Apple became the largest smartphone vendor last quarter, selling more than 20 million iPhones and recording its best ever quarter with 142% year-over-year growth. Also, last week, it passed Exxon briefly as the world’s largest company by market cap.Two big catalysts on the horizon for Apple’s iPhone unit include a potentially cheaper version designed for emerging markets like China and India as well as the iPhone 5 announcement that Apple could release as soon as September. While all seems well in Apple land, competition will certainly stiffen as it’s do-or-die time for Research in Motion and Nokia. Both beleaguered smartphone vendors are desperate to get their smartphone strategies righted in 2012. In addition Google’s Android phones are flooding the market as handset manufacturers like HTC and Samsung are soaking up market share with Droid phones. Now Google is buying Motorola Mobility to make its own phones.
All of this competition implies pricing pressure down the road that could weigh on Apple’s gross margin.While we estimate iPhone’s gross profit margin will decrease from 49% in 2012 to 37% by the end of our forecast period, Trefis members indicate a slighter decrease from 52% in 2012 to 46% during the same period. The member estimates imply an upside of 12% to the Trefis price estimate for Apple’s stock. Whether the soon-to-be-launched iPhone 5 will be responsible for some of this upside remains to be seen.We currently have a Trefis price estimate of $510 for Apple’s stock, about 35% above the current market price.
While Apple is leader in smartphones, its market share in the global mobile phone market is paltry 5%. Given the low smartphone penetration in emerging markets like China and India and the corresponding growth in these economies, Apple is in an ideal situation to introduce a cheaper phone that is affordable to the price conscious consumers.While such a move will drive volumes for Apple and thereby increase its market share, it can be a drag on its profit margins due to lower pricing. Also there’s a risk of the cheaper iPhone cannibalizing sales of high end iPhones.
Apple Will Be the Most Valuable Stock in the World by 2012.
Apple (AAPL) reported another stellar quarter after the market closed Tuesday. That probably wasn’t a big surprise to anyone. What was surprising was how dramatically Apple exceeded even the most bullish expectations.Wall Street consensus expectations called for EPS of $5.80. Even the most bullish estimate reported by Yahoo Finance was $6.62 per share. The actual results from Apple were $7.79 EPS. That’s nearly 18 percent above the most optimistic estimate.Revenue growth was an astounding 82 percent! A lot of small companies are able to generate high growth rates off their small revenue base. However, Apple’s revenue base was nearly $16 billion (and it grew in 12 months to over $28 billion). That type of growth rate from a large cap stock is almost unheard of.Even more impressive than the 82 percent growth rate, is the fact that revenues could have been even higher. Apple sold 9.25 million iPads in the second quarter, but management pointed out that they sold every iPad they could build during the quarter. The lack of credible alternative [ahem, Research in Motion (RIMM), Hewlett Packard (HPQ), etc.] continues to drive incredible demand for the iPad.Apple also sold over 20 million iPhones in just the last 3 months. That’s despite not releasing a new version of the phone in June like they have done in the past.Despite their 82 percent growth rate and growing demand for their products, Apple stock is not trading at premium. Even before their blowout earnings results, AAPL was trading at only 13x consensus 2012 earnings. Those estimates are certain to go much higher as every analyst on Wall Street scrambles to raise their forecasts. Apple also has zero debt, $76 billion in cash sitting on their balance sheet and did I mention their 82 percent growth rate.Google (GOOG), which reported a nice 33 percent growth in revenues, is currently trading at 15x consensus 2012 earnings.Netflix (NFLX), which reported 44 percent revenue growth in the first quarter, is trading at 43x consensus 2012 earnings.Qualcomm (QCOM), Yahoo (YHOO), Salesforce.com (CRM), Juniper Networks (JNPR), etc. all trade at much higher multiples than Apple despite having much lower growth rates.The investment case for Apple is not only intact, but it is growing more intriguing each quarter. Apple stock briefly traded above $400 per share following the earnings report before closing at $387 today. It is only a matter of time before it permanently crosses that mark and starts heading towards $500 per share.Right now ExxonMobil (XOM) is the most valuable stock in the world with a market cap of $410 billion. However, with their current market cap of $358 billion, Apple is gaining fast.At approximately $445 per share, Apple will surpass XOM as the most valuable company in the world. Even assuming that Exxon stock price continues its current pace, Apple will still overtake them by year end. By 2012, we will be talking about Apple being the most valuable stock on the planet and it's hard to see them giving up that title for a long time.
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