Jason Schwarz's  Instablog

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, Amazon, Cisco, IBM, Intel, Google and Baidu.  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 it’s 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 (http://blogs.zdnet.com/Apple/?p=1316) that said Apple’s iPhone produced 50 times more search requests that 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’ (http://seekingalpha.com/article/106744-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’ (http://seekingalpha.com/article/106744-apple-s-greatest-idea-yet) I forecasted 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 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% (http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5012496&sec=business).  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