Have you been watching the action in the stock of Apple recently? A few months ago as Wall Street and the Fed went into panic mode as a recession looked imminent, shares of Apple's fell from a high of $200 to less than $120. Forbes Wireless Stock Watch readers know that I had been eying Apple for some time because I saw that it was rapidly becoming a leading company in the wireless handset business with its iPhone.
Last month I told my readers to buy Apple shares at $133 and a little more than a month later they are 30% richer. I still think Apple is a buy at its current $174. I expect that after some exciting news in June, it will climb back to $200 or so. There are other fast growing wireless stocks now selling at opportunistic prices that I am currently featuring in my monthly newsletter. My current issue features what I consider to be Latin America's blue chip wireless stock. Below you will find my write up on Apple Inc sent via email to my subscribers on March 21. I invite you to check it out. If you agree with my reasoning, you might want to subscribe to my monthly newsletter, which is chock full of smart picks like Apple.
Excerpted from the March issue of Forbes Wireless Stock Watch
Dear Wireless Investor,
My newsletter is devoted to seeking out winning stocks in mobile computing and communication. Some people still consider Apple to be a PC maker whose business has been transformed by its tremendous success in portable music players with its iPod. This is true, but the more I look at Apple and its new iPhone, the more I consider it to be, perhaps, the most innovative and transformative company in mobile computing today.Nokia,Motorola, LG, Palm and even RIMM with its market leading Blackberry smartphones should be worried.
Apple's hardware designs have always been elegant, but what really sets the company apart is its software, the stuff that makes its products a joy to use. That is where Macs, iPods, and now the iPhone and iPod Touch, excel. Apple recently announced some major changes that are likely to make iPhone usage surge. Despite it, Apple's stock has pulled back significantly since its peak 2007 price of $202.96 and now may be a good time to get in.
In this issue of Forbes Wireless Stock Watch I make the case for buying Apple stock largely based on its iPhone. Put simply, iPhone is a game-changing product. I am not alone in this sentiment. Just listen to the testimony of one of the smartest and most successful people in technology today, Kleiner Perkins' John Doerr, a Google-backer and perhaps the most successful venture capitalist of our time.
"Think about it," said Doerr pulling his iPhone from his pocket, "in your pocket you have something that is broadband and connected all the time. It's personal, it knows who you are and where you are. That is a big deal. It's bigger than the personal computer."
Doerr is putting his money where his mouth is. As you will see later in this report, he and his partners have recently raised $100 million for entrepreneurs developing software for Apple's iPhone.
- Nikhil Hutheesing
Editor
APPLE'S PINSTRIPE PUTSCH
Apple [nasdaq: AAPL]
Business: computers, wireless phones, electronics
Recent price: $133.27
BUY - 12-month target: $201
APPLE'S WIRELESS STRATEGY
When Apple first announced its move into the wireless PDA business―in January 2007 when it introduced its iPhone― there was skepticism over whether it would be able to grab market share from incumbents like Research In Motion (RIMM), which makes the BlackBerry smartphone and Palm which makes Treo handhelds.
Nobody is doubting Apple today. Steve Jobs' iPhone is in thehands of over four million people and it is now the number twosmartphone in the business with a 28% market share. It has surpassed Palm and is nipping at the heels of RIMM's BlackBerry.
For those of you who somehow missed Apple's iPhone marketing blitz, iPhones, now priced at $400 like other smartphones, provide cell phone and data service (via AT&T's network) but also act as an iPod music and video player, a Wi-Fi equipped Web browsing device and a digital camera. It does away with BlackBerry's fixed keypads and instead offers an intelligent touchsensing screen for making calls and tapping out emails. There are over a thousand applications already for iPhones, from Wikipedia and Facebook, to mobile BlackJack and Fidelity's Market Monitor. Ask anyone who owns an iPhone and you will learn that it is simply the best designed and easiest to use smartphone on the planet.
Okay, but up until recently, iPhone, like Apple's Mac has been a fairly "closed" universe. It was a great consumer device but it had little presence among large corporate users, the so-called enterprise market. That all changed on March 6th when Steve Jobs, Apple's founder and chief executive, announced to a gathering of developers that the iPhone was entering the enterprise market offering secure push email, contacts and calendars service to corporate clients using Microsoft Exchange ActiveSync. Jobs also announced that he would be opening up the iPhone/iPod touch platform to all software developers with a new SDK, or "software development kit." Apple sweetened this proposition by promising developers 70% of any gross revenues their applications generated from the iPhone.
