Posted on 09/13/2010 5:16:04 PM PDT by Swordmaker
Apple (Nasdaq: AAPL) will become the most valuable company in the world. Bet on it. In fact, go out and sell all your personal belongings, liquidate your 401(k), and buy Apple stock with every last dollar you own.
OK … on second thought, I wouldn't advise that -- it's a bit rash. But there are ample reasons to believe that the company's rise is just starting and that Apple will continue blowing past expectations.
Big Oil, meet Big Phone
You've heard the standard "bullish" reasons before: Apple has $45 billion in cash and trades at only 12 times forward earnings when netting out cash.
Yet investors are rightfully nervous about the stock. It went from the brink of irrelevance to the top of the tech world in less than a decade. It built its $236 billion market cap by selling to consumers, a notoriously fickle crowd. Investors have been burned in this area before; they watched Motorola (NYSE: MOT) rise to prominence only to be cut down to size as its designs lost favor. People are afraid to hear that "it's different this time." For many, avoiding Apple is the safer play.
This changes everything … again
Well, it truly is different this time. I'll give you four reasons that the iPhone, and smartphones in general, are a whole new ballgame.
1. Software is the new kingmaker
Apple went into one of the most hypercompetitive markets in the world and created a product that was technologically years ahead of all its competitors. It entered a market that everyone knew would have vast potential -- hence the reason telecoms such as Verizon (NYSE: VZ) and AT&T (NYSE: T) built out massive data networks to support smartphones -- and Apple still managed to destroy a powerful group of competitors.
How? By virtue of a sea change within the mobile industry. The only difference between older "feature phones" -- you know, like that old flip phone sitting in your closet -- was hardware. The mobile companies loaded their own software onto the phones and pretty much controlled the software experience.
In spite of the iPhone's phenomenal hardware designs, software created the difference and the lasting competitive advantage. The user experience, the apps, and the iTunes integration were the factors that created Apple's long-term success. Other handset makers can easily replicate the touchscreens and the slim design, but the App Store, the clean operating system, and the iTunes integration? Well, everyone else is still catching up on those fronts.
2. iOS scales
Apple's mobile operating system, known as iOS, is optimized for a mobile experience. However, it scales extremely well for other high-growth markets and creates both a uniform experience and an app market for users. Although many were hesitant about the iPad's potential (me included), Apple is now reportedly cranking out 2 million of the iOS-based tablets a month to meet demand. Furthermore, even though the current Apple TV is underwhelming, it manages to keep Apple involved in the battle for the lucrative home-entertainment market, and future models of Apple TV could easily incorporate iOS to provide better media, gaming, and other apps right into consumers' televisions. The point is that even though iOS started on smartphones, it's now a dominant platform on tablets, and it could make further inroads into the home.
3. Consumer behavior on its side
Smartphones are growing by leaps and bounds, but few take the time to examine the dynamics. How many people would pay the full, non-subsidized $600 average selling price Apple receives from AT&T and other carriers? Obviously, the number of users would be far lower. Smartphones take advantage of consumer behavioral traits; as consumers, we're far more willing to pay a low upfront cost if future payments are obscured. In many markets (the U.S. included), carriers subsidize the cost of smartphones, and doing so artificially boosts sales figures.
Not only that, but smartphones also encourage people to do things like collect a series of apps that work on only one system. And since people like keeping what they've already collected, most who have a proprietary system will stick with the same proprietary system for their next upgrade. Thus, 89% of iPhone users want their next phone to be another iPhone. That figure falls to a mere 42% for users of Research In Motion's (Nasdaq: RIMM) smartphones.
4. Underrated smartphone growth
While consumer-electronics sales are expected to be flat this year, smartphone sales are expected to boom. Last quarter, the smartphone market grew by nearly 50% over the previous year. Researcher Gartner believes that over the next four years, smartphones will see 28% annual revenue growth.
Smartphones clearly present an enormous opportunity, yet there's plenty of evidence that the opportunity is actually underrated. Companies that can profit immensely from the spread of smartphones -- Cirrus Logic, Marvell, and even Qualcomm (Nasdaq: QCOM), to name three -- still trade at pretty low valuations for a field with such tremendous growth rates.
What's more, Apple has growth opportunities in mature markets where it already succeeds. The company sells through just one carrier in such major markets as the United States, Japan, and Germany, but it's expected to pursue a multi-carrier strategy in the coming years. That strategy should assure that Apple secures an even larger slice of the pie in growing markets.
