Apple is NOT that large!

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    Posted: 27 January 2012 08:01 PM

    In the intraday update thread I have read an interesting comment by Adam which I would like to take up and discuss in a little more detail:

    “But what you have to absolutely LOVE as an AAPL shareholder is that TC said on the F3Q11 call that Apple?s share of the total phone market is only 5% and he thought eventually all phones would be smart phones. Basically, he said what Horace has been saying for a long time now but it means an awful lot more when you hear TC say it (no offense, Horace). TC isn?t playing the game to win the current smart phone market. He?s playing to win the global phone market.”

    I also loved Tim Cook’s comment and it fits into what I think some people misperceive about Apple, namely, that it is NOT that large.

    When it comes to Apple I always hear about the ?law-of-large-numbers?-argument. A lot of investors just don?t think that a company the size of Apple can grow as fast in the next 5 years as it has grown in the last 5 years. Apple has just become too large!

    This argument is flawed because Apple is in fact NOT that large! Yes, Apple is the company with the highest market cap. Yes, Apple?s revenue numbers are huge, as are earnings and cash. But is this the right definition of ?large? that investors should focus on? I don?t think so.

    Market cap, revenues and earnings are all financial indicators. However, they do not indicate the potential for future growth, and whether Apple is too large to grow at current rates (or even at half these rates). More interesting would be to ask how many more products can Apple sell in the future, and at what price?

    Last quarter Apple sold 37 mil. iPhones (90.8 mil. in calendar 2011). Its global smartphone market share was 19% in 2011 (and only 5% for all mobile phones). This leaves plenty of room to grow further. But even if Apple would remain at 19% market share for the next five years, the global smartphone market grew 63% in 2011 (yoy). Since smartphones still only represent a quarter of global cell phones sold in 2011 there is still a lot of growth opportunity.

    Compared to the iPhone the iPad is quite a very new product (actually a whole new product category). Last quarter Apple sold 15.4 mil. iPads, an increase of 111% compared to the same period in 2011. The global tablet market is still in its infancy and growth prospects are great.

    In fiscal 2011 Apple sold 16.7 mil. Macs. The 22% yoy growth is spectacular since all other computer makers are barely recording any growth. Since Apple?s share of the global computer market is still at around 6% there is more than enough room for growth.

    When investors/analysts talk of Apple being too large to continue growing at past levels they only focus on market cap and revenues, not on unit sales and market share.

    Think about this. Porsche is selling less than 2% as many cars as Volkswagen, but earns 25% as much as VW. That?s because Porsche is a premium product. Apple?s products are also premium, and therefore cost more than the competition. However, people aspire to have premium products. And if you don?t have enough money to buy a premium car, you will definitely have enough money to buy an iPhone or an iPad. Apple is selling ?Porsches?,... just at a level that no other premium brand has so far been able to achieve. That?s what investors/analysts don?t seem to understand.

    In addition, they are afraid that Apple could go the same path as Motorola and Nokia. However, surveys show that more than 80% of iPhone owners will buy an iPhone as their next cell phone, too. This is huge since the number for Android based phones is more like 40%. Owners of Apple products are entrenched in an ecosystem that just works. For example, the iPad is so easy to understand that little children of 3 years and grandparents over 70 years can use it. And once I have a Mac at home, an iPhone, and an iPad, the costs to switch to a different device (no matter whether it is cheaper, faster, has a larger screen, or is lighter) are huge.

    So if people start realizing that Apple is in fact NOT that large, they should be able to see that the growth prospects for the next 5 years are great. And I am not even talking about new products, like a TV. Apple will definitely grow faster over the next 5 years than the 20% currently estimated by WS analysts. With the current PE ratio of around 10 the share is a bargain.

    Let?s put that into perspective with the REALLY large companies that have/had nowhere to grow because of the law-of-large-numbers…

    When Nokia was at the height of its growth it managed to sell almost 440 million mobile phones which accounted for 40% of ALL global mobile phones sold. Intel grew all the way to a market share of 85% and when MS Windows hit its high it was a monopoly (in a way it still is). That?s what I call LARGE!

