Nuts and Bolts of Apple

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

Recently, the tech conference was hosted by Goldman Sachs in which different companies presented their future directions. Among those companies, Apple (NASDAQ: AAPL) also presented its case. Normally, these sorts of conferences are good in two manners for investors:

1)      Given that companies present their cases, it is a good ‘contact point’ for investors. Normally, investors only find such detailed discussion on the company on the earnings conference call.

2)      As most of the major companies belonging to a specific sector/industry present in the conference, these presentations help the investors to sense the general trajectory of the sector (whether it is growing, stabilizing or declining in the future).

Apple’s Presentation

CEO Tim Cook discussed many topics that were top of mind for investors and was clearly optimistic on the company’s growth prospects. Moreover, the company appeared much more flexible in returning additional cash to shareholders as it responded to recent shareholder activism on this front.

On Capital Allocation

Cook noted that the company will continue to heavily invest in R&D, new products, the supply chain and acquisitions. Nevertheless, he also stressed that Apple is in a position to seriously consider returning additional cash to shareholders, though it will be thoughtful and deliberate. With regard to the recent Greenlight proposal for perpetual preferred stock, Cook noted that the company will consider it, though he was clear that Proposal 2 on its recent shareholder ballot did not preclude the issuance of such a security, but rather just required a common shareholder vote.

On Innovation

Cook noted that he had never been more bullish on innovation at Apple. Innovation is deeply embedded in the culture of the company. In particular, Cook highlighted Apple's ability to simultaneously innovate on software, hardware and services, which enables the company to deliver a truly elegant and integrated experience for consumers relative to competitors that can only do one of those components. While skeptics have doubted the benefits of vertical integration over time, Apple continues to believe in controlling the primary technology in its products.

On New SKUs and Price Points

Although Cook did not give any specific indication of new product plans, the company appeared much more flexible in its willingness to expand its product lines and covered price points, noting that the only thing Apple would never do is make "a crappy product." The CEO reminded investors that Apple’s TAM expansion has not always been driven by the addition of SKUs within a product family (such as the addition of the shuffle, nano and touch to the iPod family), as in some cases the company has addressed new price points and customers by creating entirely new markets (such as the iPad in response to demand for lower cost Macs). While product innovation remains at the core of Apple's strategy, the company did remind investors that with regard to gross margins, the halo effect, Apple’s supply chain prowess as well as its ability to monetize software and services, act as buffers that are often under-appreciated by investors.

On Growth and Share Gains

With regard to the company's growth potential, the management remained optimistic. The smartphone market is projected to double in three years, and the company believes that all mobile phones will eventually be smartphones. Meanwhile, the company noted that the iPhone is currently only available to 50% of subscribers in the world. In addition, the company continues to view its ecosystem as a key source of competitive differentiation, revealing that it has paid over $8 billion to developers to date.

In the tablet market, the company pointed to the growth outlook for the market as well as the high usage of the iPad relative to other tablets. Indeed, the tablet market is attracting people who have never owned a PC on top of its increasingly apparent PC market cannibalization. Finally, the company continues to expand in emerging markets, with the App Store now available in 155 countries, the iTunes Store in 100 countries, and iCloud in virtually every country. The company’s retail stores have also been key enablers of this growth, with the company noting that it now has over 400 stores and plans to add 30 more this year, mostly outside of the United States.

Growth Story All Round

Tech investors were encouraged to see a bullish sentiment from the management. All were positive on their ability to capitalize on long-term opportunities from trends such as mobility, big data and cloud. With regard to the demand environment, QLogic (NASDAQ: QLGC) and SYNNEX noted a stabilization in demand overall.

QLogic’s President & CEO Simon Biddiscombe also presented in the conference. The company reiterated that spending trends appear to have stabilized and discussed the longer-term outlook for the Fibre Channel and Ethernet markets. In addition, the company was optimistic on its Mt. Rainier technology, which should start generating revenues this year. QLogic said it started to see spending trends stabilize in the September quarter and reaffirmed that its March quarter guidance reflects this stabilization.

SYNNEX's (NYSE: SNX) CEO provided an update and commentary on current demand trends. The company believes that the overall demand environment is flattish, with the SMB market a bit better and the consumer market a bit softer. Geographically, SYNNEX commented that things appear a bit softer in Canada relative to the United States. By product line, segments that have been soft, such as printing and PCs, continue to be soft and SYNNEX expects that dynamic to continue. Mobility sales, including tablets, are very strong, but this is partly balanced by the cannibalization of traditional notebook type sales. Finally, SYNNEX added that networking, security, and storage are a bit stronger.

Foolish Bottom Line

Overall, the presenting companies looked cautiously optimistic about the future, which has sent bullish signals to the market. Specifically for Apple, the Street is bullish given its flexible approach towards returning cash to the shareholders and improved product line in the future. Goldman has set a target price of $660 at a forward multiple of 14x and a 2013 EPS of $47.29.

 


AnalystX has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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