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>The Power of Apple

>iTunes helped put the Music store out of business

Remember way back when the mall used to have Music Stores? Remember those stores that would let you preview the CDs before you bought them? Remember how you’d preview the $ 17.99 CD at the mall and then you’d go buy it at Best Buy (BBY) for $ 11.99? Do you remember Napster? People used to run out and buy music when their favorite group put out an album, sometimes the CD was a hit, sometimes it was a miss and you wasted your money. In the past people would sometimes buy an entire album for just one song. The simplicity and convenience of itunes helped bring the music industry to it’s knees. Apple (AAPL) didn’t knock down the music store, Napster did a lot of the heavy lifting but Apple helped deliver that knockout blow.

iPods won the MP3 Race

Everybody under 30 has one. The iPod dominates the market with an estimated over 90% market share. The prices of ipods are already going down, and the race was easily won by Apple. Nobody has a Zune. In some cases the imitators ( I mean competitors) even have better features or products but people still aren’t buying them. Apple is a brand that people know and trust, and it works well with their eco system of products. How annoying would that be if you were an engineer at Microsoft (MSFT), Sony (SNE), or Sandisk and you theoretically made a better product and people still weren’t buying it? If you are a competitor, you can’t just equal or be slightly better than the ipod, you have to be much better for people to buy your product in mass. The Mp3 market seemed to be just chugging along until the ipod touch gave Apple a shot in the arm. These little devices are amazing and gave reason for people to upgrade from their nano or other iPod.

iPhones changed the game

All other smart phones are just impostors. Remember all the hype a couple of years ago surrounding the iPhone? Wouldn’t you say they lived up to the huge amount of hype? Let’s face it, all of these other Palm (PALM), Motorola (MOT), LG (LGERF.PK), HTC, Nokia (NOK), Google (GOOG) phones are just impostors. Apple is cool, user friendly, convenient, easy to use, and has that “it” factor. All of these other phones are just knock off of iPhones. Once again it must anger the other companies engineers greatly that you could create a product that might have better features in some cases but in order to beat Apple, you can’t just equal it, you have to be much better than it. The only thing that was really holding the iPhone back was not being able to sell on Verizon’s (VZ) #1 network but Apple is working on the details of getting around that. There are also grumblings of a new iPhone launch over the summer. How many Verizon customers are there out there that wanted an iPhone but didn’t want to sacrifice service (that will be buying the Verizon iPhone)?

Apple computers continue to sell due to high customer satisfaction and a loyal fan base

The iPhone has been a strong earnings catalyst but Apple computers still derive the biggest chunk of revenues. If you wanted to look at their PC segment qualitatively you’d see that Apple has very strong customer satisfaction and a loyal fan base. You constantly run into people that say things like, “I was always a PC guy but I love my Mac… the conversion isn’t difficult… I’m never going back to PC…this computer just works etc.”. When you look at the total PC market Apple has barely made a dent and has plenty of room to grow. While their competitors are selling PCs under 1000 bucks (and making thin margins), Apple is known as “quality” and is selling computers OVER 1,000 bucks and making higher margins. A wise man once told me that over the long run in business you are better off selling the best quality product for more money than selling an average product for a fair or even cheap price. Plus, it’s much easier lowering prices than raising prices – especially with technology that operates naturally on a deflationary pricing scale.

The iPad will be a game changer

The last big things at Apple (iPod and iPhone) were smashing successes that lived up to the hype and that bodes well for the iPad. I remember the couple of days after Apple unveiled the iPad you’d see strangers on the elevator talking about the iPad instead of the weather. Apple sold 450K iPad units after the first 5 days of its launch and once again you had people camping outside stores to get their hands on the latest iGadget. The iPad is furthering the trend of moving the internet mobile and that’s a trend I’d expect to continue. Why sit down at a desk when you can carry the internet right with you on an iPhone or an iPad? Why not have your music, books, movies, internet, camera, phone and friends with you on an easy to carry device? I know the iPad doesn’t have a camera yet but people expect the next generation will.

The iPad will help put bookstores out of business

iTunes and the iPod helped put music stores out of business, and I believe the iPad will help put the bookstore out of business within 5 to 10 years. These bookstores are sitting ducks, at least in their current form, much like the music stores were 10 years ago. They are big, take up a lot of space, and their books are more expensive than Amazon (AMZN) mailings, a Kindle or soon to be iPad. Why would you go into Barnes and Noble (BKS) and buy a new book that might not even be in stock for 25-30 bucks when you can buy it on Amazon for cheaper or on your iPad for 10 buck? Why have a library full of books in your house when you can have them all digitally online saving space? I do believe you’ll still see used bookstores in trendy urban areas like Washington’s Dupont circle, but the big neighborhood bookstores will be dinosaurs. They could try and sell coffee, have online books, and build a “community”, but there is no need for retails to dedicate all that floor space to books in the year 2010. Yes, some people do like the tangible aspect of holding a book, but people respond to prices and the Amazon bookstore, Kindle and ipad win hands down. There will still be Left leaning Americans with a “luddite” mentality that will want to support their neighborhood bookstore to the bitter end, but most Americans will do the sensible thing and buy the lowest cost provider. You could start a support (higher priced) Mom and Pop movement all you want, but people are still voting with their feet and buying the lowest cost stuff at Wal-Mart (WMT). Apple will be the Wal-Mart of Books pushing the Kindle out of the way.

