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ATPM 18.01
January 2012





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The iPad Chronicles

by Robert Paul Leitao,

Apple’s Ghost of Christmas Yet to Come

In the famous novel by Charles Dickens, Ebenezer Scrooge is visited on the night before Christmas by Ghosts of Christmas Past, Present, and Yet to Come. The story, which has endured many popular adaptations, ends with the conversion of a miserly and miserable man to a gentleman who carries with him the hopeful and generous spirit of Christmas to the end of his years.

I have followed Apple since the release of the original Macintosh in early 1984. I have witnessed and written about the tragedies and triumphs of the company’s past, its present, and Apple’s potential for growth in the years yet to come. Today I see a storied enterprise with a colorful past befitting its own novel, yet an enterprise that maintains a youthful, almost playful approach to the product strategies that will yield success in those years yet to come.

Apple’s Ghost of Christmas Past

I remember a time when the word “beleaguered” had become a de facto prefix to the company’s corporate name. The company that many consider the first modern tech industry IPO and the company that claims to have ignited the personal computer revolution became stodgy and stubborn like the character in the Charles Dickens novel.

In the mid-1990s Apple didn’t lose its leadership in the PC market because Windows PCs were better. Apple lost its leadership because the CEO at the time bet on the brand name rather than innovation to deliver revenue and margins. The Performa line of Macintosh computers nearly drove the company to oblivion.

It was a twist of fate and a combination of products for content creation and content consumption that reversed Apple’s fortunes. The return of Steve Jobs, the nimble and diminutive iPod, the iTunes Music Store, and a revamped line of personal computers sparked one of the great corporate revival stories of the past one hundred years. It was innovative thinking that started Apple, and it’s the continued spirit of innovation that recently delivered the company’s first $100 billion fiscal year.

Although Apple has invested heavily in building global brand awareness, innovation, not the brand name, is delivering record revenue and earnings. Apple has learned from its ghosts of the past.

Apple’s Ghost of Christmas Present

For the holiday season of 2011, Apple released a compelling line of new smartphones, and the company is a global leader in the emerging market for tablet-style products. This quarter Apple will generate revenue of over $40 billion and earnings of more than $11 per share.

Apple Competes With Device Makers, Not Operating Systems

Contrary to popular opinion, Android handset makers compete more with one another than they compete with Apple. Apple’s biggest challenges are maintaining the pace of product innovation and meeting demand with supply when refreshed products are initially released.

Absent innovation, Apple cannot sustain strong rates of revenue and earnings growth. Only in the absence of adequate supplies of newly released Apple products can competitors establish or sustain a lucrative foothold in any of the company’s primary product markets.

The Kindle Fire Is Not an iPad Competitor

The subsidized Kindle Fire is designed to sell content distributed by Amazon. The Kindle Fire is sold at price points well below the Apple iPad’s entry price. If anything, the Fire is expanding the market for tablet-style products and is not diminishing the iPad’s potential for growth. The success of the Kindle Fire will be determined by the amount of post-purchase content Amazon can sell to device owners. Success will not be measured by the vague claims of Amazon as to how many Kindle Fires might have been sold.

From the company’s inception, Apple has been primarily a device maker. Apple distributes content because content sells devices. Apple develops its own operating systems as a means to differentiate its devices in the market and as a means to create devices with enhanced functionality and uses.

The Macintosh Remains an Important Component of Apple’s Product Strategy

This fiscal quarter Apple will sell more than five million Macintosh personal computers for the first time in the company’s history. For the second consecutive quarter, Apple will sell more than one million Macintosh computers through the company’s retail stores. Last fiscal year revenue from Macintosh sales reached $21.783 billion, and this fiscal year revenue from Mac sales will surpass $26 billion. Apple is the nation’s #3 PC maker and may reemerge among the world’s top five PC makers as early as this year’s fourth fiscal quarter.

Apple Remains Undervalued

Apple’s nominal share price only seems expensive. At December 9th’s closing price of $393.62, the company is trading at only 14.22 times trailing 12-month earnings, and at the end of the last quarter $87 in cash stood behind every outstanding share. Apple is trading at a deep discount to anticipated FY2012 and FY2013 rates of revenue and earnings growth. I maintain a $640 price target on the shares.

Apple’s Ghost of Christmas Yet to Come

Apple’s future is at least as promising as the company’s colorful past. In calendar year 2012, Apple will surpass HP in revenue to become the nation’s largest technology company, and it is on track to reach one-quarter trillion dollars in revenue as early as the first fiscal year yet to come. This fiscal year Apple will surpass $170 billion in revenue and $46 in earnings per share.

The Law of Large Numbers Is Not Limiting Apple’s Growth Rates

I first wrote about Apple and the Law of Large Numbers 18 months ago. At this time the axiom still does not apply.

In the current fiscal year, more than 75% of Apple’s revenue will be generated from products introduced since 2007. Last fiscal year domestic sales represented less than 40% of Apple’s $108.249 billion in revenue, and as early as next fiscal year more than two-thirds of Apple’s revenue will be derived from regions outside the United States. Asia-Pacific is Apple’s fastest growing region, and sales inside China surpassed 10% of the company’s revenue total last fiscal year. This vast geographic region will continue to produce extraordinary rates of revenue growth over the next few years. Apple still has only one authorized iPhone carrier on the mainland, and India remains virtually untapped for sales of Apple products.

Brazil and Russia are underserved markets. Along with other emerging economies, there are plenty of regions around the world in which Apple has yet to establish a significant sales presence. Geographic expansion will create attractive rates of revenue and earnings growth for the foreseeable future. The world’s population has surpassed seven billion. Even now only a fraction of the world’s population has ready and convenient access to Apple products.

Apple Will Continue to Develop New Products

Apple’s future isn’t limited to the company’s current product portfolio. Apple continues to develop new products while finding new ways to make product sales and distribution more efficient. The success of the company’s global retail store network lends itself to new product development and new product distribution.

At the center of Apple’s success is a culture of innovation. The essence of the company’s growth is that as an enterprise it cannot and will not stand still.

Although for a time in the 1990s it appeared characters similar to Jacob Marley or Ebenezer Scrooge ran Apple, the return of Steve Jobs focused the company’s talent and resources on new opportunities and the rewards that come through constant innovation. Only when the company attempted to rest on its laurels did it confront the reality of losses and the possibility of demise.

Apple in the Years Yet to Come

In the years yet to come, Apple can become the first global enterprise to reach $1 trillion in market cap. But this will occur only if Apple continues to innovate, continues to develop new products, and continues to enter currently underserved and untapped markets. The ghosts of Apple’s past remain ever present. Like the outcome in the Charles Dickens story, Apple’s Ghost of Christmas Yet to Come will herald opportunities for renewal and the chance to maintain a youthful and even playful approach to the company’s product strategies. But these opportunities will last only as long as the company chooses to never again stand still.

It’s innovation that will always drive Apple’s success.

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Reader Comments (2)

Warren Shaw · January 2, 2012 - 15:44 EST #1
Steve Jobs was widely credited with being the spirit and driving force behind innovation at Apple. He is now gone. How likely is it that the team he left behind can continue the rapid and successful pace of innovation seen in the past decade? If one looks around the technology landscape, Apple has been rather unique in doing so under Jobs.
Robert Paul leitao (ATPM Staff) · January 2, 2012 - 21:21 EST #2

The brilliance of Steve Jobs extended to the talent he selected to lead the company. Tim Cook, for example, is an extraordinarily talented and hardworking individual who has an impressive command of and knowledge about all things Apple.

I expect strong results from Apple over the next few years as the company's global market expansion continues unabated.

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