Consumers Will Continue to Buy Apple's Fashionable Gadgets

I haven't talked about Apple (AAPL) in a while. When last we left Apple, hand wringing over iPod sales this or iPhones sales that, led to a tremendous selloff. I was commenting how everyone is missing the forest for the trees - the real story of these products is the halo effect of bringing customers to the bread and butter of the company: the Mac. But then again I was shouting into a stiff wind and the herd ran me over. They had no use for that logic. But I still like this company as the de facto consumer entertainment convergence play; although I needed to sell some to layer into the demolished commodity space.

Why still like Apple when the consumer is dying is one of my themes? Well, not every consumer - especially the "snobbish" Apple consumer. The upper 10-15% will still be fine... and for the other percentage of society? Well the last things people will give up are video games (see Gamestop's latest results), fashionable gadgets, and $200 jeans for teenagers. It would take a full out depression for teenagers to stop buying those jeans - I still contend American parents would rather give their kids money for expensive clothes than buy something for themselves - so they will cut that last.

As customers retrench, spending on restaurants goes down but things that help us cocoon or still have brand 'cache' will hold up the best. And Apple is increasingly turning into an international story.... So it's not all blight out there - even from this corner of the blogosphere. Macs seem to be booming...

• The report shows growth in Mac unit sales up 60 percent from 2007 and growth in dollar terms up 66 percent. That’s considerably higher than Pacific Crest’s estimate of 10 percent, according to the same report.
• AppleInsider’s chart of the NPD data is pasted below the fold. It shows Apple’s share of the U.S. PC market growing from 9 percent in Feb. 2007 to 14 percent in Feb. 2008. In dollar terms, NPD has Apple capturing a full 25 percent of the U.S. computer market last month.
• Meanwhile, Piper Jaffray’s Gene Munster analyzed NPD’s February report on the iPod line and projected sales between 9.7 and 10.5 million units for the March quarter. The midpoint of those two figures would equal a 4 percent drop from 2007, considerably lower than the 2 percent gain on 10.8 million units that is the Street’s consensus.

Frankly, a 14% market share (if accurate) would blow away all my assumptions - I was hoping for something like that by end of 2009. (in dollar term, 25% is even more impressive) But again, people seem fixated on these periphery products - like the Walkman for Sony which created a buzz and cache (in the 80s folks, I know Sony is not cool now), iPod revolutionized Apple but to focus on iPod now as a growth driver is misguided.

It will be a nice steady cash cow and keep driving people to another cash cow, the iTunes website. Meanwhile, the growth in the Macs is extraordinary if these numbers hold. And again, this is without the enterprise market which is the last castle for Apple to storm. Some of the recent updates to the iPhone are designed to help Trojan Horse into the enterprise.... if that conversion from PCs to Apples ever takes hold, it's going to be a massive upside.

But I've been saying that for a long time, I said it in good times (for the stock), I say it in bad times (for the stock) - the story remains the same, but in the near term the herd has it's own ideas and drives the stock where it wants to go (namely into purgatory of late). I still think Apple is one of the few true growth stories in tech, and at current valuation, is extremely compelling. But until a lot of technical resistance overhead in the low to mid $140s is taken care of, the stock will remain range bound. But... I think this will be a very good performer in 2nd half 2008, all things being relative (i.e. stock market not imploding another 20%).

Disclosure: Long Apple in fund; no personal position

Comments

[frs:]

"everyone is missing the forest for the trees - the real story ..... is the halo effect of bringing customers to the bread and butter of the company: the Mac" - AT LAST - a sane and accurate article about AAPL's business model. Thank YOU!

2008 Mar 20 11:41 PM

[Tubbyluv:]

Apple's "coolness quotient" and 25% international sales of iPods, laptops, and mp3s via iTunes Store doesn't tie them to the sinking ship of American consumerism.

2008 Mar 21 12:52 AM

[CH:]

its true that Apple has no where to go but up, even in a recession, and here’s why: Microsoft’s windows, and HP, Dell, and the like’s, require new sales to grow. Apple’s focus is conversion, which means all current PC owners are potential new customers. And the osmotic (?real word?) pressure between them is such that every one percent decline in Windows marketshare is a huge percentage increase for apple. So they will double many more times if they are able to continue this ride for the next decade

2008 Mar 21 01:01 AM

[Danthemason:]

Don't expect to buy AAPL at 140 after April. It will be up up and away. All these recent positive stories will have their effect on the small investor and speculation on all that news will push the price north. my 2 cents

2008 Mar 21 07:00 AM

[tom1234:]

apple products are the college students bling---and now a new generation of apple people has been established for the foundation of the future --nice job Mr. Jobs

2008 Mar 21 08:56 AM

[MacManMaz:]

Good Article, but can you keep it quiet until I acquire some more shares?
I am long on AAPL and think that it will be one of the big surprises of late 2008 and 2009.

