I have been writing about Apple Inc. (NASDAQ: AAPL) for the past ten months for AOL's BloggingStocks and have been a bull in every article. The shares have been a home run for investors in this difficult and challenging year. Apple is fast becoming the business school case study right before our very eyes as this company is executing flawlessly. Let's examine what's going on here in the calender fourth quarter -- Apple's fiscal first quarter of fiscal year 2008.
The stock has ranged these past 12 months from a low of $76 to a high of $192. Currently Apple is at $171 and this may be your last chance to buy it below $175. Apple finished its fiscal year 2007 with incredible numbers, margins, and more importantly, momentum, entering the new fiscal year. The new and improved Mac has taken market share and will continue to. The new operating system, Leopard, is enjoying rave reviews and quite frankly has the competition nervous. It should. The Mac sold 2.16 million units in the quarter ending in September, and the December quarter will only see upside to that number.
The revolutionary iPhone is exactly that: revolutionary. It is now the phone of choice from teenagers to the elderly. My two teenage children are only asking for one thing this Christmas -- the iPhone. With the price point down to $399, a whole new generation of buyers has emerged. Also, iPhone is debuting in Europe and Asia, where demand is already high. Apple will recognize iPhone revenues over a 24 month period as it matches the contract length of AT&T (NYSE: T), the service provider. Of course Apple will be reaping a portion of AT&T's monthly iPhone subscription revenue.
Apple is fast becoming the master of the razor-razor blade business model. Customers buy the iPod and/or the iPhone, and the revenue stream for Apple just gets started as the iTunes store and the AT&T revenue share begin to contribute very high margin, ongoing revenues. Apple is fast approaching its 3 billionth iTunes sale -- that's 3 billion!
The iPod is still a monster for Apple. With new versions having been released these past two or three months, many buyers are return customers purchasing their second or third units. Apple has sold more than 120 million iPods since its release in late 2002 and the surface has been barely scratched. The addressable audience for the iPod is north of a billion potential users. It's still in the second or third inning of a nine-inning game. iPhone is still taking batting practice.
A great observer and investor I know, Glenn Cohen, who lives in South Florida, called me on Wednesday and was jumping for joy about the Apple store. He sat and watched as the Apple store at the Boca Raton mall was packed -- this is the day before Thanksgiving -- with buyers. The lines at the " portable" cash registers were six or seven deep. What stunned Glenn was the major jewelry store next door, even larger than the Apple store in square footage, was empty.
Apple has endorsed a $9.32 billion revenue line for this December quarter and $1.42 in earnings per share. I believe this number will be exceeded as Apple has all cylinders operating in sync. Also, one important point often overlooked in the Apple story is component pricing. Apple has maintained terrific margins through superb pricing at the component level. Every semiconductor vendor would love to have Apple as a customer. Apple has and can continue to squeeze its suppliers, thus enhancing its own margins.
I estimate Apple will earn $5.10 per share in fiscal 2008 and $6.25 for fiscal year 2009. I also believe these numbers will be revised upwards several times before we see the end of fiscal year 2009. My price target on Apple is $225 ... and yes, this will likely go up as well.
Georges Yared is the CIO of Yared Investment Research and the author of Stop Losing Money Today.
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Reader Comments (Page 1 of 1)
11-24-2007 @ 3:58PM
Anthony to the S. said...
and now that they've unlocked it, apple can spread the goodies.
http://paidandpopular.blogspot.com
11-24-2007 @ 5:33PM
D.Kretchun said...
Don't forget about Eric Schmidt sitting on Apple's board and Steve Jobs being Disney's largest shareholder. This is a monster company in the making. I'm just wondering how much longer it can fly under the radar of so many. Yes, I believe it is still in Stealth mode. Too many analysts are focused on the charts and graphs. Go to your local Apple store this weekend and just observe. Theres something happening here. I would think that even Warren Buffet, (A noted tech hater) would notice the simple visual of the retail stores being packed. Absolutely packed. Go visit any college campus and see whats going on there too. This is just the very beginning of an incredible journey that Steve Jobs is about to take us all on. 5 years from now.., think different.
11-24-2007 @ 8:43PM
AppleRP Fanboy said...
Add Ron Paul to the equation and a call to draft Steve Jobs for the vice presidency and you've got a revolution in the making!!
11-24-2007 @ 8:50PM
Dianne Olivo said...
George,
here you go again! How many shares do have your clients in? And your $225 target? when should this take place by? The iphone should be called the itouch ipod that can answer a phone. Most current buyers & users are waiting either to turn it back in or if serious business people to switch back to the new blackberry.
