within the smart phone market Apple’s share increased to 13.3% in Q209. Apple sold 78% more iPhones in FY09 over FY08. iPhone units are tracking a similar path as the early years of the iPod. Could the iPhone one day grow to 70% of the smart phone market? If they did then we would need to raise our price target to $5000 instead of $500. The point is, there is much upside to the current 2.5% global market share and this will be a primary stock driver for the next two years. You might want to be in on this one. The Apple Revolution is coming.

Disclosure: Long AAPL, BIDU, AMZN

Comments

[dingding]

How did you come up with $500?

2009 Nov 06 05:23 AM

[Jon T]

If Android doesn't deliver something spectacular in the next two years, then iPhone will be heading towards ridiculous market shares, just as the iPod did.

And that's not even accounting for the iSlate/MacTouch..

All the predictions of an Apple tipping point in the market are coming true. How nice that the world order can be so well and truly turned upside down.

2009 Nov 06 06:14 AM

[Techtrader10]

Time to give it a break Jason. The market is awash in smartphones and while none to date has caught the fancy of the public enough to de-throne the consumer driven iPhone (although that new Mototola might do it). The other problem for Apple is the company is letting their MAC lines get old. They are pushing their toys and letting the staple of their line go stale. Trees don't grow to the sky and neither do stocks.

2009 Nov 06 09:11 AM

[mollytjm]

Great article, Jason. And Fortune has named Jobs the CEO of the decade. He's created such a strong, smart company that it will even make it without him when the inevitable happens. There are amazingly brilliant people at Apple these days, in all sectors of the business. Just as Walt Disney remains the spirit of Disney, so will Steve Jobs remain the spirit of Apple. There are people of such genius that whatever they build seems to take hold and endure.
The stock will continue to do well and we'll be lucky to be able to buy in on the dips at this point. I can't guess the stock price eventually, but i'm as sure as one can be about any company...that Apple will be here in 2020, when some will not be.
long APPL

2009 Nov 06 09:30 AM

[dual cit]

Jason, an idiot could have predicted the climb in Apple shares over the last year if one could simply read or listen to the news. Instead of tooting your horn, give us a follow-up on your Apple apps pic Artifical Life (ALIF) which appears to be a for move interesting story since it recieved backing from and partnered with 3M.

2009 Nov 06 10:09 AM

[brewer]

@ Techtrader:

I know your posts have no basis in reality, but you ought to know that Apple just refreshed literally ALL of their Mac (not MAC, BTW) product line over the summer and fall. There is nothing older than, what, 4 months?

2009 Nov 06 10:36 AM

[Constable Odo]

I hate to say this, but these articles are way over the top. Apple can barely hold $200 a share. Even Amazon is making Apple stock look like nothing special. I don't care how good a company Apple is, investors don't really care that much for it. All the talk about accounting changes, reserve cash and ultra-high iPhone demand is doing nothing for the stock. Do you think investors are going crazy that they opened a store in the Louvre? Hell, no. Apple share price is about the same as it was before earnings. Apple would have to sell about 20 million iPhones just to hold the stock over $200. I positively enjoy my Apple products and I think their quality is way above average, but investors just don't care about those sort of things, apparently. Maybe Apple isn't making enough profits the way Amazon is. Apple is really starting to pile on overhead with those retail stores and maybe that's what is making investors angry. $500 is a pipe dream. Maybe $250 and even that will be hard to come by.

2009 Nov 06 10:46 AM

[Dialectical Materialist]

In the world of trees, there are dogwoods and giant red woods. Neither grows to the sky, but one gets a lot higher than the other. Same for stocks. Whereas some huge tech names like MSFT will likely hover around their present level for years to come, some will continue to grow. There are many compelling reasons (and Jason has presented some of them in his articles) that AAPL will continue to grow revenue and market share. $500 is a nice sounding round number. I don't know if Apple will get there in today's dollars anytime soon. But it does have room to run. $300+ easily if the economy starts to recover and their business continues on its present path.

Regarding macs getting old... It is not the bulk of their company anymore, but having said that, just watch what happens this winter. It will surprise you. An unusual "refresh" is coming.


On Nov 06 09:11 AM Techtrader10 wrote:

> Time to give it a break Jason. The market is awash in smartphones
> and while none to date has caught the fancy of the public enough
> to de-throne the consumer driven iPhone (although that new Mototola
> might do it). The other problem for Apple is the company is letting
> their MAC lines get old. They are pushing their toys and letting
> the staple of their line go stale. Trees don't grow to the sky and
> neither do stocks.

2009 Nov 06 10:55 AM

[Roger Knights]

"Jason, an idiot could have predicted the climb in Apple shares over the last year if one could simply read or listen to the news."

Nonsense--all the "normal" analysts were not predicting any large upside from AAPL, with the exception of Munster. (Remember Huberty's two-digit year-ahead call?)

Apple has refreshed the Mac line with its technically difficult and forward looking Snow Leopard OS revision. Despite competition from Android, the iPhone will continue to grow share rapidly, and the iTablet could be a huge winner too. (I hope the company offers a foldable version, so I can pocket it.)

AAPL is vulnerable to a decline in equities, but not much else. Buy on dips for sure.

2009 Nov 06 11:24 AM

[Roger Knights]

PS: The conventional wisdom a year ago was that AAPL would underperform in a recessionary environment, given its premium prices, onrushing smartphone competition from Palm's Pre and BB's Storm (etc.), and the uncertainty about SJ's health. Only uncertified bloggers got it right.

2009 Nov 06 11:49 AM

[JW.USC]

Time to give it a break, TT10, with your incessant Apple-bashing and "trees don't grow to the sky" simplistic thinking.

It's gotten way beyond old.