Some figures to toss around
In the following table, I've created a set of iPhone growth assumptions, all of which point to a company with significant upside. In the past 12 months, Apple has generated nearly $21 billion in revenue from iPhone sales and products related to the iPhone. If the company can merely match anticipated industry growth rates, its iPhone line should generate more than $56 billion in revenue by 2014. In the past 12 months, Apple's revenue as an entire company was $57 billion.
So let's make some assumptions about the future profitability of the iPhone. Gross margins are estimated using industry estimates, and I'll shrink them in part to reflect a declining average selling price. Operating costs and the effective tax rate come from companywide figures.
Source: Capital IQ, a division of Standard & Poor's, and company filings. Gross-margin estimates from researcher iSuppli and industry analysts. R&D=research and development. SG&A=selling, general, and administrative expenses. If Apple matches industry growth rates, the iPhone alone would produce $23.8 billion in pre-tax profit by 2014. On a post-tax basis, that's still more than $15 billion in profits. However, that's still not all! The phone also drives a "virtuous cycle" for Apple. As more users buy iPhones, they upgrade to Apple's other products. Even though Apple controls up to 90% of the market for computers costing more than $1,000, the company keeps growing Mac sales at industry-thumping rates. What does that mean? It means Apple is creating a new class of users willing to spend more on its computers. The more iPhones it sells, the more crossover sales it gets to other products. For investors, the ka-ching of cash registers at Apple Stores is music to their ears. Bottom line For instance, it's almost impossible to do an Apple write-up without mentioning Google (Nasdaq: GOOG). If we see a reduction in the relevance and use of apps over the next few years, Apple could get burned while Google's model of free distribution continues growing like wildfire. In addition, as smartphones gain increasing penetration rates in developed countries, much of the continued growth will come from emerging markets. Even if the smartphone market grows at the stunning 28% rate I mentioned earlier, Apple might not be able to keep pace as consumers reach for lower-end offerings. The natural beneficiary? Again, Google. Since Android can scale down to extremely inexpensive phones, it should do well in emerging markets. But hey, every investment has its risks. Apple may not be the king forever, but the next few years should just keep getting better for Jobs & Company. |
Can't you read? I am using 2010 information... not 2009.
Your data for Microsoft is for 2010. Enough said. Learn to compare like periods...
You lied. You stated that ACEs cannot break the OS - it's not a problem. But we have PROOF of ACEs doing it in the past, and that is how current jailbreaking works (ACEs in things other than ACE).
So, if it's not an arbitrary code execution exploit, how do these guys jailbreak the phone? How is an unbreakable OS subject to being cracked within a DAY of release?
You lied, you're wrong, and you REFUSE to admit it.
Going to answer? Use the latest data available, use your "GUESSES" that you posted above. Do the math:
Does Apple have a lower margin than Microsoft and Google?
Either answer, or dodge (and admit you're a shill and nothing more)...
Well, I see that nothing has changed lately. You’re still beating the snot out of the Microsoft guys. I guess they like it.
The answer is not as simple or as black or white as "yes or no," Puget. And, quite frankly, it has little to do with the subject of this article.
The profit margins of Apple, Microsoft, and Google are a pure Straw man argument you have raised.
All three of those companies are in different industries. The margins of profit between companies in different industries are different and not comparable for a host of reasons... primarily because the economic inputs that make up their products are completely different. Apple's is lower than both Microsoft's and Google's. So what? The costs involved in manufacturing goods are completely different than the costs involved with publishing software which are completely different than the costs involved with running a search engine and selling advertising. Why should that bother me? Or anyone else, for that matter. Of course, the numbers don't lie... but the reasons why are more important than are the raw numbers.
The profit margins between a SOFTWARE company, an ADVERTISING/SEARCH ENGINE company, and a COMPUTER HARDWARE/CONSUMER ELECTRONICS PRODUCTS factory are not comparable. Again, learn some basic economics about economic inputs and costs involved before you blather. I don't care. I know the difference. You apparently don't.
In the markets that Apple does compete in, their margins are QUITE healthy... usually the best in the market. For example, in the Personal Computer manufacturing market, their margins are market leading. We've discussed the margins in the cellular phone market... again, market leading. Digital music? Same thing. MP3 players? Ditto. I would suspect that if you compared Apple's margins in software, you'd find their margins there were at least comparable to Microsoft's software margins. Now that Apple has moved into Advertising, where they have yet to post any profits, we cannot say. But if their profits are not at least competitive with Google's, I would be surprised.