    However, investors/analysts somehow bring up these companies when they talk about the situation Apple will have to face soon. But if they compare Apple with those companies (which is hilarious since Apple is still in an earlier stage of its growth path) then please give Apple the valuation they had back then, too!

    When Nokia hit a market share of 38% of ALL mobile phones in 2003 its PE was at 25! Similarly, Microsoft, back in 2003 after the dotcom-bust and long after it had matured as an established company traded at a PE of 50. The same with Intel, which had a PE of over 100 in 2002. Dell reached a PC market share high of almost 17% in 2005 and was still trading at a PE of 25. HP reached its PC market share high of over 19% in 2009 and had still a PE of 15.

    All these companies had only limited future growth opportunities when compared to Apple today, but were still valued higher. As long as the investing community does not realize that Apple is NOT that large it will continue to play catch-up. That’s why I loved Tim Cook’s hint about Apple’s market share.

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    Posted: 28 January 2012 02:07 AM #1

    Appreciate your insights Al.

    Did you guys notice something this week?  Maybe it’s just me noticing it now but I heard at least one analyst assigning Apple a growth rate based on trailing 5 years.  While that’s hard to take seriously, it might have been a little extra insight into how the pros value Apple.  Of course, what will they do when the bad quarters during the Great Recession fall away and that 5-year average gets much higher…

    The reasons change but the game stays the same.  We know better and that is our potential advantage.

    Y’know what, I think I’ll go see what Apple’s actual 5-year growth average was…

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    Posted: 28 January 2012 03:03 AM #2

    adamthompson3232 - 28 January 2012 05:52 AM

    Eventually smart phones will be one billion units per year. Apple will be a significant portion of that, if not a majority. Can you say $$$$$$.

    Right, except smartphones will be much more than one billion. A billion iPhones per year is attainable within 5 years.

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    Posted: 28 January 2012 03:08 AM #3

    That one, I’m not so sure of.

    It’s pretty damn remarkable that 1.2 or so billion handsets get sold every year in the first place!  Not sure if the market will ever get much higher than say 2.5B or so max - is handset turnover really that high?

    That said, the trend sure looks like most handsets sold every year will be smartphones and the handset market shouldn’t really shrink anytime soon.  Even if AAPL’s FY ‘13 iPhone growth got cut by half, we’re still conservatively looking at AAPL selling over 200 million iPhones in FY ‘13.  That’s unbelievable.

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    Posted: 28 January 2012 03:47 AM #4

    I’m not sure either. I said attainable, not inevitable. Here’s how: Within a 7+ billion world population, an emerging smartphone market that will replace and exceed the dying dumbphone market, and a two year replacement cycle, Apple would need a majority share of the market.

    If not 5 years, how many before this seems like possibility?

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    The only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. — Steve Jobs

         
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    Posted: 28 January 2012 04:18 AM #5

    Two points :

    1. I heard similar things about RIM many years ago. Right now aapl is not the same of course.  But keep this in mind, especially in 2 years

    2. Be thankful that the market is behind the curve in this understanding. It is this information/understanding arbitrage that allows us to profit from Apple’s rise.

         
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    Posted: 28 January 2012 04:27 AM #6

    RIM is not remotely like AAPL.  This is totally factual.

    If you want a clear, advance warning sign, here’s one: 

    http://www.appleinsider.com/print/11/06/16/rim_hit_by_plummeting_sales_prices_and_profits_announces_layoffs.html

    “In 2008, Apple’s chief executive Steve Jobs announced in the company’s third quarter results that “Apple beat RIM” in its unit sales, noting that “RIM is a good company that makes good products. And so it is surprising that after only fifteen months on the market that we could outsell them in any quarter.”

    Disruption in proper context.

