Editor's Choice

Apple Ready To Rocket Higher From New Products

Maxwell 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 game-changing ideas and must-have products, Apple (NASDAQ: AAPL) is in a category of its own. I can think of no other company with such a dedicated and loyal base of customers. The company’s annual events are part rock concert, part revival meeting. The introduction of a new Apple product invariably leads to lines formed around the block to be one of the first to own the latest cool device. And the company lives up to the hype by creating innovative gadgets that seem to fill a demand that no one even realized was there.

Apple stock has been all over the news lately, with its shares topping $600 for the first time, and extending its lead over Exxon Mobil as the most valuable company in the world. It overtook Google on a per-share basis recently, moving from $500 a share to over $600 in just 22 days. It is the first company since Microsoft (NASDAQ: MSFT) in December of 1999 to achieve a $600 billion dollar market cap. As a side note, 13 years later Microsoft has a market cap of just $260 billion.

Apple also recently took on another accolade, as shares received an analyst price target of more than $1000 each within the coming year. At this valuation, Apple would become the first $1 trillion dollar company ever. Whether this can happen is anyone’s guess, but one thing is certain; Apple keeps surprising everyone by continuously beating sales and revenue estimates. So where does the stock go from here? I believe it keeps going in the same direction it has been, from the lower left to the upper right.

The Case for Continued Growth

You may think that a company the size of Apple, with total sales of nearly $130 billion would find it hard to continue growing. Well, you would be wrong. In its most recent quarter, Apple grew Mac sales by 26%, while iPad sales grew by 111%. Perhaps the most astonishing was sales of iPhones, which grew by 128% to 37 million units, led by the new iPhone 4S. Apple more than doubled its profits in the first quarter of 2012 to $13.06 billion, from $6 billion in the year earlier period.

As the iPhone and iPad gain more traction with business users, replacing Research in Motion’s (RIMM) 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 this year, with a potential for more thant 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 and revenue by continually making stuff that its customers want to buy. I believe no other company in history has been as adept at doing this as has Apple. The company seems to anticipate a trend before it takes off, and to make products and services that address this demand.

Finally, Apple has been rumored to be interested in a household appliance that would deliver TV and other entertainment media. It already has a set-top box called Apple TV, but it hasn’t gotten much traction as of yet. If the company does introduce an iTV-type device, and position it as innovative and cool as all of its other products, this could be the driver that takes the stock to $1,000 a share and beyond.

Other Catalysts

Apple currently has more than $100 billion cash on hand, with that number expected to hit nearly $140 billion by year’s end. At some point this huge amount of cash can become a liability to a company, as it is earning very little return. That’s why Apple has announced a plan to distribute some of it to shareholders, in the form of its first dividend ever. They’ve also announced a $10 billion stock repurchase plan that is designed to help offset dilution from employee stock issuance.

Apple’s iPad is the best-selling tablet on the market. Some are even calling it a laptop and PC replacement. iPad sales totaled 55 million last year, and Apple CEO Tim Cook has recently said that he expects sales to reach 325 million by 2015. Cook has also been quoted as saying, “We believe the tablet market will surpass the PC market in size. It’s just a matter of time.”

Apple is undoubtedly an aspirational brand. For one thing, there is the sheer appeal of its products to a wide range of users. This cult of cool has been arduously maintained within the corporate culture. Although co-founder and 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.

Potential Risks

When Steve Jobs passed away in October of 2011, there was legitimate concern that the innovation and passion the company was known for would end. While too little time has passed for this prediction to be disproved, it is worth considering as a potential investor. Steve Jobs was not only the figure-head, but the chief visionary behind many of Apple’s best-selling products.

Perhaps a more valid concern for investors may be 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.

Anyone considering an investment in Apple stock will realize the incredible performance of the past decade. If you had purchased Apple ten years ago, you would have seen an increase of nearly 5,000% 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.


The Motley Fool has no positions in the stocks mentioned above. StockCroc1 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.

blog comments powered by Disqus