This was no small news. Essentially, Steve Jobs was unveiling iPhone 2.0 next generation software that could greatly expand iPhone usage. RIMM's BlackBerry, and more importantly corporate America, are now firmly in Apple's crosshairs.
Before I get into details about its Enterprise foray, let me briefly talk about the significance of its new SDK.
The way I see it, opening up iPhone to third-party developers is a move taken from the pages of Facebook's gameplan. When Facebook opened up its popular social network to third party developers, applications exploded, along with network usage. Facebook boasts more than 60 million users today.
So it is no surprise that within the first four days of Apple's announcement on March 6th, more than 100,000 developers downloaded the iPhone SDK. Programmers are excited about iPhone/ iPod touch. I view them as the earliest of adopters and a good leading indicator for Apple's success. They want to create great new software that might lead to the next Amazon or Google and of course tap into that $100 million "iFund" funding that Kleiner Perkins is making available. This will mean thousands of new apps for iPhone/iPod touch.
The whole point is to make iPhone the "must-have" device for consumers and business people. Apple is hoping that new iPhone converts will help it break RIMM's hold on the corporate market. Indeed, technology research firm Gartner Group recently predicted that IT organizations will soon get a "flood of requests" for Microsoft Exchange support. This will put Apple on the fast track as a corporate provider.
Another big push for iPhone sales that is not being focused on is video gaming, a business that is booming and I predict will continue to grow. I have already written much about how bullish I am about mobile gaming.
At Apple's March 6th developers conference, it showcased several video games that take full advantage of Apples triple axis accelerometer. This allows developers to create games that users can control through natural movements like tilting or shaking rather than pushing buttons. If buttons are necessary, developers can use the iPhone's touch screen to create ones just for their game.
Recent Events
・ Apple introduces next generation iPhone software
・ Apple opens up its software toolkit to developers to create apps for the iPhone
・ iPhone developers get a 70% cut of revenues and Kleiner Perkins sets up $100 million iFund
・ Apple announces that it will integrate with Microsoft Exchange ActiveSync servers for email access
RECOMENDATION: BUY APPLE (AAPL)
Business: Computers, wireless phones, electronics
Share Information:
Recent Price: $133.27
52-Week Range: $89.60 - $202.96
Dividend Yield: N/A
Market Cap: $117.13 billion
2007 Financials:
Revenue: $24 billion
Net Income: $3.6 million
Gross Margin: 34.8%
Valuation Metrics:
AAPL Competitors
Trailing PE: 29.23 29.13
PEG: 1.15 1.18
Largest Institutional Owners
Company Shares Owned
FMR LLC. 44,547,292
Barclays Global Investors 33,883,854
State Street Corp. 28,346,283
Axa 28,218,569
Short Interest
Shares Short/Float: 2.6%
Essentially, your iPhone is a motion sensing gaming console, not unlike Nintendo's Wii. Developers from Electronic Arts and Sega showed off games they created. EA showed a version of "Spore," a game developed by Will Wright, creator of "The Sims." Sega, which has not yet committed to develop games for the iPhone, demonstrated a version of "Super Monkey Ball," a popular arcade and console game. Apple's team gave a wowing demonstration of a fighter jet game it had created.
These demos have already attracted video game developers, such as ID Software and Glu Mobile (part of the Wireless Portfolio). Another developer, Gameloft, has already committed to releasing 15 games for the iPhone by the end of the year.
Why all the excitement about gaming? Today, most phones offer games but only about 3% of phone owners in the U.S. download a game for their phone each month, according to M:Metrics, a Seattle-based mobile media measurement firm. Meanwhile, mobile game developers typically have to create dozens or hundreds of different versions of each game to account for the vast variety of cell phones on the market.
Why haven't these video games caught on? Because, by-and-large, cell phones are lousy gaming devices. If cramped keyboards and tiny screens weren't enough of a deterrent, slow network downloads and limited storage make the whole process a hassle.
Apple's plan is different. iPhone/iPod touch already offers a bigger (3.5 inch) touch sensitive LCD screens (like Nintendo's DS, which has sold 50 million handhelds since 2004), an impressive motion sensing technology and rapid broadband downloads via Wi-Fi networks. It also has a built in wired distribution system via its ubiquitous free iTunes software.
Making its mark in video game market won't be a cinch. Even mobile phones designed with gaming in mind, such as Nokia's NGage and the Gizomondo, haven't done particularly well in the market. But like Nintendo's Wii, Apple isn't necessarily aiming for adoption by so called "hardcore" gamers. It may be eyeing the much larger "casual gamer" market. I have a feeling that playing video games will be just one more reason users will love their iPhones.
