Will 2013 be Another Stellar Year for Apple?
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple (NASDAQ: AAPL) has reported spectacular results for the March quarter and once again taken Wall Street by surprise. On a year on year basis, profit nearly doubled to $11.8 billion on sales of $39.2 billion which works out to an EPS of $12.30 a share. This was well above the consensus estimates of revenues of $36.81 billion and an EPS of $10.04 per share. Sales volumes were in line with consensus estimates and Apple sold 11.8 million iPads and 35 million iPhones in the quarter. As a result of this announcement, Apple's market cap increased by more than $50 billion and this change alone is greater than the total market cap of any of the bottom 400 companies which make up the S&P 500. In the process, Apple became the most valuable company in the world overtaking Exxon by almost $100 billion.
Any worries that Apple may be slowing down due to the death of Steve Jobs seem to be misplaced and Tim Cook, who is believed to be the best paid CEO in the United States, has certainly earned his paycheck. Apple is now sitting on a mammoth cash pile of more than $110 billion which would approximate the GDP of many smaller countries. It is the opinion of many analysts that the global market for many of Apple’s products is just now materializing which bodes well for the future. For investors and analysts alike, the most impressive part of this performance was the gross margin that was earned. The company has earned gross margins which are almost as much as the cost of production and stand at 47.4% as against 41.4% on the previous year. This means that Apple has not had to compromise on pricing while selling large volumes and it looks well placed to continue the premium pricing strategy.
A major reason for the stellar performance was what Tim Cook, the CEO, described as "an incredible quarter in China." iPhone sales were boosted by record demand in China for the iPhone 4s and international sales accounted for roughly two thirds of the company's revenues. What came as the most pleasant surprise was that the improvement in gross margins meant that the company made more and more money on each and every device that they sold. The year over year increase in iPhone sales was 88% while iPad sales grew by over 150%. Apple's success has to be viewed against the backdrop of what its competitors are doing. Google (NASDAQ: GOOG), Microsoft and Samsung are all trying to compete for market share in the smart phone and tablet markets. So far, they have not even begun to put a dent in Apple. Samsung has been reasonably successful while the Google Android mobile operating platform is now second.
I believe that it would be useful to spend some time looking at Apple's marketing strategy. As a potential investor, you should understand what its competitors are doing and how they are likely to affect Apple cumulatively. Apple has demonstrated with great success that an effective line of products can be used to deny competitors any foothold in any lucrative market niche. This means that the competitors are doomed to compete on price in a non-Apple market while Apple creams the market in terms of premium pricing.
If you deny the competition any profitable market segment, you are depriving them of creating a springboard to attack your markets. They are left unable to present themselves as the cheaper alternative to Apple. Moreover, Apple is a master of supply chain logistics and competing on price is difficult unless you are willing to compromise on margins. In other words, Apple is in the happy position of selling superior products at competitive prices while protecting their mouthwatering margins. As an example, take the less regarded portable music player market. The iPod has captured and retained something like 70% market share despite constant attack from other players for well over a decade. What is more, it has used the iTunes Store to stay relevant to consumers and taken in almost $2 billion in revenue last quarter. Moreover, every iPhone is also an iPod that can make phone calls and the company has a large customer base that can be persuaded to upgrade to the more profitable iPhones.
It is not an encouraging thought that analysts have so consistently underestimated Apple's ability to perform and its capacity to consistently surprise the markets. Nevertheless, let me stick my neck out and look into my crystal ball to see what may be expected of Apple for the rest of this year and 2013. Some analysts expect growth to slow down after the end of the current fiscal on the 30th of September but, to be honest; this just doesn't make any sense. Why should the company that has grown at such a fantastic clip decelerate in October in the absence of any clinching evidence? Moreover, the expectations of analysts for the year 2013 are, to say the least, depressing. Consensus estimates are now just over 15% growth which is curious that you consider the near 100% growth in the first quarter.
In my opinion, 2013 should be another standout year. Almost certainly, there will be upgrades on iPhones and iPads, increasing international market penetration especially in Asia and room for lots of expansion in China. Quality of management no longer remains a negative because Tim Cook and his management team have conclusively established that there is plenty of life after Steve Jobs. This momentum should carry the company through at least till the end of 2013 when the next wave of innovation is likely to take place. On fundamentals alone, I regard the stock as undervalued and, when you factor in the future growth prospects, the investment becomes almost irresistible. Considering the current multiple at which the stock is quoted, I would most certainly recommend it as a strong buy.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.