Please...Don't Call Me A Fanboy

By Jon Quast - January 19, 2013 | Tickers: AAPL | 0 Comments

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The critics have been having a hallelujah good time the last few months as they have watched Apple's (NASDAQ: AAPL) stock price drop around 30%.  That's troubling.  So, what can be our hope for the future?

AAPL Revenue TTM data by YCharts

The critics have been having a hallelujah good time the last few months as they have watched Apple's stock price drop around 30%.  That's troubling.  So, what can be our hope for the future?

The Iphone 5 Hangover

The Iphone 5 was supposed to be a big hit.  I remember reading articles where analysts were drooling at the possibility that Apple could sell 50 million units.  But reading the news these days, you'd think it was a big flop.  The Wall Street Journal just informed us that Apple is cutting their orders for parts.  The reason supplied by the journal was "weaker-than-expected demand."  This has since caused an already sliding stock to fall even further.

Yet, interestingly, the same article provides an estimate that Apple did indeed sell 50 million units in the quarter.  Analysts are hoping for 47 million units.  Ok, those are big numbers.  How does that stack up against other Iphones?

If indeed Apple sold 50 million iPhones in the first quarter, this would not only be the greatest quarter for iPhones ever, it would also beat analyst expectations.  And this at a time when some are calling for the Apple investors to abandon ship.  Maybe, just maybe, the iPhone 5 isn't as big of a flop as they would have you believe.  Actually, by these numbers, the iPhone is a screaming success.

What About the Other Guys?

Perhaps most impressive about a record breaking iPhone quarter is that it is coming at a time when the other guy, the iPad, continues to also gain ground.  In the fourth quarter Apple sold 14 million iPads.  This was 26% growth.  The lowest estimates for iPad sales in this upcoming first quarter call for 17 million.

Don't forget that the iPad has a kid brother now, the iPad Mini.  There has been a waiting list to get this little guy ever since he came out.  This coming quarterly announcement will be the first time we see iPad and iPad Mini results in the same report.

While iPad sales keep climbing, it's important to remember what comes with the iPad.  With the iPad, you are consuming a lot of other things from Apple:  Apps.  Movies.  Music.  Games...Even the biggest cheapskate is going to download something for their iPad.  

When people begin buying things through iTunes, this is a great incentive to stay with Apple.  There is no legal way to get purchases made on iTunes to another device, such as Amazon's Kindle or Samsung's tablets.  Once a person gets an iPad, it is unlikely that they will switch unless they are ok with "losing" their purchases from Apple.  What is more likely is that they will stay with Apple and continue to upgrade their device every couple of years.

The Apple Killer

Some folks are just waiting for the death of Apple.  For every MySpace, there is a Facebook. For every Yahoo there is a Google.  So who will be the one to out-apple Apple at their own game?

This argument is legitimate, but let's take a look at where MySpace and Yahoo went wrong and see if that compares at all to Apple.  

The following reason is given on why Facebook beat out MySpace:  "Little by little, the challenger is innovating while the past ruler is stagnating, or simply following. And, little by little, even the most novice computer users are starting to catch on to the difference."  I think that really sums up where the problem is.  A company innovates their way to the top.  Then they stop innovating and someone else topples them from their throne.  The same thing happened with Google.  Google's search engine was so superior than that of Yahoo that eventually in 2000 Yahoo started using Google to power their engine.  In both scenarios, Facebook and Google innovated and improved while their competitors stagnated and compromised.  Those two innovators are still reaping the benefits of that today, and have a bright future ahead of them.

So, has Apple stopped innovating?  From sales growth and even current quarter estimates, things are looking good, but it may be all for not if Apple begins to compromise.  According to a survey, public perception still has Apple as the number one innovator.  Critics will point out that the iPad was the most recent true innovation, and that has been over 2 years ago now.  But as Motley Fool writer Evan Niu pointed out, the iPod came out in 2001.  The iPhone in 2007.  The iPad in 2010.  The first innovated the music industry.  The second innovated the phone industry.  The last innovated the computer industry.  There is a significant gap between all three.

Apple has been improving the products they currently have.  They haven't released one that is truly revolutionary in over 2 years, but that's not to say Apple is done.  Apple spent $3.4 Billion on R&D in 2012, up 40%.  Critics again will point out that the percentage spent on research and development is lower than competitors, but $3.4 Billion still goes a long way to funding the next product innovation.

My Takeaway

My takeaway from all this is that there has been too much good stuff that has happened, and that is currently happening to count Apple out.  When you consider the forward P/E of 8.8 you can't even say that Apple is too expensive to chance.  Given all this, I'm a huge fan of Apple's stock, just please don't call me a fanboy.

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