On October 26, Microsoft (MSFT) brought its much-anticipated Windows 8 software to market. Prior to the release, PC Magazine writer Dan Costa described Microsoft's fusion of traditional smart phone, personal computer, and tablet interfaces beneath one Windows 8 umbrella as a "huge gamble." Today, Microsoft brass is hopeful that Windows 8 software can help this company make inroads within a rapidly evolving tablet market. In conjunction with Windows 8, Microsoft is also launching its Surface tablet.
Opposing the Microsoft blitz, however, Forbes Magazine writer Dave Thier offers "mixed" reviews for the Surface tablet. According to Thier, Windows 8 software is a disappointment. Tepid market acceptance for Windows 8 would, of course, preserve the pecking order of a consumer electronics marketplace that Apple (AAPL) dominates.
The Apple Ecosystem
Apple's effective "I am a Mac and I am a PC" campaign captures the essence of today's technology sphere. In these series of advertisements, Apple personifies itself as a chic, yet eager-to-please and functional hipster. Alternatively, Microsoft is a corporate relic of the past who labors in a tweed suit and requires help to stay out of his own way. Against this backdrop, Apple has unleashed a wave of revolutionary products on to the market. Today's horizontally integrated Apple ecosystem includes the iPod, iTunes, iPhone, iMac, and ultimately, the iPad.
The Steve Jobs halo effect defines an Apple brand notable for its fusion of both technology and artistry. Zack Whittaker and ZD Net describe Apple's drive for full integration as "corporate paranoia." Meanwhile, Microsoft partners up with traditional rivals Dell (DELL), Hewlett-Packard (HPQ), Nokia (NOK), and Samsung (SSNLF.PK) to largely hawk software while the personal computer industry flat lines. Within the past four years, Apple stock has levitated from $100 to $600 per share. Alternatively, Microsoft shares have literally done nothing but pay dividends for more than one decade.
The iPhone remains the focal point of the Apple ecosystem. For the fourth-fiscal-quarterly period ending September 29, Apple reports 27 million in iPhone unit sales. This sales performance accounts for $17 billion of Apple's $36 billion in quarterly revenue. Certainly, Apple iPhone quality influences demand for the iPad platform, which contributes $7.5 billion to Q4 2012 total sales. In terms of units, the iPad is generating 26% year-over-year growth. Taken together, both the iPad Mini and iPhone 5 represent Apple's most important drivers for bottom line growth into fiscal 2013.
The Tablet Market
On November 2, Apple is set to launch the iPad Mini. With this move, Apple signals that it is committed to following the trend of going small, and bridging the gap between conventional tablets and smartphones. Microsoft, however, is heading in the other direction, with a Windows 8 product that largely integrates personal computing and tablet interfaces together. The Surface tablet is a versatile device that features a separate and functional keyboard. As a workstation, the Surface arrives complete with Microsoft Office, alongside USB port connections for printing documents.
Apple and Microsoft effectively coexist as a Venn diagram where each corporation shares slight overlap, but caters largely toward separate spheres within the technology marketplace. I speculate that future sales results for the iPad Mini will again highlight that Apple's share of the consumer electronics marketplace is highly profitable. In Wall Street terminology, Apple has historically been able to leverage several billions of dollars in goodwill and intangible assets to help sustain a corporation worth more than $550 billion in market capitalization. Consumers are motivated to purchase Apple products at premium prices because they fashion this business as "cool."
Alternatively, I foreshadow that the Surface tablet release may be written off as a forgettable event. Microsoft has yet to shake its image as an uninspiring software licensing operation. Microsoft effectively labors as a cash-rich utility that monopolizes one particular personal computer market niche.
Apple promotes its iPad Mini as a handheld device. Weighing in at 312 grams, the iPad Mini stands 7.9 inches tall by 5.3 inches wide. With these dimensions, it is possible to hold the iPad Mini with one hand. Scrolling and navigating the iPad Mini 1024 X 786-pixel touch screen, however, will still require the use of two hands. In terms of physical specifications, Apple's iPad Mini is a 23% thinner and 53% lighter product than the traditional iPad.
Despite its smaller stature, the iPad Mini maintains, if not improves upon traditional iPad features. The iPad Mini is notable for its fast Internet connection speeds, the image clarity of its 1080-pixel resolution camera, and ultimately, the 2750,000 separate applications that allow for personal customization of this tablet experience. Beneath the glossy interface, Apple's A5 chip drives the iPad Mini with dual core, ARM Cortex-A9 processing power.
The iPad Mini retails for $329, $429 and $529 for its 16GB, 32GB and 64GB Wi-Fi only versions, respectively. At this price point, the iPad Mini sells at an approximate $170 discount to the traditional iPad with Retina display. Although cheaper than conventional iPads, the iPad Mini retails for between a $100 and $150 premium above competing Amazon Kindle and Google Nexus 7 tablets.
Amazon (AMZN) and Google (GOOG) effectively follow a subsidized subscription model, where these corporations are willing to sell hardware on the market at cost, in exchange for future cash flow related to content and search sales. Over the long term, however, weak profit margins and flagging investment returns may serve as the bane of both Amazon and Google shareholders. Earlier this month, Google shares declined sharply amid ongoing speculation that its Android platform generates minimal amounts of revenue. Last year, Google closed on a $12.5 billion deal to acquire Motorola, largely to guard Android against patent infringement lawsuits.
The Apple Corporation remains the best pathway from which to leverage the consumer electronics marketplace. In terms of a reordering of this status quo, I feel that the Microsoft Surface release will emerge as a relative non-event.
The Bottom Line
Apple closed out its latest fourth quarter with $121 billion in cash and investment securities on the balance sheet above 929 million shares outstanding. One $600 share of Apple stock therefore carries $130 worth of financial assets. In theory, if Peter Oppenheimer, CFO, were to pay off Apple's $58 billion in total liabilities, Apple investors would still be left with roughly $68 in net liquidity per share. Despite averaging greater than 60% growth in net income over the past five years, Apple shares still trade for an attractive 13 times trailing earnings. According to these snapshot figures, Apple is a compelling buy.
Going forward, I am projecting $50 billion in fiscal 2013 net income for Apple. This projection assumes 50% and 20% in year-over-year sales growth for the iPad and iPhone platforms, respectively. If Apple were to recapture a price-to-earnings multiple of 15, Wall Street would then value Apple as a $750 billion corporation. For Apple, $750 billion in market capitalization calculates out to a one-year price target slightly above $800.
At worst, Apple will transition into the product maturity stage of the business cycle. At that point, Apple stock would largely track the S&P 500 Index, while offering regular dividend payments. A one-time, special dividend may serve as evidence that Apple lacks growth opportunities. With $51 billion in cash generated from operating activities over the past year, Apple can afford to return even greater amounts of capital to shareholders. Inevitably, the time will come when Apple stock, like Microsoft, is described as a conservative investment.
Disclosure: I am long AAPL.