On Nov 06 09:11 AM Techtrader10 wrote:
> Time to give it a break Jason.

2009 Nov 06 11:55 AM

[John Galt]

One thing I've noticed at the Apple Stores in the mall. You have these energetic 20-40 years olds working there that love the products. I believe some of these workers in say their 40's have other jobs, but I know for a fact some of these 20 somethings are working at Apple until they find their "real jobs".

My point is, you have a great staff there, that truly love the products. You certainly couldn't find the micrsoft people as happy and energetic about their products.

I know analysts really only care about numbers, but little things like this matter to me as an investor. I'm not long Apple currently, but I've traded their shares.

2009 Nov 06 12:03 PM

[AdamC]

@Constable Odo

The problem with Apple share is it's the shorts' favourite stock and has been for years. They made and make great profits all the time. These shorts also have analysts on their side helping them with damning reports such as those of Kathy Huberty and Toni Sacconaghi and a slew of tech bloggers like Scotts Moritz, etc..Remember how Cramer outlined his idea of shorting Apple shares on the Daily Show.

Some companies like RIMM and AMZN are loved by the wall street crowd and they will at the slightest excuse push their prices up - don't you find it amazing that AMZN P/E is 70 and they are not fazed by it whereas Apple at 30 people are already complaining.

I too get annoyed when Apple cannot hold their shares above $200 but then with all the forces against Apple I am surprise they are holding pretty well above $190.

2009 Nov 06 12:45 PM

[argosy]

Techtrader10,

A couple of things. The mp3 player market was awash in players shortly after the iPod entered that market. So being "awash" in smart phones historically doesn't seem to be much of a barrier. In the case of the iPhone it is probable a help, given the competition.
Currently, most people (in the US) with "smart phones" either have an iPhone or a Blackberry. That comparison for most consumers is a win for the iPhone. Sure there are others who have other smart phones, but the chances are slim that we run into more than one or two people using the same "other" phone.

People need to remember that AAPL started the calender year 2009 at $78.20/share!!! Um...so not sure why there is any reason to be upset it can't stay above $200/share in the short term. It just broke $200 late October and it is only November 6th...

Not saying Jason went into any depth as to how he got the $500/share number, but there is no arguing that there is TONS of market share to be had by both the iPhone in the mobile space and Macintosh computers in the PC space...

Cheers,
Argosy
Way long AAPL

2009 Nov 06 01:22 PM

[Brad Johnson]

If the price of Apple goes to $500 a share, it will be the largest publicly traded company ever.

I really doubt Apple is going to be "worth" more than Exxon Mobil (the largest company on Earth)

Look, I love Apple's products, but anything north of $200 a share is overpriced, imo.

2009 Nov 06 02:31 PM

[Dialectical Materialist]

I've heard this argument before. I'm not sure why Exxon Mobil is the only company that gets to be the biggest but the "That would be bigger than Exxon" is thrown around a lot. I think the worlds largest company could be any company with a global footprint, a huge brand recognition, and a product line that is essential to the way of life for much of the world's population. Great margins don't hurt. So when I think world's largest company, I have no problem with it being a large tech firm instead of an oil company. It does not surprise me that it is Exxon, but if it were Apple, I don't think were stretching the imagination too far. It's not like we're talking about facebook or travelocity. Apple is a legitimate world class company with a very desirable and very profitable line of products. There are arguments against a $500 stock price, but I think "that would mean it was the biggest company on earth" is not one of them.


On Nov 06 02:31 PM Brad Johnson wrote:

> If the price of Apple goes to $500 a share, it will be the largest
> publicly traded company ever.
>
> I really doubt Apple is going to be "worth" more than Exxon Mobil
> (the largest company on Earth)
>
> Look, I love Apple's products, but anything north of $200 a share
> is overpriced, imo.

2009 Nov 06 03:44 PM

[neutrino23]

I can't do the arithmetic to say that AAPL might reach a particular target, but I can see that Apple is a very unusual company. They have no debt, a huge amount of cash, no legacy technology holding them back, they own their own technology and designs. They now have this fantastic machine for developing new tech products. They are not limited to PCs, iPods and iPhones. Any consumer product that involves software is a potential target for Apple expansion. This will be fantastic to watch.

2009 Nov 06 05:14 PM

[Jae Jun]

"AdMob discovered that the iPhone OS increased its global market share up 7% to 40% while Nokia dropped 9% down to 34%. "

The data you used is completely wrong and misdirected. Why are you looking at Admob to get your data?

Smartphones still don't account for the majority of phone sales in the US. Apple has about a 16% market share in the US while the leader Samsung is at 35%. If Apple wants to make money, it has to start reaching into other segments.

"Since we’re talking about simplicity I’ll make this easy, there are 6.795 billion people in the world and more than 50% own a cell phone."

Common sense shows that of the 6.795billion where 50% own a cell phone, a huge number of sales go to 3rd world or developing countries. Don't expect to see the iPhone in rural China or Africa.

This is where prepaid and cheap phones come in and why Nokia and Samsung have dominant positions.

2009 Nov 06 07:38 PM

[irieblue]

$500 with Apple's PE as of today (around 30) means they would have to generate almost $17 in EPS. However if we use a multiple of 40 which is circa 2007 levels , then that's 12.50 in EPS. Which is probably do-able with Apple getting rid of subscription accounting, / adding new product lines. Apple is worth more than Exxon because it has the potential to grow earnings per share faster than Exxon. There are only a handful of companies that have that level of double digit growth. Earnings growth is like crack to wall street..

2009 Nov 06 09:15 PM

[Neil Anderson]

Apple has tons of potential and tons of room for growth in the iPhone and Mac/PC markets.

2009 Nov 06 11:27 PM