Since the iPhone was introduced nine months ago in the U.S., it has also become available in several European countries. Apple says that it sold four million iPhones globally through mid- January. And those iPhone users are fast becoming users of mobile TV, video and other applications. This month,M:Metrics reported that a staggering 30.9% of iPhone owners watched mobile TV or video, versus a 4.6% market average, and more than double the rate for all smartphone users. Usage of social networking is also popular among iPhone users: 49.7% accessed a social networking site in January, nearly twelve times the market average.Twenty percent of iPhone owners accessed Facebook, one of the first Web properties to customize its content for the iPhone, versus 1.5% of the total mobile market.
Catalysts
・ Third party developers. Already, 100,000 software developers have
downloaded Apple's SDK - which will mean thousands more applications on the iPhone
・ Corporate adoption of iPhone after June thanks to secure Microsoft Exchange compatibility
・ Videogames -the iPhone becomes a hot new gaming platform
・ A 3G version of the iPhone will be released in 2008
・ Research firm Gartner reverses its opinion on iPhone granting it "appliance level" status
Risks
・ Competition from smartphone manufacturers, including Samsung,
LG,Nokia and Research In Motion, Palm and Microsoft's Zune
・ Corporate IT departments lack Apple training and may resist change
Now, Steve Jobs says that Apple's goal is to sell 10 million phones this year―and that goal will likely increase for next year, when the company will be will be-able to tie into corporate secure email systems and provide a variety of new applications.
I believe that Apple's success with its two wireless products, the iPhone and iPod touch, will continue to help the company gain market share in personal computers. The iPod and iTunes helped resurrect Macintosh as a personal computer and now it's beating Dell and other PC giants in terms of margins and growth. In a sign that the company is winning over more users from Windows, Apple said more than 50% of the customers buying new Macs didn't previously own an Apple computer.
What all this shows is that Apple has a winning strategy and now its wireless devices is leading the charge. There is some risk that the iPhone and iPod touch will cannibalize iPod sales, but the key is that most are upgrading to higher margin Apple products like the iPhone. I think Apple iPhone/iPod touch sales will skyrocket around the holiday season. This will be great news for Apple shareholders.
VALUATION
Shares of Apple's stock soared to over $200 on iPhone hype at the end of 2007, only to fall about 40% this year with the falling stock market and slowing economy. There are also worries about recession induced cutbacks in production of iPods and lost revenues from "unlocked" iPhones. Those are iPhones that had been purchased but altered to work on wireless networks other that AT&T in the U.S., or those of Apple's partners in the U.K., Germany and France.
Currently, AAPL trades at $133.27 per share―giving it a market cap of $117.13 billion and a price/earnings ratio of 29.23 based on trailing twelve months earnings. The stock trades at about 25 times 2008 earnings estimate and is selling at a relatively cheap price relative to its growth rate. Apple's price-earnings to growth (PEG) ratio is 1.15. In the first quarter of this year, AAPL generated $2.6 billion in free cash flow and it increased its overall cash to $18.4 billion. For the 2008 calendar year, AAPL should generate $7.8 billion in free cash flow. I believe that AAPL will likely generate free cash flow of $8.05 per share for fiscal 2009.
Why buy now? In December, AAPL just came off a strong first quarter. But the company's gave a muted outlook for the March quarter―traditionally a slow time after the holiday season. Apple projected revenues of approximately $6.8 billion, implying a year over-year growth rate of 29%. Management also expects a sequential decline in gross margins, to about 32%, and looks for earnings per share of 94 cents. A disappointment, but much of that bad news has already been absorbed by the stock, which is one reason why it's down so much this year.
Apple has about $18 billion in cash, and no debt. Its shares currently trade at 22 times 12 month free cash flow estimates and as mentioned before, it has PE of 29. Both of these metrics are at the low end of its five year range. At the same time, this company will likely grow its top line revenue by 34% in fiscal 2008 as sales of its Macs, iPods and the iPhone/iPod touch pick up. I believe this growth rate is conservative because iPhone/iPod touch sales may be explosive for the reasons cited above.
I think its reasonable to expect that the company's stock price could trade at, or even exceed, its historical levels of cash flow as the iPhone drives sales. At 25 times free cash flow of $8.05 per share in 2009, my target price for shares of AAPL is $201 per share--an increase of 55%. I recommend investors buy shares of AAPL.
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