Can Apple Continue its Upward Momentum?
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) is currently trading at a hefty valuation of close to 5-times its book value - which is about 40% higher than the Technology Sector's average. Apple is also the most valuable company in the world at $522 Billion and its latest iPhone and iPad were such strong performers soon after their release that some analysts now expect Apple to reach a valuation of $1 Trillion.
Of course, the real question is not whether Apple can achieve such a lofty valuation, but what will drive it going forward. Over the years, technology mega caps like Microsoft (NASDAQ: MSFT), Cisco (CSCO) and Google (NASDAQ: GOOG) have all seen fanciful predictions on their stock prices fall by the side of the road as reality set in.
Analysts expect Apple's revenues to rise around 20% in fiscal 2013 over 2012 - a strong number - but not as impressive considering that Apple has seen its revenues rise by over 50% in each of the past two quarters compared to the same quarters a year earlier.
Consequently, while I expect Apple to sustain its strong growth, I believe a 40% stock price upside is more reasonable. Prospects for Apple remain strong but, like its fellow Mega-Caps, it will undoubtedly enter a period of consolidation and re-alignment as it faces even tighter competition.
Part of the lingering caution regarding Apple can be traced to the passing of Steve Jobs. Without a doubt, Apple's meteoric rise over the past decade can, in no small part, be ascribed to him. Although Jobs left the company in early 2011, his influence still pervades the company - even the latest iPad model carries innovations ascribed to Jobs.
While current Apple CEO Tim Cook was responsible for shepherding the successful launch of the new iPad, some like Apple Co-Founder Steve Wozniak, have questioned whether he can bring new innovations to Apple. Cook is aware of such criticisms and used a recent keynote to emphasize that Apple continues to innovate.
That's a legitimate concern: the latest iPad and iPhone models are, after all, merely evolutions of the devices that preceded them. What's more, Apple is set to announce new MacBook models that, while improving significantly on technical aspects of its existing models, only evolve the product line rather than introducing anything revolutionary.
The same can be said of Apple's forthcoming Mountain Lion, an update to its popular OSX Operating System. Fortunately for Apple, while the PC market as a whole may be shrinking, it has actually seen its own PC market share grow by nearly 21%.
As time passes and Apple's products get launched, the true acid test for Cook's ability to lead innovation at Apple will be the launch of the iPhone 5 in the 4th Quarter of 2012. Certainly, while demand for the iPhone remains robust, Apple continues to trail Google in the Smartphone space with iOS accounting for just 29% of the US Smartphone market in the first quarter of 2012 compared to 61% for Android, according to a recently-released survey.
Apple should claw-back some smartphone market share with the release of the iPhone 5 in the 4th Quarter of this year but survey results such as NPD's continue to reinforce the notion in some circles that iOS has become dated - especially since Android handsets come in a multitude of configurations to suit nearly every market.
The good news is that Apple continues to dominate the Tablet market with 63% of all Tablet ships in the 1st Quarter of 2012 - a strong rebound from 55% in the 4th Quarter of 2011 when Android Tablets accounted for nearly 45% of Tablet shipments.
Apple should not rest on its laurels, however. Not too long ago, it controlled 83% of the Tablet market. The reality is that Android is steadily eroding Apple's lead and may eventually replicate its feat in the smartphone market, particularly as Android tablets such as Amazon's Kindle Fire competes through lower price-points.
As Apple battles to retain its market share, it is also in the midst of various lawsuits pertaining to its Intellectual Property. Cook has gone on record to say that he would prefer to settle these and I believe that this is a sensible tactic. Lawsuits tend to draw a company's focus away from its central business - in this case, the time spent by Cook and his team in litigation could be better spent exploring new avenues for innovation and strengthening its digital ecosystem.
Indeed, Apple has poured considerable effort into its Cloud-based service, iCloud, which is built into the latest versions of its iOS and OSX product lines. Apple's advantage in this area is that, rather than simply providing online storage and database services, it is leveraging its experience in consumer products to give iCloud a greater degree of everyday usability in the form of notes and calendar reminders.
Apple has long held a place as the Emperor of stocks. However, with steep competition at every product level, it will need to continue innovating at a brisk pace to stay ahead of competitors like Google and Microsoft.
That said, Apple does have advantages over traditional PC competitors like Hewlett-Packard (HPQ) in the form of its successful (and profitable) network of Apple stores and its hefty product margins that provide it with the necessary means and the financial cushion to vet new products.
Moreover, investors now have another incentive for holding onto Apple shares: a 1.8% cash dividend. At 5-times Book Value, Apple is not cheap - but it is not over-valued either: it trades at a Price-Earnings (P/E) Ratio of only 14, compared to 22 for the S&P 500 and 17 for the Technology Sector.
Is Apple worth $1 trillion? No one knows for sure, but I'd certainly hold onto Apple shares for the 40% upside.
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.