Huge Growth at Value Pricing

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

When it comes to innovative and must-own products, Apple (NASDAQ: AAPL) is in a category of its own. I can think of no other company with such a dedicated and loyal fan base. The company’s annual events are part rock concert, part revival meeting. The introduction of a new Apple product typically means lines around the block and a rush to be one of the first to own its latest cool product. That being said, the company lives up to the hype by creating innovative devices that fill a demand in the market.

Apple’s stock has recently dropped from its all-time high of around $700 in September to a recent low of just over $500 a share in mid-November. Since then, the shares have bounced, but are still way off the highs. The pull-back in the stock may be nothing more than a standard correction, or even profit taking on the part of early investors. With a current P/E ratio of around 12 and anticipated growth of more than 20% over the next 5 years, Apple is a terrific value no matter how you slice it.

Competition

Apple is truly a unique company, but it resides firmly in the consumer segment. As such, it competes with the likes of Microsoft and Hewlett Packard in the desktop and laptop markets, as well as Google (NASDAQ: GOOG), Samsung, LG and others in the smartphone segment. In the tablet realm, where Apple owns nearly 90% of the market, there are smaller players such as Amazon (NASDAQ: AMZN) with their Kindle, as well as some other niche devices.

The recent introduction of the iPhone 5 has shown yet again that any new offering from Apple has pent-up consumer demand behind it. Selling nearly 5 million units in the first weekend it went on sale, the iPhone 5 broke all records. Estimates are for sales of 40 million units in the 4th quarter. By comparison, Samsung sold 20 million S3 phones –but it took 100 days to do it.

The Case for Continued Growth

As the iPhone and iPad gain more traction with business users, replacing Research in Motion’s (NASDAQ: BBRY) Blackberry devices for instance, sales could grow even more. On top of this, China is a huge potential market for these devices that has barely been tapped. Estimates are for close to 40 million iPhones to be sold in China in 2012, with a potential for more than 150 million over the next few years.

And then there are new product cycles and upgrades of existing devices that will drive growth globally. A company grows its sales by continually making stuff that their customers want to buy. I believe no other company in history has been as adept at doing this as Apple. Finally, Apple has long been rumored to be developing a household appliance that would deliver TV and other entertainment media. They already have a set-top box called Apple TV, but it hasn’t gotten much traction as yet.

Potential Risks

A valid concern for investors in Apple is whether or not market saturation is likely for the company. When the personal computer was first introduced, the market for it seemed infinite. Of course we know from flat PC sales over the past decade, this was not to be the case. New products and services aside, Apple may see a day when its growth comes strictly from product upgrades and replacements, in which case the high rates of growth (and the high multiple) will no longer hold.

Finally, there is a risk to Apple’s stock that may seem obscure to some investors. The subsidies that Apple has negotiated with U.S. carriers in order to compete on price with other smart-phone manufacturers will likely disappear over time. In countries where there are no carrier-provided subsidies, the iPhone sells for around $700. This can be compared to an Android phone that regularly sells for $200 in the same market. As the Android operating system gains in popularity and the device manufacturers continue to copy Apple’s innovative designs, the sky-high margins that Apple enjoys may be a thing of the past.

Conclusion

Apple is undoubtedly an aspirational brand. For one thing, there is the sheer appeal of their products to a wide range of users. This cult of cool has been arduously maintained within the corporate culture. Although co-founder and former CEO Steve Jobs is no longer at the helm, his legacy of delivering only the coolest devices that work flawlessly, has continued. It’s partly this commitment to the customer experience that gives Apple its edge.

Anyone considering an investment in Apple stock should consider its performance over the past decade. If you had purchased Apple ten years ago, you would have seen an increase of nearly 5000% on your investment. It is highly unlikely (read impossible) for that type of growth in the future, however Apple continues to be an extraordinary stock for investors. With an average return of nearly 42% per year over the past decade, it may yet find a way to at least come close to those rewards for the next ten years. So where does the stock go from here? I believe it keeps going in the same direction it has been on any given price chart, from the lower left to the upper right.


Chizy has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple and Amazon.com. 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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