Will Apple Cross $1,000?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Investment Case

I believe that Apple’s (NASDAQ: AAPL) valuation is very attractive and that shares could benefit as the company ramps recently released products and introduces new products and services next year. Over the long term, I believe that Apple could return much more cash to shareholders through buybacks and dividends, building on recent initiatives. I believe that there is also room for more product platforms that include solutions for live television and lower-end smart phones.

The Business Drivers

Apple stands out as a leader in “disruptive mobility.” Even with Android gaining share of late, the iOS App Store platform is regarded as the safest and most reliable way for developers to monetize ideas. I believe that Apple is disruptive to PC and printing companies given its mobile devices are being used for more tasks that PCs used to perform, while also inventing new uses. Through the use of a fully integrated mobile ecosystem (i.e., hardware, software, online services, and retail), Apple can extract profits out of other computing segments. I believe that Apple’s expansion can continue from tablets and smart phones into more services and hardware in 2013.

In 2013, I look for Apple to increase its presence in emerging markets with new products and carriers, specifically in China, and increase the total addressable market (TAM) of existing product lines. At the moment, the iPhone 5 is not officially available for China Mobile customers, essentially cutting off more than 600 million subscribers from purchasing carrier supported iPhones. I believe Apple has more control to expand the TAM for its iPhones and iPads than its competitors given its vertically integrated business model. I believe there is significant upside to our estimates as Apple expands uses for existing products such as increasing its hardware and services presence in TVs, mobile payments, and integration in automobiles.

Competitors Analysis

There is no single company that can be directly compared to Apple’s performance. Therefore, one can only do a sum-of-part valuation in order to check whether Apple is performing better than its competitors or not.

Apple has the following products:

1)      Desktop

2)      Notebook

3)      iPad

4)      iPhone

5)      iPod

6)      Peripherals:  iTunes

7)      Software, Service & Other Revenue

Desktop and Notebook

This segment is facing a downslide after the introduction of smartphones and tablets in the market. This segment contributed $6.76 to the 2011 EPS. This was down 10% from its contribution of $7.50 to the 2010 EPS. However, it is important to note that the growth in Notebook sales still remain strong at 33%. In this category, Dell and Hewlett-Packard remain strong competitors. These companies are trading at forward multiples of 6.5x and 4.3x, respectively. The average turns out to be 5.4x.

iPad

We all know that Apple is the father of tablet industry. It is the first ever company to launch a tablet in the world. And this is why I call it a disruptive mover. However, the company no longer enjoys the enormous amounts of profits it once used to reap from iPad sales as the market has been saturated by different tablets from Apple’s various competitors. Google (NASDAQ: GOOG) has launched its Nexus 7 in collaboration with Asus. Similarly, Amazon recently upgraded its Kindle Fire series. Microsoft (NASDAQ: MSFT) has also launched its Surface tablet and is set to launch the Surface-Pro tablet. The increased competition has led Apple to apply price cuts on its iPad. The iPad is now being sold at $450, only 65% of its introduction price of $700.

In response to the competitors’ new products, Apple has already launched iPad-mini and rumors are that is actively working on iPad-mini 2.

Software, Online and iPod

Both Microsoft and Google give Apple competition in this segment. The following table shows the forward multiples of these companies:

<img src="/media/images/user_15211/capture1_5_large.PNG" />

These compare to Apple's forward multiple of 9x.

iPhone

iPhone, by all measures, is the most important product of Apple. This product alone brings more than 50% of revenues. iPhone 5 has received both favorite comments and criticisms. Where people have liked the light weight, slimmer profile and higher-resolution screen of the phone, the users have heavily criticized the map and camera features in the phone.

In this segment, the company faces tough competition from HTC, Samsung, Nokia and Research-in-Motion. Nokia has a strong product in the form of Lumia 920 with 4.8 inch display that is much cheaper than iPhone 5. Similarly, Samsung is the pioneer of 4G LTE technology and has a powerful product in the form of Galaxy SIII which has a 4.8 inch display.

Upside/Downside Scenarios

Apple has prospects for high organic growth, with open-ended potential to gain share in phones, tablets, and Macs. I view Apple’s upside scenario at $910 based on about a multiple of 15x and a FY14 EPS estimate of $60.66.

I believe the biggest issues facing Apple include the risk of losing share to lower-end products and the risk of having to cut prices for key products like iPhones and iPads. I view Apple’s downside scenario at $450 based on a multiple of 7x and FY14 EPS estimate of $60.66.

Valuation Analysis

The price target of $800 is based on a forward multiple of 13x and FY14 EPS estimate of $60.66. I believe that Apple is relatively inexpensive on a P/E basis, especially given its cash position. Currently, Apple is trading at a forward multiple of 9x, well below the 5-year average of 16.7x.

 

 


AnalystX has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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