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By Brian Tracz

In the area of consumer electronics, it is rare that a company has a strong hold on more than a couple different staple products or devices. The Apple (NASDAQ:AAPL) line of products includes the iPad, Macbook, iMac, and iPhone, which are the premier products in their respective tablet, laptop, desktop, and cell phone markets. In the past two years alone, for example, over 100 million iPhones have been sold to a variety of markets. Overall, Apple derives most of its revenue from the Americas (45%) and Europe (20%). Not to be underestimated, the Apple TV, iPad, and iPhone are integrated seamlessly with iTunes, the world's largest vendor of recorded music.

I advocate a 1-year and 5-year buy position on Apple shares. Additionally, with continued efforts on the managerial end, the Apple stock has become a more attractive, overweight holding for a healthy portfolio. This is an opportune time for investors to beef-up their allocation of Apple shares within their tech sector holdings.

Valuation

With a price hovering around $600, Apple shares are definitely trading at a discount-but the question is the extent of this discount. Ambitious estimates have placed a $1000+ target on the price, while more conservative estimates place the price at about $700. Long term, a stock split seems likely. I place the 1-year to 3-year target at $800, a target I believe easily justified by the company's strong fundamentals and potential.

On Tuesday Apple announced its quarterly results, beating the EPS expectations by nearly 25%. The year-over-year revenue growth rate is 59% and eps growth rate is 92%. This is an amazing accomplishment for a mega-cap company. More importantly iPhone revenue in China, Taiwan, and Hong Kong increased five-fold in the quarter, helping Apple sell more than 35 iPhones. Chinese market will play a huge role in maintaining Apple's high growth rate over the next few years (see our article about Why Apple will succeed in China).

Product Development

In quarter one 2012, Apple sold 37 million iPhones, 9% of all phones sold in the world. Apple has sold 55 million iPads total. The fact that Apple revived a defunct tablet niche in a matter of two years is astounding. It is hard to believe that at the beginning of 2010, we lived in a world with very few tablets. The iPad 3 has delivered the technological goods-including iSight, a quad-core processor, and Retina display-that indicate a healthy development of this line. Regarding the outlook of the Apple product line, CEO Tim Cook has reversed the company policy of conservative guidance. Instead, he has remarked that "we don't see a ceiling on our outlook" and that "innovation is the most important product."

Managerial Strategy

Apple is doing and has done an excellent job in consolidating its product mission and financial strategy. Indicated in part by their recent $10 billion share buy-back program, a versatile managerial approach allows Apple to take advantage of opportunities as they become available. Indeed, possibilities in the gaming and television media markets are dynamically changing, and Apple stands to capitalize on these active markets. With the institution of a quarterly, discretionary dividend, Apple is trying to anticipate issues derived from the future reality of an "Apple world" in which increased growth is slow or unobtainable. At such a moment of decreased growth, Apple's stock stands to remain resilient-the idea is that income-oriented investors will hold their shares to benefit from a dividend. In the time being, Apple's management and investors will no doubt be pleased that a diverse set of both income-oriented and growth-oriented investors have large stakes in the company. A strategy that returns value to shareholders is a welcome move.

After former CEO Steve Jobs' tragic death, many had the sense that there would be a lack of product ingenuity and development. Thus far, the opposite has been true. Management has taken Jobs' vision and applied it full force to the new circumstances of increased cash flow and economic momentum, achieving a super-high market capitalization of around $550 billion. Assuming that management executes its plans efficiently, I see no reason why Apple will not be the world's first $1 trillion company over the next decade.

Risks

Despite my overall optimism, there is obviously a fair amount of competition in the burgeoning consumer technology sector; one would hope as much given the fact that Apple is seemingly involved in every major consumer electronics category. I do not see Android overtaking iOS in the near-term, especially because of the iPhone's impressive young-user appeal. However, Amazon.com (NASDAQ:AMZN) has steadily bolstered its Amazon Prime concept, which has come to include streaming video and music, both for purchase and for rent. This is an obvious competitor with iTunes, which is currently the largest online supplier of music.

Two technological grey areas exist for Apple's outlook. First, the possibility of a killer-line of Windows "ultrabooks," possibly released from the likes of Hewlett-Packard (NYSE:HPQ) or Dell (NASDAQ:DELL), would be a problem for the Macbook line. These products would have similar functionality and design, but they would most importantly be below the $1000 retail price barrier that Macbooks and most Air devices more than exceed. Second, the consumer release of Windows 8 looms (from Microsoft (MSFT)). With a totally redesigned interface and lightweight applet structure, Windows 8 could very well reclaim much of the consumer sector market share that it has recently lost. However, this "Windows comeback" scenario is contingent upon attractive hardware options to run this operating system-options besides a dual-booting Macbook or iMac, that is.

Growth Potential

The long term EPS for Apple lies somewhere around 15%. Short-term, some of the growth potential depends on the demand for personal electronics. However, Apple has a degree of demand independence. Apple garners public interest with its "rumor method" transmission of prospective launch dates and updates. Those intending to purchase a computer often adjust their time of purchase according to the "Apple product cycle." While this practice of updating an entire product line in a synchronized manner shores up popular interest, it might deflect would-be buyers to other brands.

In reality, though, Apple is winning market share in the mobile phone, computer, laptop, and tablet categories. The Apple product strategy, including a consolidated product line and infrequent but major updates to the respective lines, give it consistent momentum. The 5-year growth rate for Apple is about 15%, whereas Dell and Hewlett-Packard, the nearest competitors, only have a projected 11% growth. The P/E for Apple also exceeds these two competitors at around 13-Dell's P/E is around 7.5. That said, there are other, smaller cap companies with higher P/E: The sector average is around 19. However, with its reliable approach to demand creation and consistent increase in its market share, Apple's lower P/E is the price to be paid for steady value.

This P/E, indeed, will shrink as Apple reaches limits in demand, since people only need one cell phone and the market of those who can afford a $500+ tablet device in addition to a laptop device is limited. However, as I noted, Apple's income-oriented strategy of returning value to shareholders in discretionary dividends will weather this hit. Furthermore, Apple's seemingly magical capacity to "reinvent" devices with better screens like Retina displays and novel hardware like Thunderbolt technology creates new device niches de novo.

Conclusion

By the end of the second quarter 2012, Apple will have announced a newly designed, slimmed-down, and more powerful line of Macbooks complete with Intel (NASDAQ:INTC) Ivy Bridge processors. Apple will also be announcing a new iMac line by the beginning of the third quarter 2012. In my estimation, an Apple breakout is imminent, and the price point for Apple shares is likely at its lowest for the foreseeable future.

Disclosure: I am long MSFT, AAPL.

Source: Apple's Run For Technological Hegemony