    Slowing growth will not necessarily be a sign of Apple decline.  Not only must you stay on the lookout for signs, you also have to interpret them correctly.  That said, slowing growth is always a point at which the individual investor starts thinking about investing elsewhere.  In 2014-2015, it’s likely that I won’t be as invested in AAPL as I once was.

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
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    Posted: 28 January 2012 09:53 AM #7

    I don’t think we can fairly say that Apple is not large.

    Apple is LARGE.

    AND there is plenty of room for growth.

    Apple’s size (economies of scale, installed base, synergistic industries, committed software developers and $) will allow them to eat more of the potential pie than its competitors.

    So, I agree with the gist of the post but think that Apple’s size is an asset going forward, not a detriment.

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  • Posted: 28 January 2012 10:15 AM #8

    The market seems to have a hard time distinguishing between large and mature.

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    @chasedodge

         
  • Posted: 28 January 2012 10:33 AM #9

    The thread title should be

    Apple 5 years growth forecast by professional analysts is ridiculously understated

         
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    Posted: 28 January 2012 11:15 AM #10

    adamthompson3232 - 28 January 2012 05:52 AM

    Holy smokes, Big Al. Keep friggin’ posting cuz you know your shi*. And of course you quoted me so I’m now biased:) But seriously you are absolutely right on all fronts. SJ wasn’t just a genius because he made the world’s greatest revolutionary products. He also happened to pick categories (e.g. smart phones) that have IMMENSE marketing potential. Eventually smart phones will be one billion units per year. Apple will be a significant portion of that, if not a majority. Can you say $$$$$$. The opportunity here is insane. Big Al, you are a genius. We should get you on CNBC debating “Apple bulls” like Giant Moron (aka Gene Munster) and Big Dummy (aka Katy Huberty).

    Thank you, Adam, but I am not really a genius since I started buying Apple shares only last year. smile I don’t know why I did not look earlier at the stock, especially since I have been owning an iPod since 2003, and a Mac since 2005.

    But when I saw the extraodinary growth rate and the low PE of Apple beginning of 2011 I knew I had to get in. Especially since I started noticing that many of my friends were buying Apple products for the very first time in their lives.

    CNBC is crap anyway wink

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    Posted: 28 January 2012 11:25 AM #11

    Mav - 28 January 2012 06:07 AM

    Appreciate your insights Al.

    Did you guys notice something this week?  Maybe it’s just me noticing it now but I heard at least one analyst assigning Apple a growth rate based on trailing 5 years.  While that’s hard to take seriously, it might have been a little extra insight into how the pros value Apple.  Of course, what will they do when the bad quarters during the Great Recession fall away and that 5-year average gets much higher…

    The reasons change but the game stays the same.  We know better and that is our potential advantage.

    Y’know what, I think I’ll go see what Apple’s actual 5-year growth average was…

    Here are the numbers Mav:

    Revenue:
    5 year growth average as of FY 2011: 41.16%

    Net income:
    5 year growth average as of FY 2011: 67.11%

    You can find more detailed growth information here (Key ratios -> growth):
    http://financials.morningstar.com/ratios/r.html?t=AAPL&region=USA&culture=en-us

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    Posted: 28 January 2012 11:43 AM #12

    Big Al
    Outstanding Observations.  As I analyze Apple, I like to do sum of the parts. I am a fan of the diffusion of innovation theory and try to apply that to each market segment Apple competes in. 

    One of the key concepts is peak growth occurs at 50% market penetration and then falls off rapidly unless new innovation reinvigorate the growth like the iPad is doing for the PC category as an example.  Apple is growing their PC market in a mature category and as a result capturing a larger percentage of the overall market by increasing the mobility and allowing interaction, the tool is available for a larger number of tasks, so ultimately I believe the market for Post PC devices is larger then the market for PC’s and while Apple is growing their share of the traditional PC market which has been dominated by Wintel, they have also used innovation via the tablet to disrupt portions of the PC market where the PC was used, but was hardly the ideal tool.  For example many airlines are moving their chart files and reference material to iPad.  In some cases this is a replacement for paper files and in others the material was carried on a laptop which is ill suited to the cockpit.  We also see this trend in the medical field where today the doctor wheels in a big cart with a PC to input scripts or medical data, the Tablet is a much better fit.  Apple early this month took a stab at another huge growth opportunity, the textbook business.

