Despite Apple’s current attractive valuation at $558, many investors are reluctant to invest because they don’t believe Apple can grow any more and they believe there is no more incremental growth. This would occur if Apple products become commoditized, if the products hit a ceiling on innovation and uniqueness, and if the products are then considered blasé. The current example, the iPhone, has shown that this is not the case.
Apple has introduced five iPhones since June 2007 and is expected to release the next generation sometime this fall. Over this five-year period, Apple has broken the stronghold on the industry by the then Big Three (Nokia, Ericsson and Motorola, remember them?), changed the balance of power that used to reside with carriers and now rests with manufacturers, and has led the industry in innovation and feature set. Each new release has created a buzz and a stir in the market, and has spurred sales of iPhones for Apple in the release quarter. Some investors are concerned that Apple has been so innovative thus far, that it can’t possibly entice buyers to purchase another iPhone. The market is saturated. However, the argument doesn’t make sense.
First, the general smartphone market is not saturated. IDC puts 2011 smartphone sales at 491M units and expects this to grow to 982M units by the end of 2015, representing a growth of 100% over four years. Apple’s iPhone sales were $61B for CY11 and should Apple grow at the same rate as the overall market, Apple’s revenues from iPhones alone would be $122B for CY15, over double what Apple’s revenues were for the whole company in FY11.
Second, Apple’s market share continues to increase, to now 24% of the market. As the following chart illustrates, Apple and Samsung are enjoying strong upward market share trends, taking share from the other market participants. And, as I have noted before, Apple has set the standards to which Samsung manufactures.
Third, when one considers iPhone buyers, there are two categories. The first is the first-time iPhone buyer, who represents an incremental iPhone purchase (and generally, two more Apple devices as the average Apple owner owns 2.6 Apple devices). And the second is the replacement buyer. Most mobile phone users replace or upgrade their phones every three years in order to take advantage of the three-year upgrade and subsidy cycle of carriers. Apple has done a great job at introducing each new generation with features that are compelling on their own, and bring new buyers into the Apple mix (as the above market share numbers report). Yet these features are even compelling compared to those in the iPhone released three-years prior, when one is ready for an upgrade. For example, compare the iPhone 4 to the original iPhone or the iPhone 4S to the iPhone 3G. Compare below:
Each new phone offers greater speed, memory and video capabilities at the same price points. Moreover, Apple always throws in a new must-have feature, such as Siri and iCloud in their latest iPhone 4S.
Apple is trading at 8.2x (excluding cash) FY13 estimated earnings of $53.88, yet its growth is still accelerating. Take opportunities created by market uncertainty and build a position in a company that continues to grow.