Hell! If Apple's margins were higher, you and driftdiver would be criticizing Apple for exorbitant margins! In fact, I believe one of you has done exactly that already in this thread.
You can scream and shout about AGGREGATE company margins being lower overall, but that is ignorance screaming and shouting. It's a Straw Man argument that makes a lot of noise but means absolutely nothing in the real world.
Your using Microsoft's fiscal 2010 figures against Apple's fiscal 2009 figures show you haven't got a clue about how to do your comparison. They are nine months out of sync. In fact, it points out that in 2010 Apple has EQUALLED in just NINE MONTHS what they did in all of 2010. You did not cite your sources... so I assumed you were using, as most people would, the most up-to-date comparable data—that for the last 4 quarters regardless of the artificial fiscal year endings—but NO, you did not. You took the lazy way out and used Wikipedia's financial reports. I did not—I used Apple's 10Q and cited the accurate, up-to-date data—and you call me a "Liar" for using the most up-to-date figures. BAH!
Words MEAN things, Puget... THIS SPECIFIC VULNERABILITY CANNOT IMPACT iOS... UNLESS YOU CAN SHOW ME ADOBE FLASH AND ADOBE ACROBAT READER APPS FOR iOS THEN YOU ARE LYING. There is no current jail breaking by the use of PDF. That exploit was CLOSED four weeks ago.
How can I be sure I always can Jailbreak in the future!Firstly, don't update past 4.0.1, the last firmware JailbreakMe supports. Secondly, and arguable most importantly, allow Cydia to "make your life easier". This will allow you to always restore back to the latest firmware available when you select that option.—Jailbreakme.com as of today, September 16, 2010
So, one month AFTER the release of iOS 4.0.2, closing the JailbreakMe.com vulnerability, JailbreakMe.com states that their software WILL NOT WORK on any firmware after iOS 4.0.1... which shoots down your claim "cracked within ONE DAY of release" If you are referring to the Geekinside.uk.com report of iOS 4.1 being cracked on September 9th.. they published a semi-retraction saying :
"Dev-Team members say there is still work to be done to fine-tune the exploit technique and that would-be jailbreakers are best served by forgoing the update to 4.1 for now. The admonition comes after they called iOS 4.1 a trap designed to prevent future jailbreaking and unlocks."—Geekinside.uk.com
Finally, I have never said that an ACE cannot work on an iOS... I have said that they will not work on OSX... because the data stacks are NON-EXECUTABLE memory and that buffer overflows in those areas cannot be executed. I have numerous times stated, including in this thread, that the iOS devices are NOT similarly protected at this time. YOU KEEP IGNORING THAT STATEMENT BY ME and claiming I have made the sweeping statement that all Apple products, inclusive, are somehow covered by my statements about OSX. Nothing is further from the truth. That is another one of your STRAW MAN arguments... you've done it in this very discussion. I've made it explicit that the Non-Executable protection that prevents ACE from being a problem in data buffer overflows in Macs DOES NOT EXTEND to the iOS devices... but you keep arguing that point and calling me a LIAR for something I never said. Just because I did not write an entire treatise on everything about the issue, covering every possible permutation of possibility, you apparently believe that gives you carte blanche to call me a liar for not doing so. Give it a rest.
Microsoft is not the company to praise for tight hardware/software coupling. Apple is.
And the proof is in the pudding, as they say: Microsoft and Google both have higher net margins than Apple.
It's easy to have high margins when you manufacture little hardware. Apple develops software and runs server farms for services like the other two. On top of that, Apple has to PAY to have millions of devices manufactured, and generally using high quality materials too.
Profit margin is often the rally-cry of the pro-Apple-everything camp here, yet Apple has a lower margin than Microsoft and Google.
Apple's margins have been compared to other phone and computer MANUFACTURERS. Apples to apples, figuratively.
The company’s Entertainment & Devices group — which includes Xbox 360, PC game, consumer software, mobile and Zune sales — reported revenue of $1.665 billion in the third fiscal quarter ended March 31, compared with $1.629 billion a year ago. Operating profit was $165 million, compared with a $41 million loss in the midst of the recession last year.That's about a 10% profit margin on a recession rebound. And that includes decreased R&D and production cost on the XBox hardware, practically no-cost game licensing, lots of software income, and most importantly income from Live subscriptions. The XBox is planned to get even cheaper to manufacture due to one SoC replacing all core components. Still, that's just taking advantage of Moore's Law on a five year-old design. I do find it fascinating how they had to slow down the SoC to remain compatible because modern tech is so much faster only five years later.
