For the last two weeks investors around the world have been selling Apple (AAPL) shares to make way for Facebook’s IPO in their portfolio. Now that Facebook’s IPO is out of the way with a valuation there for all to see investors are heading back, with APPL looking more attractive on a growth and valuation perspective. What was concerning in early April was the exuberance around the stock with an Apple analyst touting a $1,001 share price target. Now that the exuberance has been knocked out of the share price investors should again learn to like AAPL.
At Decisive we are bullish AAPL however some commentators are worried about the sustainability of the growth putting forward examples of what has happened to Nokia, Motorola and RIMM. These commentators tend to miss that these were hardware companies while AAPL combines both the hardware and software. This is a very important difference as the hardware model has little barriers to entry with company after company producing better looking designs and customers flocking to them. Instead the AAPL software/eco-system offers iTunes, over 500,000 applications and iCloud user storage integrating consumers into their system. This is hard to replicate as users (some for many years with the Ipod) have invested plenty of time and money customising their own music and downloading applications they like making it very costly and less likely to change to another system.
The main risk for AAPL is the reliance on mobile subsidies paid by the carriers. These subsidies which are around $400 make the iphone more affordable for the masses. However customers are more concerned with which phone to buy rather than which carrier to join giving AAPL the upper hand in subsidy negotiations. As Tim Cook mentioned in AAPL’s latest call carrier executives have told him that the churn from Iphone customers is the lowest of any phone they sell. This stickiness should lead to more sustainable growth than some commentators expect.
What is interesting is not analyst share price targets or the earnings multiple but the earnings estimates for the next year. Looking at Factset earnings per share estimates for September 2013 $53 vs $47 in September 2012 with analysts expecting an increase of 14% in earnings. A quick look at AAPL’s last quarterly result where APPL beat earnings estimates by 22.5% shows Mac Desktops (see sales split below) growing revenues by 7% year on year. Surely APPL’s other products such as the Iphone and Ipad are growing more quickly and more importantly are more material to overall sales. According to Strategy Analytics total smart phone shipments rose 41% in the past quarter, a lot faster than the macs 7% rate.
Source: 10Q
There is a lot of focus on the iPhone given the materiality to overall sales but I believe that the Ipad opportunity is just as great. The main reason is personal customisation. Being able to download applications that the user wants creates a need to have your own, more so than personal computers suggesting that the Ipad market could become larger than the pc market. Quoting Tim Cook “just 2 years after we shipped the initial iPad, we’ve sold 67 million. And to put that in some context, it took us 24 years to sell that many Macs and 5 years for that many iPods and over 3 years for that many iPhones”. People tend to forget how successful the Ipad is, AAPL’s last result highlighted how the Ipad now contributes more revenue than desktops and portables combined.
Given the recent pullback and still low earnings estimates for next year investors would do well to like AAPL.
http://www.decisiveassetmanagement.com/
Disclosure: Decisive is long AAPL
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Disclosure: Decisive is long AAPL
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