2008 Mar 21 12:19 PM

[Tom B:]

"Apple’s focus is conversion, which means all current PC owners are potential new customers. And the osmotic (?real word?) pressure between them is such that every one percent decline in Windows marketshare is a huge percentage increase for apple."

I have contemplated this math on a few occasions. I totally agree.

"apple products are the college students bling"

I'm not keen on talking about Apple products as being "fashionable". They are, but the real beauty of them is that they WORK and work WELL. I have used Macs, Windows machines, and UNIX boxes for years and years, and, let me tell you, the only way I'd contemplate buing a Windows box would be if Apple went out of business. and, even then, I might very well choose Ubuntu, instead; I'd think about it.

2008 Mar 21 12:55 PM

[FreeRange:]

iPod sales will rebound. But this will be helped along significantly the Touch and the iPhone, the two most sophisticated iPods (but more, much more than just an iPod). Many people are sitting on the fence right now waiting for V2 and 3G, and when time comes to replace their existing iPod, many will opt to do so with the iPhone or Touch instead. Higher price points, and more margin for Apple! Also, Apple is in the early stages of international growth. There are still tremendous opportunities ahead for this company.

2008 Mar 21 05:01 PM

[zmonster:]

Can you please expand on your statement that AAPL has a great deal of technical resistance in the low/mid $140's? I am curious how you came up with this idea. Is it merely due to the visual appearance of resistance in the 1-year graph you posted, or are you factoring in other data points like open options interest? I'd like to know from a purely technical analysis if only to learn.

2008 Mar 21 06:05 PM

[Bobz:]

It is now apparent that Apple really gave low guidance for this quarter and will set new first quarter revenue and profit results which should let the stock finally break out from the 120-135 range it has been in. The technical resistance should fade as investors realize they don't need to sell just because they are not now underwater on the stock the purchased during the first quarter of this year.

2008 Mar 21 11:47 PM

[flatman:]

Here's the issue with AAPL - Will mass consumers pay the premium for AAPL products? As the economy slows PC's and other devices are getting ridiculously cheap. AAPL's fixed prices look very much like 'overpriced'. So far they've chosen big markups over market penetration but if the economic slowdown is deep they risk losing their momentum. I feel AAPL can 'own' the home user but pricing is an issue. BTW AAPL always low balls guidance and everyone knows it.

2008 Mar 22 09:15 AM

[Jake2:]

Excellent article. Very much up to Seeking Alpha standards.

2008 Mar 22 12:18 PM

[dithers:]

@ Flatman - good point!

Apple have the ability, in a severe recession (which is not happening), to drop their prices dramatically and STILL make good profit.

Why drop prices yet? With growth at 60% over the year, there is no need.

If things go bad, they have the margins to go much lower.
Its built-in recession proof from a company that must go to $300 in the next 18 months.

2008 Mar 22 04:46 PM

[TraderMark:]

Eric H,

Simply enough the stock is below both major moving average, 50 day and 200 day. In fact the 50 day crossed below the 200 day mid March which is another negative trend. But 50 day is about $140 and falling daily and 200 day is $144

It sounds counterintuitive to newer investors but a lot of technical traders like to buy stocks at higher prices once the momentum is back. Bargain hunters prefer to buy lower. Most technical traders will latch onto Apple once it breaks free of both those 2 trading resistance areas. Hence why I said mid $140s.

You can buy now (or lower) but your timeline to hold will be longer. So you can buy cheaper but for all we know Apple sits in this range area for 1 more day, 1 more week, 1 more month, or 1 more quarter. Etc. So it is simply a strategy to buy on a "breakout" - you pay more but you should have a quick return at that point.

Either way I like Apple for the long run - and agree with some of the comments above re: Conversion. Also there will be a consumer spending retrechment in this country but its all relative. Spending is not going to zero and I also am a big proponent of the cache factor. People just dont realize what a benefit it is; when I was growing up people were paying $120 for Nikes when Adidas were available for 25% of the cost, just as good of a shoe. Here one could make the technical arguement Apple is superior but even if it weren't they have created a brand that people are willing to pay more for. That is invaluable, and its global and its the type of cache that very few companies have. Sony used to be one 2 decades ago.

Again, not IMMUNE to consumer spending crunch I believe is happening and will continue to worsen but its a relative commentary. HP, as fine of a company as it is (or Dell or Lenovo), has no real cache among teens/20s, etc. And those people set the trends.

2008 Mar 22 05:23 PM

[VSD:]

If only 10% of the enterprises start supporting iMac like they do windows laptop; apple's share of the pc market will double. The biggest growth story for apple is the imac. imac is the forest, ipods and iphones are the trees.

2008 Mar 23 07:50 PM