Contributor Since 2012
The last few weeks had been a momentous one for Apple and its shareholders. Besides claiming the title of having the largest market capitalisation ever when its market value hit USD$638.2 billion on August 27, the company also won its lawsuit against Samsung on "patent infringement" charges. Samsung will have to pay apple USD$1 billion in damages and it may be required to remove some of its products from the US market as a consequence. Additionally, the iPhone 5 will be released shortly and there is talk of Apple becoming the first trillion dollar company.
Regardless of your views on Apple, I believe we can all agree that Apple's market value is largely dependent on one product, the iPhone. And this is worth taking a closer look at what the value is based upon. Looking at the numbers, there are three key points worth making about the iPhone franchise:
iPhone Original: June 2007
iPhone 3G: July 2008
iPhone 3Gs: June 2009
iPhone 4: June 2010
iPhone 4s: October 2011
Given the iPhone's profitability and dominance in the growing smartphone market, when assessing the value, the following questions have to be asked.
There are internal conflicts between considerations 1,3 and 4. Since in order to preserve the high margins of the iPhone requires a price premium and reduction in R&D expenditures, more customers may switch away and reduce the market share of the iPhone.
To sum up, Apple has created an ecosystem of innovative products consisting of the iPod, iMac iPhone, iPad and Apple TV and this has attracted a whole group of loyal fans. With the fan base and by out doing weaker and less innovative competitors, Apple has been able to increasing overall market size. The question that investors must ask now is whether Apple can continue to innovate and inspire. The valuations attached to the company assume that the company can keep on doing what it is right now, that the iPhone 5 will launch successfully, followed by the iPad Mini and so on. The risk is that the link may break down somewhere along the way. Unlike other large market cap companies like Coca Cola or Mcdonalds with long product life cycles or diversified product offerings, Apple's value rests on being able to constantly reinvent itself every few years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.