    While it is realistic to assume that YOY growth in the smart-phone market will slow over the next 5 yrs as the market becomes saturated,  Apple still underserves the emerging market and so in addition to being able to expand due to market growth they can increase their market penetration within the existing market by adding carriers and additional price points.  We saw this phenomena in the recent qtr when Apple introduced a new device on multiple carriers in the US.

    One of key assumptions all the pro analysis make IMO is that Apple will not create new markets for their products and so they assume growth will tail off.  We have now seen Apple move from the PC to the iPod, to the iPhone to the iPad so really we need the pro’s to give Apple some credit for their track record of being able to find what’s next.

         
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    Posted: 28 January 2012 12:52 PM #13

    Apple II+ - 28 January 2012 07:03 AM
    adamthompson3232 - 28 January 2012 05:52 AM

    Eventually smart phones will be one billion units per year. Apple will be a significant portion of that, if not a majority. Can you say $$$$$$.

    Right, except smartphones will be much more than one billion. A billion iPhones per year is attainable within 5 years.

    Just imagine the number of Foxconn factories and the number of Foxconn employees it would take to produce that kind of volume.  That’s like saying, on the launch weekend Apple sold 25 million new iPhones.

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    Posted: 28 January 2012 06:26 PM #14

    jjjz - 28 January 2012 01:53 PM

    I don’t think we can fairly say that Apple is not large.

    Apple is LARGE.

    AND there is plenty of room for growth.

    Apple’s size (economies of scale, installed base, synergistic industries, committed software developers and $) will allow them to eat more of the potential pie than its competitors.

    So, I agree with the gist of the post but think that Apple’s size is an asset going forward, not a detriment.

    That’s true. Apple is a large company. But what I wanted to point out is that it is not THAT large that the “law-of-large-numbers” applies. cdodge used the term “mature” as a way to differentiate from large. I could live with that.

    pats,
    very nice insights. I think the reason why many investors/analysts assume that Apple will not create new markets for their products is because Steve Jobs is not running the show anymore. I really think that this is a big factor for many people. Yes, they acknowledge that Apple will be fine for the next few years selling iPhones and iPads like crazy, but what’s next? They do not think that Apple without SJ is capable of inventing the next big thing.
    The true puzzle to me is how low Apple is valued assuming that they will only sell the current product line up (+ upgrades) in the future.

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    Posted: 28 January 2012 06:38 PM #15

    What’s the next big thing for IBM?  (14.6 multiple)  More services and a side of POWER servers and chips?

    Google?  (19.5 multiple)  More monetization of data?  I mean hey, that’s all Android is without license fees.

    Wal-Mart?  (12.8 multiple)  More ways to shop?

    McDonald’s?  (18.7 multiple)  Different food/food delivery concepts?

    It’s all a big excuse, like the “where’s Apple’s stable recurring revenue stream” meme.  (The recurring revenue stream is the devices, the same way automakers live and die by selling cars!)

    It’s difficult for some to see in front of their noses, even WS analysts, and that’s OK.  And the way WS typically gets embarassed on the numbers, they’re not even convinced that Apple’s products are selling “like crazy” in the first time.

    Apple doesn’t really even need a next big thing anymore.  Apple has huge running room ahead of it in every market it participates except iPod.  It has at least an outside shot of one day becoming the world’s largest company by revenue.  (400M iPhones, 150M iPads, and 40M Macs someday, all by themselves, already gets you well over $300B conservatively and probably well into the Top 10).

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.