Apple has to constantly ramp up manufacture for a few new products every year using the latest in technology.
So, the guy that tries to deflect reports about Apple’s declining market share by talking about profit margin cannot admit that Apple’s two biggest competitors have higher profit margins.
Thanks for confirming that you are, in fact, a shill.
Yes, they do. You made a BLANKET STATEMENT that ACEs are not a problem for iOS.
THIS SPECIFIC VULNERABILITY CANNOT IMPACT iOS... UNLESS YOU CAN SHOW ME ADOBE FLASH AND ADOBE ACROBAT READER APPS FOR iOS THEN YOU ARE LYING.
BS. I'm not the one that made the QUOTED BLANKET STATEMENT.
There is no current jail breaking by the use of PDF. That exploit was CLOSED four weeks ago.
But there were, and it was an Arbitrary Code Execution exploit, right? In bone-stock Apple code only.
Can you admit that an arbitrary code execution exploit was used to completely root a phone with no interaction from the customer other than going to a website? That an ACE exploit can totally root your OS?
Can you, Sword?
Finally, I have never said that an ACE cannot work on an iOS..
And here you are, lying about your lie. I give you this:
In the case of OSX and iOS, PDFs are usually read by native, non-Adobe, routines built into the OS... so they are not at risk either.
We've seen them for iOS, and that we've seen that the native routines were susceptible when Adobe's routines were not. ACE exploits allow ownership of iOS. There are undoubtedly many more, not being used right now (that you know of...) as there is a history of ACEs in PDF readers written by Adobe. Can you admit that?
Oh, and your little statement about it not being possible to attack OSX this way? Sorry, you're wrong, it's happened in the past. And there are many, many more ACE exploits that will compromise OSX, per Apple's own statements about those holes.
And it will definitely happen again in the future. Only a shill of the highest order would deny any type of attack or hole in an OS.
And what's with copying a bunch of other people on your failed defenses? Is it because you're hoping someone else will bail you out?
You would be surprised how tightly Microsoft works with the hardware vendors... There is a tight coupling there, and a continual push to strengthen it, it's just not visible like at Apple.
Hundreds of millions of dollars of development - LOTS of hardware - done for other companies, so that the products developed will work 100% with Microsoft OSes and applications and services. It's tight, it's just not visible. When that product is developed and designed at Microsoft, but sold under another company's name, the consumer doesn't know - but it's still from the same company, the same tight coupling.
You think those new WP7 phones have been developed by HTC and Samsung in a vacuum? ;) No, there's been heavy MS involvement from the beginning.
It's easy to have high margins when you manufacture little hardware.
EXACTLY. Which is why crowing about how Apple has high margins (even with a shrinking marketshare), and how it's going to overtake companies with even HIGHER margins (and in the case of Microsoft, more revenue AND profit), doesn't make sense.
What technical reason is there for claiming Apple will be the most valuable company in the world? Other than hope and enthusiasm, precious little. They make their profits in a low-margin field!
And ask the general consumer who the competitor to Apple is; they'll say Microsoft and Google. It's not Samsung or HTC or Motorola. In the consumer's mind, Apple is competing against Microsoft and Google. And when you look at the margins, Apple comes up short.
Apple's margins have been compared to other phone and computer MANUFACTURERS. Apples to apples, figuratively.
Why? Doesn't Apple also make computers and operating systems? Why should they only compare to phone makers (in which case, we should also look at market share, as that is the best predictor of long-term success given the 2+ year lock-in in the US and brand loyalty overseas)? Is the computer side of things, the OS side of things, really not important any more? Is Apple now just a phone and media player maker?
Google's PHONE operating system sells on more phones than Apple's. Does that mean Google should not be considered a player in the telecom/mobile phone market, just because their phone hardware sales are basically nil?
Microsoft builds hundreds of thousands of desktop phones every month. Conceptualized and designed in-house by Microsoft (right in building 31, 2nd and 3rd floors - I was there). They're labeled with another company's name and sold under their brand. Microsoft bears the burden of that hardware, but they still make more margin. And they do it because it couples that office phone system even more tightly to Backoffice Server and Office Communicator (their software sales).
