by Tom Taulli | February 14, 2012 11:29 am
When Steve Jobs returned to Apple (NASDAQ:AAPL) back in 1997, the stock price was about $4. It’s been a long climb, it’s now widely recognized as one of history’s greatest corporate turnarounds, with AAPL stock now over $500. That puts the market cap at $470 billion. In fact, Apple is now worth more the Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) combined.
But can the stock keep moving up? Or might there be problems ahead? To see, here’s a look at the pros and cons:
Hottest Markets: Besides having a strong brand and best-of-breed technology, Apple is also targeting some of the fastest-growing markets. Take a look at the following projections for Apple from some major firms:
|Smartphone Shipments||IDC||305 million in 2010 to
1 billion+ in 2015
|Tablets||IDC||63 million in 2010 to
135 million in 2015
|Global 3G Penetration||Informa Telecoms
|18% in 2011 to
50% in 2015
|Wi-Fi Enabled Devices||Gartner||1 billion in 2010 to
3 billion+ in 2015
|App Downloads||Gartner||17.7 billion in 2011 to
108 billion in 2015
Financial Resources: As profits pile up — and without a dividend payment — Apple has close to $100 billion in cash (and no long-term debt). This could prove useful in making transformative acquisitions, which could help propel growth. One idea is to buy Facebook. For the most part, Apple has been a laggard with its Internet strategy, especially with social networking (here’s a piece I did on the topic).
Or Apple could make a big move into the enterprise software market, such as with cloud technologies. This market is growing at hefty rate and has become a threat to incumbents like Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and SAP (NYSE:SAP). One idea is for Apple to purchase Salesforce.com (NYSE:CRM), which would instantly make it the cloud leader.
Interestingly enough, Apple has already shown promise with its iCloud offering. Since its launch in mid-October, it has picked up 85 million users.
Valuation: Even with the stock up 31% over the past six months, it still looks cheap. The forward price-to-earnings ratio is at 11, which compares to 13 for the S&P 500. Besides, Apple is growing much faster than most companies in the index. In the latest quarterly report, revenues spiked by 73%.
As InvestorPlace.com’s Jeff Reeves puts it: “People just can’t wait to give the company their money.”
Steve Jobs: If you read Walter Isaacson’s biography, Steve Jobs, you’ll realize his amazing creative genius. And a key was his constant insistence on building products that were “insanely” great.
Losing such a key leader has been a problem for other great companies. A classic example is when Disney (NYSE:DIS) lost Walt. It took over a decade for the company to get back on track.
Home Invasion: To keep up its growth rate, Apple needs to dominate the home market. To this end, the company has plans to launch a next-generation TV.
But this won’t be an easy market to crack, even for Apple. The sales cycle for TVs can be years — even if there is whiz-bang technology involved. Keep in mind that the existing Apple TV has mostly been a dud so far.
Other issues: Will the price be low enough? What about cooperation with Hollywood and cable companies? And can Apple really get customers to upgrade to new TVs every couple of years?
Failure: It seems that Apple never makes a mistake. But in the tech world, this can’t forever. So, yes, Apple will eventually release a bad product.
While Apple faces challenges, these likely won’t be a problem for a few years. In the meantime, the company should benefit from the momentum of its current products. More important, its core markets are showing no signs of trailing off.
The valuation also looks attractive. Adding up all these factors, the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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