Sunday, March 18, 2012

Apple - US$960?

Could Apple reach $960? Possible. I don't mean to say that PE will rise by 60% as I am not a fortune-teller but for revenue and profit to rise by 60%, why not? Before we go about why it can reach $960, let's examine its growth driver in the past 4 years.

Fig 1 Revenue by Segment

A quick glance and every single figure is increasing year on year other than ipod. Mac sales increases by around 25% yearly as a result of perhaps brand loyalty coming from iphone and ipad. Ipod is on a downtrend due to the redundancy in having a iphone and ipod at the same time. Most other figures contribute insignificantly to its overall growth. It can be easily seen that the main reason for its revenue growth comes from iphone and ipad. Since 2008, iphone has been doubling yearly and has been the lead driver in profit growth. As for ipad, it was another great growth booster as a new product that contribute 20% to the topline in just 2 years. Therefore, to understand how Apple can continue its growth, we should look at both iphone and ipad.

The reason for the spike in ipad is due to the number of countries that they have distributed to. There is still plenty room for growth for ipad given that if a country has the necessary infrastructure to support iphone, it will be able to support ipad. Thus, I definitely don't see any reason why ipad cannot increase by another 50%. In fact, I do believe that it is not of a problem for ipad to double in sale. The key here is that we should not see ipad as an attempt to replace PC, laptop or whatsoever it is. Ipad is creating a market of its own called the tablet market. The main purpose of a tablet is a portable device that delivers all-round entertainment + surfing the net+ educational purpose. As for work purposes, I will say it may be able to snatch a bit of market share, but do not expect people to be throwing their PC or laptop away just for an ipad. Just with the ipad, total revenue can already grow by another 15-20%.

As for iphone, can the sale figure double again? Personally, I don't feel that Apple is able to win much more market share, perhaps just another 10-15%. The competition is too fierce for Apple to be able to secure customers from its competitor. Blackberry has a niche market of its own while you can have smartphone that are cheaper and more functional to cater to another group of people. A Microsoft and Nokia combination can be pretty dangerous too. Thus, it could be really hard for Apple to double its iphone sales by doubling its market share.

However, as in the case of ipad, we might actually be focusing on the wrong perspective - that of Apple securing market share from its competitor. Perhaps, we should be looking at the prospect of smartphone vs the non-smartphone. Gartner estimated that 2011 total smartphone sales worldwide is 472 million or 31% of all mobile communication device sales which stand at 1.5 billion. A smartphone having just 31% market share is simply too low even if we take into account that it is not in every country that you can enjoy 3G or data roaming. Smartphone is simply a irreversible trend that so long as the infrastructure is there and the price is not too expensive it will continue to spike up. Anyone that uses a smartphone will understand why - Connectivity on the go, GPS, Unlimited games and apps, Stock trading and e.t.c.

As such, JPMorgan predicts that 657 million smartphone will leave stores in 2012. IDC predicts sale to rise to 982 million by 2015 and IMS expects smartphone to rise to 1 billion annual sale. Such a trend is not only driven by the fact that smartphone will gain more market share, but also by increase in population(7 billion currently) and rise of the emerging countries where phone penetration rate is still low. Thus, so long as Apple is able to hold its market share well, it is pretty easy to see why Apple is able to double its iphone sales in the next 2 years. With that, you have another 40% growth in revenue.

The above table is the average selling price per unit derived through dividing total revenue by total unit sold. While Apple control significant mind share, the unit price shows otherwise. From 2008 to 2011, price of iphone only increases by 13%. This does shows the intense competition that Apple is facing from all-round, from Android down to the unbranded created in China smartphone. Thus, for it to increase its ASP to increase revenue and profit margin might not be very possible.

Apple has never been scared of cannibalizing on its existing sale and has been successful with iphone and now ipad. Will it be as successful with an iTV in creating another new revenue source? It may be able to increase revenue in the short term, but i highly doubt that it can be a game changer. If iTV were to be successful, it will definitely be able to create a new revenue source, but one that's short lived. Firstly, it is very possible for a family of 5 to have 5 ipads or iphones, but not for them to have 5 iTV unless they are very rich. Secondly, while we may change our phone year in year out, an average family is unlikely to do that with a TV. It should be able to lead a growth in revenue for another 2-3 years but for it to persist longer than that a subscription service will then be needed.

To sum up, a 70% growth in revenue is achievable with growth from ipad, iphone and iTV. Thus, so long as the market continues to price Apple at its current P/E, US 960 is definitely possible. We should not assume that Apple is no longer agile just because no corporation has been able to continuously grow at double digit at US 500bn market capitalisation in the past. Though I have to admit that this was why I did not look at Apple's figure when its share price was at $300. However, reversion of mean in terms of PE will always occur as our Mr Market is never forever optimistic. When revenue increases by another 70%, it will then be really hard for Apple to continue growing at this rate unless it is able to offer another successful product without the presence of the visionary Steve Job.

(not vested)

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