If we're going to trumpet the "margins" of Apple, then by all means - let's look at the margins of the others in their fields, their competitors - Microsoft and Google. And in that case, we find Apple coming up well-short.
Never mind all we hear from the pro-Apple camp is "high margin! High margin!" Well, great - then Microsoft and Google must REALLY be good because of even HIGHER margins!
How BRILLIANT of Microsoft and Google to get hardware makers to take the smaller share of profits! How absolutely genius to defray the costs to someone else, and reap the lion's share of the rewards! Apple's being stupid about trying to do both and keeping that anchor of hardware tied around its waist!
Why do we not hear that regarding margins? Because it would be praising Microsoft and Google at the expense of Apple and Lord knows that just is NOT tolerated.
I've shown you what kind of margins Microsoft has when hardware production is involved, and that's with outdated hardware. Quit trying to compare apples and oranges. Compare Apple to Nokia and HTC for phones, to any other OEM for computers, etc. But don't compare different whole companies with completely different structures overall.
Microsoft spent billions developing Windows 7 in previous years. Now Microsoft gets to sit back and reap the license profits, making for very big profit margins. After the R&D it costs Microsoft less than $1 to manufacture and ship a retail copy. It costs Microsoft absolutely nothing to make most of the copies of Windows 7 sold (the OEMs and enterprise customers do the duplication).
Apple not only has to R&D operating systems as well, but also hardware devices (and now even down to the SoC). Then Apple has to pay to have the parts manufactured, assembled and shipped.
PugetSoundSoldier -- you're language is completely inappropriate on these threads. Name calling is absolutely inappropriate. Clean up your language or I will call in a moderator.
And yet your and swordmakers namecalling and personal attacks is ok? Are you truly making that case?
Oh, I know how Microsoft tries. It's the success that matters. That Microsoft is willing to weaken the compatibility due to partner pressures is disturbing.
When that product is developed and designed at Microsoft, but sold under another company's name, the consumer doesn't know - but it's still from the same company, the same tight coupling.
Is this like the original Zune, basically a Toshiba Gigabeat? Or the XBox 360 CPU, ripped off from the Sony/Toshiba Cell R&D? Do you have better examples? Unless I hear better examples, I continue to believe that the last innovative consumer hardware product from Microsoft was the Intellimouse.
You think those new WP7 phones have been developed by HTC and Samsung in a vacuum? ;) No, there's been heavy MS involvement from the beginning.
I would like to know the level of involvement beyond making sure the OS will work on the hardware.
Doesn't Apple also make computers and operating systems?
In most cases, Apple has a heavy manufacturing expense. Microsoft and Google do not.
Google's PHONE operating system sells on more phones than Apple's. Does that mean Google should not be considered a player in the telecom/mobile phone market, just because their phone hardware sales are basically nil?
No, it means Google has no manufacturing expenses (I'll allow you to forget the embarassing Nexus One). In fact, the CEO brags about it. There's R&D and the profit it returns, without the expense of manufacturing.
Well, great - then Microsoft and Google must REALLY be good because of even HIGHER margins!
As I've shown you, Microsoft doesn't do all that well when hardware manufacture is involved. And is Google even making any money off of Android yet? Does Google's profit have anything to do with anything that competes with Apple?
Apple's being stupid about trying to do both and keeping that anchor of hardware tied around its waist!
Apple gets to lead the way because Apple controls its hardware and software. Apple can come out with fully integrated products on day 1. Many Android users are still waiting for Froyo on their devices months after its release.
So maybe Microsoft and Google are like the Soviets, saving costs by letting the Americans do it first, then copying. Don't worry, Apple is used to the copying by now. Microsoft's been doing it since the 80s.
So Apple isn’t a competitor for Microsoft or Google now but we should use Nokia as the guide?
We’ve already shown that Nokia sells far more phones than Apple and I was personally attacked, not once but repeatedly.
The only reason Apple has the manufacturing costs on their bottom line is because they refuse to license anyone else to do it. Microsoft licenses their software and it works on an open standard that anyone can build.
Apple chose their business model.
The issue of quarterly profit margins does not directly equate to most valuable company in the world. There is far more involved in the market determining a company's value, such as a solid history of profitability and success when expanding to new markets.
Yes, I am making the case that calling people names is not appropriate. If you have an instance of me calling you a name, then please produce it.
If PugetSoundSoldier does this again, I will call in a moderator.
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