Changing Newspaper industry

Newspapers are currently on the ropes as well but they are in the process of changing forms. You don’t need to buy the paper when you can view it online often times for free. Before the days of the internet, cities had virtual monopolies over their geographic markets. Now you could live in a big city and read your local paper from back home or anywhere around the country from your iPhone or iPad.

Cannibalization & new niche markets

The iPad will lead to new “niche” markets. In all reality the iPad will cannibalize some existing iTouch and laptop sales ( estimated 15%), but I believe it will also bring new people to the market and better serve customers. You could see older people that have never used a laptop/desktop buying an iPad. You could see older people with declining vision buying a beautiful new iPad. The device could serve a niche market as it’s in between a laptop and iPod touch. I believe the iPad has the potential to serve customers needs unlike any other product currently out on the market.

iAds

This leads all leads to the iAd. An advertising platform for Apps on mobile devices that will bring in hundreds of millions of dollars within a few years. Not only is Apple creating homerun products, but they are in the process of creating a residual income stream off of those products. If you are a marketer you want people to see your advertisements, whether that be in the form of the newspaper ad, a google search, or before an iPhone app. You want an audience, and you want to hit your target markets.

Apple is an innovator

Apple didn’t invent a lot of their products, they just made them better with a visionary leader who added value. Henry Ford didn’t invent the automobile but he made cars better faster and cheaper. Ford’s known for bringing the innovative assembly line process into the auto factory, he’s known for paying his workers the high salary of 5 dollars per day, and he’s known for making cars affordable enough so that you didn’t have to be rich to buy a car.

Apple didn’t invent the computer, MP3 player, smart phone, or even the tablet. Steve Jobs took an existing product, saw the potential and made it “his” in much the same way Henry Ford did with early cars.

Explosive Earnings Growth

2004: .37
2005: 1.44
2006: 2.47
2007: 3.93
2008: 5.36
2009: 9.08
2010E: 11.87
2011E: 13.88
2012E: 15.19

2009 Breakdown of Earnings

Computers 13.859 Billion
– Mac Notebooks 9.535 Billion
– Mac Desktops 4.324 Billion

iPhone 13.033 Billion
iPod 8.091 Billion
Music + iPhone apps 4.036 Billion
Software 2.411 Billion
Peripherals & other hardware 1.475 Billion

Less Cost of goods sold 25.683 Billion
Gross Profit 17.222 Billion

Selling & Gen Admin 4.149 Billion
R&D 1.333 Billion
Operating Income 11.74 Billion
Interest & other Income .326 Billion
Pretax Income 12.066 Billion
Taxes 3.831 Billion
Tax Rate 31.8%
Net GAAP Income: 8.235 Billion
2009 GAAP EPS 9.08

Valuation

Look at Apple’s earnings growth explode to the upside when our country is going through our Recession/Depression in 2008 and 2009. I’m a boring dividend/value Investor but I do allow myself a select few speculative companies and Apple is a company I’m willing to bet on. The good news is that you don’t have to pay a big premium to invest in Apple. Over the last 5 years Apple has historically traded between 65x and 16x earnings and is now at 20x earnings. The company is bigger than it was 5 years ago so I don’t see them trading at 60x earnings but let’s say they went to 25x earnings or 30x earnings which is reasonable for a big growing company. That would put the stock in the 300-350 rage, the 350-400 range next year, and the 375-455 range in 2012.

Summary

Apple helped put music stores out of business and they will help put book stores out of business (at least in their current form) within 5 to 10 years. Apple has changed the way we think about music, movies, telephone, games, internet, and computing just by improving and optimizing existing products and making them their own. They have the power to be a dominant overall media provider in the near future.

Apple is exactly what Corporate America and this country as a whole needs. They demonstrate financial prudence by carrying no long term debt, have tens of billions in cash, they make products that people in other countries want ( they export stuff) and they represent American innovation and creativity. As a freedom loving American I am proud of the company Apple and I own their stock.

Source: John Galt

A huge shift in the computing space has been happening for 10 years now, but only recently is it really being noticed.

You owe it to yourself to go to www.apple.com and have a look around.

READ the text, WATCH the videos, READ independent reviews, LOOK at the sales figures, LISTEN to people and make up your own mind. But DO look.

Look at the facts and extrapolate.

You should be at the forefront. Don’t get left behind.

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