Should You Buy Apple Before the iPad Goes On Sale?
Mar 3rd 2012 7:16PM
Updated Mar 9th 2012 1:12PM
This article was updated March 9, 2012.
"Apple (NAS: AAPL) will become the most valuable company in the world. Bet on it. In fact, go out and sell all your personal belongings, liquidate your 401(k), and buy Apple stock with every last dollar you own."
That was the intro to an article I wrote on Sept. 12, 2010, on the inevitability that Apple would become the most valuable company in the world; Apple has risen 107% since then and recently did secure its place as the world's most valuable company. While the intro was a bit sensationalistic -- on purpose -- the message of the article was clear: Go and buy Apple. And less than a week later, I followed it up by issuing a buy recommendation. Later, I bought Apple for my real-money portfolio on fool.com. In that buy recommendation I called it "my top conviction selection to outperform the market in 2011."
All this to say, I've been a huge Apple bull the past year and a half, and I'm hardly alone in my opinion. Wall Street has nearly unanimous buy recommendations on the company. But so much changes when a company sees huge gains the way Apple has across the past year. During its torrid 2012 run alone, the company has already notched a 35% gain in just two months.
The $500 billion question has become whether Apple shares have any fuel left in the tank. Today we'll examine not only what the iPad means for Apple ahead of the new iPad launch on March 16, but also whether the company is still a buy.
The incredible iPad mania
It might be stunning to investors who witnessed iPod and iPhone mania, but it's the iPad that has claimed the title of Apple's fastest-selling product in history. As of last quarter, it'd already moved 55 million units, far outpacing other iconic Apple products.
Source: Tim Cook at Goldman Sachs Technology Conference.
The iPad contributes about 20% of Apple's revenue today, second only to the iPhone. It's a central force in pushing Apple into American business, with nearly every Fortune 500 company deploying the iPad in some form. By 2013, Forrester Research estimates that about 17% of all global business and government PC spending will be on iPads. Any way you slice it, the iPad is an essential component of Apple's meteoric rise.
The new iPad will continue Apple's dominance of the tablet space. Features include:
- Retina Display: Like the iPhone 4 and 4S, the iPad will have a display that significantly reduces any pixilation. Put simply: a much sharper, clearer display.
- 4G connectivity: So far, Apple has eschewed next-generation LTE capability because the technology was new and basebands from supplier Qualcomm (Nasdaq: QCOM ) would consume too much power. However, with years of research and improvements to LTE chips, Apple finally committed to LTE and the higher data speeds it provides. The best part? LTE use isn't a battery hog on the new iPad.
- Hardware: The iPad comes with an upgraded A5X processor and also reportedly doubles the amount of RAM inside.
Critics will point out that competitors already have implemented many of these features, but that doesn't matter. Apple has been soundly trouncing higher-priced tablet offerings based on Google's (NAS: GOOG) Android. However, this major hardware upgrade does further push Apple's advantage over where it has proved more vulnerable: the low-end price points in tablets. Having all these features further distinguishes Apple from low-priced competitors such as Amazon.com's (NAS: AMZN) Kindle Fire.
Put it all together, and the newest iPad not only offers a larger hardware upgrade than the iPad 2 -- enticing existing iPad users to upgrade -- but it also pushes Apple's premium tablet perception. Not only that, but Apple is now following the pricing strategy it has with phones by selling the older iPad model at a discounted price. Although this approach doesn't fully close the pricing gap with the Kindle Fire, the iPad 2 will continue in production at a reduced $399 (or lower) price point.
I just gotta talk about the iPhone
Although I've focused here on the iPad ahead of its release on March 16, the question of whether to buy Apple veers back toward the iPhone.
It's quite simple: While most consumers pay only $200 to $300 for their iPhones -- which is roughly half the cost of an iPad -- the heavily subsidized nature of the mobile industry means Apple actually collects more revenue on each iPhone sold (roughly $660 per phone) than on iPads ($590). This despite the fact that iPhone costs are generally regarded to be in a range where the average phone has about $200 worth of "guts" inside. Compare that with the iPad, where the iPad 2 was closer to $300 in components in each unit. Because of the economics of the wireless industry, the iPhone sells for more and costs quite a bit less to make.
Secondly, while the iPad is Apple's fastest-growing product ever, that's largely because Apple was very careful about building out the iPhone's carrier partnerships and was less aggressive about its pricing during its first few years on the market. Now that the iPhone has opened up to more carriers and is taking advantage of the global demand for smartphones, its sales have skyrocketed.
Tablets are a key area of growth for Apple and remain a near monopoly for the company, but the smartphone market is just staggering. We're still on target for a billion smartphones shipped in 2015. It wouldn't surprise me if tablets and PCs put together were roughly only about 60% of smartphone shipments in that time. And with the iPhone costing the same as the average PC and more than the average tablet sold, well ... you get the picture.
Enough, already! Is Apple still a buy?
Put it all together and yes, I still think Apple's a buy. It can be nauseating to buy a company at its all-time high, one that's been running up for weeks, and one attaining an unprecedented size for technology companies. However, it's worth noting the majority of times buying Apple in the last decade required buying it near all-time highs while it had seen strong gains across the past year. Wall Street is constantly catching up with the realities of the opportunity in front of Apple.
I outlined in a previous article why I believe Apple is still a buy north of $500, and it really hits on three main opportunities for the company. Combined, I believe these opportunities will push Apple ahead of already lofty expectations across the next two years.
- Emerging-market growth: Apple has pushed hard into China, and its efforts are bearing 50-pound fruit. China accounted for 16% of Apple's sales just a few quarters ago. With the iPhone not having launched in China last quarter, its momentum in that country should push Apple to another blowout quarter when it next releases earnings. However, China is just one (very large) component of the emerging-market opportunity. Apple focused on the country first but is now expanding out to markets such as Brazil, Russia, India, and Indonesia. All those markets have relatively large amounts of consumers with enough discretionary cash to buy Apple products and present an added opportunity across the next two years.
- Business spending: The iPhone has been on the vanguard of an idea called the "consumerization of IT," but the iPad and Mac are now pulling their weight in businesses as well. Rather than having IT departments dictate what their employees use, they're now opening up. Essentially every major company is testing iPad use across their organization. Business spending growth in Macs and iPads alone could account for 25% of the growth projected for Apple in the next two years.
Apple TV: While Apple unveiled a new Apple TV box Wednesday, the larger opportunity will be its own television set, which is likely to hit in 2013. This is an opportunity to once again leverage the iOS ecosystem and could disrupt several industries in the process.
So there you have it: Three reasons for Apple to keep up its momentum in front of the iPad going on sale next week.
One more idea for the road
One final point I'd like to make is that while I've purchased Apple in the portfolio I manage on fool.com, my greatest winner has actually been one of the components inside Apple products. If you're looking for a way to play Apple, you shouldn't limit yourself to just buying the company. We've prepared a free report named "3 Hidden Winners of the iPhone, iPad, and Android Revolution" which not only details that winner in my portfolio but also two other great ideas that are riding Apple's growth. To get your own copy of the report, just click here now -- it's free!
At the time this article was published Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Qualcomm, Google, Amazon.com, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Google and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.