The New York Times first began to describe Apple (NASDAQ:AAPL) as a “cult” and “religion” in 2007. In more recent times, technology writers Chris Matyszczyk and Nick Bilton have both dismissed Apple followers as overzealous “fan boys” who rail against anything short of fawning commentary toward this Cupertino, California-based company. Fan boys, of course, do have plenty of reason to cheer for a business model that integrates technical proficiency alongside artistry to claim Wall Street’s flag as the world’s largest corporation at the moment. To date, Silicon Valley competition has failed to challenge Apple brand loyalty. At worst, Apple fan boys may unwittingly drive the bandwagon up the 5 freeway into Microsoft (NASDAQ:MSFT) territory.
Again, Apple shares would merely track the S&P 500 Index and pay out regular dividend payments through iPhone and iPad product maturity, at the very least. Innovation, of course, may not be calculated with any regular algorithm. Most likely, Apple stock will outperform the broader market over the long term. The late Steve Jobs and his fan boy loyalists would not have it any other way.
Apple’s product mix
Apple’s 2006 “Get a Mac” campaign still sets the stage for today’s consumer electronics market. Apple has personified itself as a chic, yet practical hipster. Alternatively, Microsoft is a company man in a sack suit from a bygone era who trips over his own feet. Today, Jobs’ halo effect still levitates above Apple’s iPhone, iPad, iMac, iPod, and iTunes platforms. Legendary investor Warren Buffett opines that fan boys fiercely guard the Apple business model from behind a moat. Alternatively, Microsoft has been resigned to lord over a rapidly deteriorating personal computer industry. At best, Windows may be described as a third wheel player beside Apple iOS and Google (NASDAQ:GOOG) Android in mobile.
The iPhone and iPad mobile machines have combined as the twin engines driving Apple’s latest growth story. For its latest 2013 fiscal year, ended September 28, Apple reported unit sales of 150.3 million and 71 million iPhone and iPads, respectively. Respective iPhone and iPad unit sales grew by 20 percent and 22 percent over the prior year. Taken together, the iPhone ($91.3 billion in sales) and iPad ($32 billion in sales) accounted for $123.3 billion of Apple’s $170.9 billion in 2013 total net revenue.
Apple bears may highlight the fact that two products account for more than 70 percent of Apple revenue as cause for concern. Consumer electronics typically feature price elasticity of demand as opposed to consumer staples such as alcohol, tobacco, and oil, which are close to recession-proof. Fan boys, however, have braved rain, sleet, slow, and recession to queue up at the Apple Store to purchase the latest gadgets. A 2012 report out of research firm Forrester also estimated an average household income of $98,560 for Mac owners.
Travel agency Orbitz Worldwide (NYSE:OWW) followed up this information with news of its own that Mac owners were 40 percent more likely to book four and five-star hotels than were PC users. Social critics, such as Tim Worstall, have already dismissed Apple machines as “Veblen Goods.” According to Worstall, Apple successfully leverages a fan boy culture that embraces style over substance and utility. The Apple fan boy, of course, was largely behind 37.2 percent gross margin and 30.6 percent return on equity for 2013.
Android and Windows competition
On August 24, 2012, a federal district court ordered Samsung to pay $1.05 billion in damages to Apple for patent infringement. This San Jose, California, jury verdict effectively banned Samsung’s Android phones from the U.S. market. The following week, however, a Japanese court ruled Samsung innocent of the same infringement charges. In any event, the ruling sparked an Internet “troll” hoax meme of Samsung trucking in nickels to Cupertino to pay the $1.05 billion fine. The fact that Apple fan boys actually believed the Internet hoax may serve as further evidence of brand loyalty.
Although Google Android software remains the most formidable threat to the iOS ecosystem, Apple has generated the lion’s share of profits within the mobile space. Android’s open architecture functions in direct contrast to Apple’s controlled, closed system. Zack Whittaker and ZD Net have described The Apple Way as “corporate paranoia.” Apple, as a vertically integrated technology company, allows for smoother transitions between component parts, software, and hardware across its product line. According to research firm IHS iSuppli, the buying power arising from duplicating component parts across different machines has helped Apple to forge major price concessions out of its suppliers.
On January 6, research firm comScore released a report of estimates for November 2013 U.S. smartphone subscriber market share. Be advised that the data actually represent averages spanning for the quarterly period spanning from September to November. Android did finish out the quarter with a 51.9 percent share of the market. Google, however, practically gives away Android at cost in order to drive traffic towards search. Despite this bait-and-switch, Apple iOS still garnered 41.2 percent of the smartphone operating system market. Apple actually topped the handset market as an original equipment manufacturer, also with a 41.2 percent share through this latest quarter.
At the bottom of the heap, BlackBerry (NASDAQ:BBRY), Microsoft Windows, and the near-defunct Nokia (NYSE:NOK) Symbian operating systems are fiercely battling over the remaining 6.8 percent of the smartphone market simply to remain relevant. Be advised that recent reports out of International Data Corp. all also feature a similar Google Android-Apple iOS duopoly above the tablet market. If anything, Microsoft will win this Pyrrhic battle of attrition. Microsoft’s bid to acquire Nokia has been set to formally close later this quarter. Taken together, Microsoft and Intel may generate near $50 billion in annual cash flow from operations. Again, the two historic partners definitely maintain the financial capacity to build out the Windows ecosystem as a third alternative to the iOS-Android duopoly. Apple fan boys, of course, would consider ditching their iPhones for Redmond, Washington, product to be an act of blasphemy.
The bottom line
Apple fan boys can take solace in the idea that “haters” betting upon a sharp correction in this stock are likely to remain severely disappointed well into the near future. At $550 per share, Apple now trades for roughly 14 times trailing earnings. This stock may be considered cheap when juxtaposed against the corporation’s 51.2 percent average annual profit growth over the past four years. Apple closed out its 2013 books with $146.8 billion in cash and investment securities to cover $83.5 billion in total liabilities and 899.2 million shares issued on the balance sheet. Apple liabilities did include $10.1 billion in deferred revenue, which will ultimately shift over to the net income statement. In effect, one share of Apple stock carries roughly $80 in liquidity.
The iPad Air alongside the looming iPhone 6 launch while drive Apple growth through the course of 2014. The recently announced deal with China Mobile may help push year-over-year mobile unit sales growth past 25 percent at Apple. Part of this growth may trickle down toward $45 billion in aggregate 2014 profits. Apple would then have grown into a $675 billion corporation, upon the condition that its earnings multiple expanded to 15. These assumptions calculate out to one-year price target of $750 for Apple shares. Fan boys may consider buying Apple stock like hotcakes.