Tuesday, October 9, 2012

Revisiting Apple

It's been a while since That Retired Guy (TRG) has commented on Apple.  In the time since the last post, Apple had a mildly disappointing quarter, and released a new version of the the iPhone.  The iPhone re-design is a particularly big deal because it is the first major re-vamp post Steve Jobs.  First impressions are that it's not earth shattering, but it is probably good enough for Apple to continue selling as many of them as it can make for the next few quarters.

The change from Google Maps on the iPhone has been a major hiccup, but is probably not a fatal flaw.   If Apple really throws their development weight behind the new mapping app, then they can probably fix most of the issues by the next release, and longer term, owning the mapping tool will be positive for Apple.  As great as Google maps are, the fact is that they have left the door wide open on this feature, and there is plenty of room to do it better.  Having a unique mapping application on Apple products gives one more opportunity to pull user's into the 'Apple Ecosystem', and any Apple user will tell you that once someone starts using Apple products they quickly (and happily) become 'locked in'.

TRG came across a very interesting article yesterday.  Apparently, Toni Sacconaghi at Bernstein Research (one of the better Wall Street Research firms) believes that 70% of iPhone 5 purchases are coming from NEW USERS and not upgrades.  TRG finds this a little hard to believe, but if it's true, it's really bad news for Google and Samsung because Apple users are very loyal, and not just because the products are good.  Apple creates loyal users because the products work together in a seamless way, and users become comfortable, and dependent on the features.

The iPhone will have a limited impact on this quarter, but it MAY be enough to bring Apple's yearly profit to 44 Billion.  That would place them in the top 5 in the list of largest earnings ever, and there's still an outside chance that they will make number 1 on the list this year.  For those who want to measure the historical greatness of Apple, this is the list to pay attention to.  The press has spilled a lot of ink on the fact that Apple's market capitalisation has made it the 'most valuable company ever'.  Even though on an inflation adjusted basis, Microsoft still holds the title.  The fact is that market capitalization really doesn't mean much.  When Microsoft topped the list, it was no where near as profitable as Apple is today.  In fact, Microsoft's highest earnings do not even place them in the to 20 of highest earnings of all time.  Microsoft rode the tech bubble to an inflated market value, while Apple continues to trade at a very modest 15 times earnings.

Is AAPL stock as good of an investment as it was a year ago?  No, the stock price growth has started to match (even exceed) earnings growth.  But at 15 times earnings, AAPL is still a pretty good deal.  Apple will struggle to keep up with demand for the iPhone in the next quarter, and if the rumors are true of a new iPad mini, then they will likely continue to increase profits.  Most analysts forecast growth greater then 20% for next year, and TRG does not see any major issue with Apple meeting or exceeding that target.

Longer term, it's harder to say.  Apple's products are by far the best designed consumer electronics, but it is always hard to stay on top when everyone is gunning for you.  Can Apple create the next big thing without Steve Jobs?

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