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Apple: The First $1 Trillion Company In The Making?
Apple, Inc. (AAPL), incorporated in 1977, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, and sells related software, services, peripherals, networking solutions, and third-party digital content and applications. Top revenue-generating product lines include Macintosh notebook and desktop PCs, as well as the iPhone, iPad, and iPod franchises. These devices are sold predominantly through the company’s online and retail stores, and through third-party cellular network carriers around the globe. Applications and other digital content are also available via the iTunes Store, App Store, iBookstore, and Mac App Store.
The technology giant recently became a member of the $500 billion market-cap club, a club so exclusive that only five companies have ever belonged. This achievement capped off an incredible run by Apple and its legendary leader, Steve Jobs, stretching back to the mid-2000s, which began when sales of iPod music players took off and picked up steam with the 2007 release of the first iPhone smartphone. Over the past five years alone, share earnings have grown more than twelvefold, from $2.27 in fiscal 2006 to $27.68 in fiscal 2011. (Years end on the last Saturday in September.) And the company’s stock skyrocketed, pulling back only during the 2008/2009 global financial crisis.
The question now on every investor’s mind is: what’s next for Apple and its high-flying stock? Can the Cupertino, California-based firm become the first $1 trillion company? Or would shareholders be wise to happily take profits at this time and move on to greener pastures?
To be sure, some Wall Street skeptics believe that Apple, without the vision of Mr. Jobs (he passed away in October 2011) and with heightened competition in the mobile Internet space -- from entrenched OEMs like Samsung and Dell (DELL) and newer players like Google (GOOG) and Amazon (AMZN) -- has peaked. But we think that the rich will get even richer in this case, and that Apple will remain on a robust growth track for years to come.
Notably, while the loss of Mr. Jobs will surely be felt, the company maintains a deep talent pool, including its new CEO, Tim Cook. (Mr. Cook joined the firm in March 1998.) And Apple’s recent decision to return some of its near-$100 billion cash stockpile to shareholders, by launching a $10 billion multi-year repurchase program and initiating a $2.65-a-share quarterly dividend, is a testament, we think, to the company’s confidence in its future.
Though Apple seems to dominate the business headlines and have no place to go but down (with revenues apt to surpass $150 billion in fiscal 2012, many investors are asking: “how much bigger can this tech behemoth get?”), the company, in truth, still has a huge market opportunity before it. Indeed, even with the success of the MacBook Air and other cutting-edge laptops, its share of the traditional PC segment is only about 5%. And it has just a small slice of the global cellphone market and newer tablet/eReader space.
We expect these market positions to grow materially in the years ahead, thanks to relentless product cycles (annual updates to the Mac, iPhone, and iPad franchises have been the norm); a commitment to heavy R&D spending (liquidity will remain more than ample even after planned dividend payouts and stock buybacks); and a vertically integrated hardware/software model that enables Apple to keep costs down and consistently stay ahead of its rivals. An emphasis on creating rich technology platforms (e.g., iTunes and the App Store), rather than just individual devices, should also strengthen brand equity further, and keep loyal customers coming back from one product generation to the next.
Apple, meanwhile, far from resting on its laurels, continues to push into new technology realms, efforts that will likely bolster its results over the pull to 2015-2017. One particularly promising venture, in our view, is iCloud, the company’s cloud-based storage and syncing service. This recently released service ought to boost revenues over time by making it much easier for customers with end-to-end Apple products to move files.
Rather than wasting time uploading and downloading files on gadgets from different OEMs, iCloud will facilitate the storage of photographs, music, and other files on remote servers, and automatically sync them with all of a customer’s Apple products -- from laptops to mobile Internet devices. This convenience is sorely needed at a time when consumers are weighed down by so many electronics products. And the new service should create an even greater halo effect for the company, encouraging more of the public to turn to Apple for all of its computing needs.
Another product likely to disrupt the technology and media spheres in the way that the first iPod did is an Apple-branded smart television. This device only exists in the rumor mill at this point (speculation is that it would have been Steve Jobs’ next great undertaking), but it does seem like a natural extension for the company as it tries to get a stranglehold on the world of home entertainment. In fact, we think that a true Apple TV (the company already markets a small digital media receiver with the trademark Apple TV), featuring the firm’s iOS operating system, will surface sometime in the next several quarters.
Such a device would likely be far more than just an old-fashioned television, allowing consumers to perform computing tasks, communicate via video, download apps from the App Store, and access content from popular entertainment sites like YouTube (owned by Google), Netflix (NFLX), and Flickr (owned by Yahoo! (YHOO)). It would probably serve as a video game console, too, with capabilities at least rivaling that of the latest Microsoft (MSFT - Free Microsoft Stock Report) Xbox and Sony (SNE) PlayStation machines.
In terms of geography, the company still has plenty of room to expand overseas. This is especially true in China, where distribution of the bread-and-butter iPhone line has been steadily widening. Of note, Apple significantly increased its addressable market in China in mid-March, when China Telecom (CHA) began selling the latest iPhone, the 4S version. This means that the company now has deals with two of the three largest Chinese carriers (the other being China Unicom (CHU)), giving it access to some 330 million wireless subscribers across that populous country. And we would expect the lone holdout, China Mobile (CHL), with an estimated 660 million customers, to jump on the Apple bandwagon before too long.
Unit expansion is yet another priority for the company as it looks to maintain its dominance. In fact, Apple, hoping to capitalize on depressed real estate values at home and abroad, plans to start opening around 50 locations a year, versus closer to 25 previously. This ambitious agenda would equate to pretty strong growth, given that the worldwide unit base is currently just over 360.
In sum, we think that the remarkable growth story at Apple is far from over, despite the (misguided) sense by some that what goes up must come down. True, bouts of profit-taking are probable in the months and years ahead, particularly in light of the still-volatile and uncertain macroeconomic environment. But Apple shares should continue to trend higher, with the company’s market capitalization likely to pass the $1 trillion mark by mid-decade.
Indeed, by 2016, we envision a market cap of about $1.2 trillion, supported by share earnings of at least $70.00. (We see the issue trading at a small premium to the broader market at that time; even at a mere market P/E multiple, the equity looks attractive.) With this in mind, we believe that it’s not too late for investors to build positions in this quality, high-profile technology name. The stock seems reasonably safe, as well, considering Apple’s rock-solid balance sheet and excellent free cash flow. And, with a modest dividend yield of around 1.5%, it is now suitable for income-oriented accounts.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.