Not long ago, the financial world was abuzz with optimism surrounding Apple’s (NASDAQ:AAPL) incredible financial performance, its huge cash stockpile and how the company will continue to sell mobile devices by the truckload in the coming years. Consequently, Apple’s stock soared almost 60% since the start of the year reaching impressive valuations.
Since then, Apple’s stock has shed almost 15% of its stock value from its highs. The fall is not entirely surprising considering the huge run that the stock had seen over the last few months; however, fears that iPhone sales may slow down this quarter due to rumors about an early summer launch for the iPhone 5 are gaining in strength. While such near-term swings in Apple’s revenues may happen, we believe that investors need to see the big picture and understand the long-term market trends before making investment decisions. Below we take a look at some of the key trends that are driving our $700 price estimate for Apple.
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Emerging markets and LTE hold the key to iPhone sales
We expect iPhone’s global mobile phone market share to increase to around 13% by the end of our forecast period. However, the iPhone is Apple’s flagship product and contributes more than 50% of our price estimate. So, even a small out-performance (or under-performance, for that matter) with respect to its market share will have a huge impact on Apple’s valuation.
The company has been posting an average annual growth of close to 90% in iPhone sales over the last three years despite short-term swings in sales. For example, in the quarter preceding the iPhone 4S launch, Apple’s iPhone sales saw a sequential decline as customers withheld purchasing an iPhone in anticipation of the launch. However, Apple more than made up for the decline in the next quarter, posting its best ever quarter of iPhone sales banking on the previous quarter’s pent-up demand. We have seen this play out in the previous years as well.
We see the current negative market sentiment reflecting this short-term trend but remain optimistic that the long-term story will play out, not only because of the historical trend but also because of Apple’s focus on penetrating markets outside the U.S. as well.
Rapid expansion of operations in overseas markets, the addition of new carriers and iPhone sales in emerging markets such as China present huge opportunities to increase market share. (see Apple Can Penetrate Emerging Markets by Riding Side Saddle with More Carriers) Apple has already added two of China’s three carriers to its list of carriers that sell the iPhone and a deal with China Mobile is on the cards after the recent Qualcomm announcement. China holds a lot of promise considering the huge 2G subscriber base that the carriers there are trying to transition to 3G (3G penetration is currently only 14% in China).
Apple’s increased presence in China helped shore up revenues from the Asia Pacific region this quarter, which grew 32% over the previous quarter and made up for most of the sequential decline in developing market sales. (see Apple To $700 Fair Value As iPhone Growth Crushes Earnings And Doubters)
Meanwhile, developed markets may see little traction for competing smartphones such as the BlackBerry and the Lumia, further bolstering Apple’s share. The release of a LTE-enabled iPhone 5 later this year could also see Apple beat previous quarterly records, as carriers promote their 4G networks widely this year.
Little competition in a nascent tablet market
The iPad debuted in early 2010, spawning a new market segment of mobile devices and sending Apple’s stock even higher. Many competitors have tried to enter this still young market segment but none have come close to threatening the iPad’s dominance. Even the much touted Kindle Fire, a 7-inch $199 Amazon tablet which was released in November last year, made hardly a dent to the iPad which set a new record of more than 15 million unit sales during the holiday quarter.
In the most recently concluded quarter, IDC estimates only 750,000 Kindle Fire shipments to Apple’s almost 12 million iPad shipments giving us reason to believe that Apple doesn’t need to develop a 7-inch iPad. (see Apple Doesn’t Need To Enter The Low-Cost Smaller Tablet Market)
The iPad is the second most valuable business for Apple after the iPhone and going forward, we see the iPad performing well in the absence of meaningful competitors in the tablet market and the very nascent stage that the market is in. However, a very potent threat in the form of Microsoft’s Windows 8 looms on the horizon.
Microsoft plans to launch Windows 8, which will be made available on both PCs and tablets, later this year. A lot of PC as well as smartphone manufacturers are expected to jump in on the offering to tap the nascent tablet market. Microsoft has a widely installed PC base in place that it can leverage to pose a big threat in the young market. Moreover, it can also leverage its partnership with Nokia to push for an integrated experience across all devices, mobile or PCs, in order to create a viable third ecosystem.
Microsoft’s threat, while very portent, should not have a big impact on Apple’s valuation considering the less than 13% contribution of the iPad to Apple’s price estimate.