Any price calculations related to "Recession"?
11-25-2007 @ 11:21AM
Mike Sel said...
I think $225 is a very conservative one year target. I can see the company consistently outperforming the indices. No, I think the iPhone is named just fine. Both have a different target market for now, but I see the two lines merge somewhere down the road. I don't know which planet you're living on, but everyone I know loves their iPhones, and are waiting to move to the 3G phone when it comes out next year. I don't disagree that the new blackberry is nice but Apple doesn't target business users. It's a matter of style, choice and making a personal statement. The iPhone makes that for a number of people. The blackberry is just for plain boring people dressed in suits and stripes. Most of the company's products are fairly recession-proof. If I were to buy one gift for someone, it'll have to be an Apple one. I can cut back on other things if my wallet is feeling the pain.
11-25-2007 @ 9:21AM
Dennis said...
I am 52 years old, a musician from the 70's, I just bought the IPOD touch. (my first one) I ended up spending more on I-Tunes than for the IPOD itself. Maybe there should be a stock split with just Itunes? Seems like the future could be interesting. Very!
11-25-2007 @ 4:37PM
John said...
Overall, I agree with your conclusions, but there are a few inaccuracies in the article -
"The Mac sold 2.16 million units in the quarter ending in September, and the December quarter will only see upside to that number."
Apple said on their last call that they expect units to decline in this quarter as back to school was a huge driver last quarter. Perhaps you get an offset from folks who held off ahead of Leopard but I would take a flat unit CPU number this quarter as the real upside should be iPod for the holidays.
"Apple is fast becoming the master of the razor-razor blade business model. Customers buy the iPod and/or the iPhone, and the revenue stream for Apple just gets started as the iTunes store and the AT&T revenue share begin to contribute very high margin, ongoing revenues."
This is just wrong. True for the revenue from iPhone contract sharing but absolutely not true regarding iTunes. Apple simply doesn't earn anything meaningful from the iTunes store. It's run basically at break even and the company has said this before. They just want to offer compelling content to get folks to keep buying and sticking with the iPod. They have to pay about 2/3 of each 99 cent song to the artist and the rest goes to cover overhead of data centers and running the store. Let's suppose Apple earns 10 cents on each track, even if they sold a billion songs a quarter that's only $100 million of earnings or less than 10 cents EPS. That just ain't much. And it might actually decline as a percentage of earnings as the total company's revenue increase dramatically and the iPhone subscription revenue starts to make a huge impact exiting CY 2008.
11-26-2007 @ 2:33AM
Rob said...
This isn't a static universe, and the competition is loading their guns. The google "g-phone" will offer lots of functionality and will be an OPEN system allowing for developers to create third party software for it unlike the CLOSED apple iphone (which Jobs purposely bricked with an update if caught running 3rd party software). Just like the open PC has maintained a huge lead over the closed apple Mac, the open GPhone will likely pull ahead once available and continue to gain market share both with users and, more importantly in the end, the developers who will make wonderful new applications for it. The Jobs autocracy may be challenged with a new phone democracy called the GPhone.
11-26-2007 @ 11:07AM
Bart Lee said...
"This isn't a static universe, and the competition is loading their guns. The google "g-phone" will offer lots of functionality"
No doubt, but the iPhone's true brilliance is in its innovative touchscreen, excellent browser, and iTunes integration. The Visual Voicemail is a must-have feature too, and one that won't be possible on a phone made available to multiple carriers due to technical differences in the way their vm systems work. Google's Android is just another Windows Mobile, albeit a better one. They put out the software and count on other companies to use it to develop for it. No other company can match Apple's tightly integrated hardware and software development. The iPhone is a marvel of engineering - it's razor-thin with a huge bright screen and all sorts of very usable, essential features.
"and will be an OPEN system allowing for developers to create third party software for it unlike the CLOSED apple iphone"
Maybe you haven't heard, but Apple's releasing an SDK for the iPhone in February. They're doing it the right way. It's great to have lots of third party apps available, but without policing them you run into problems. Anyone who's used a Treo with lots of third party apps knows what I'm talking about. Crash city.
"Just like the open PC has maintained a huge lead over the closed apple Mac, the open GPhone will likely pull ahead once available and continue to gain market share"
Of course pcs have maintained their lead (though have you noticed it's shrinking?). Most people will always go for the cheapest option possible. Ask Dell or Gateway how that's worked out for their profit margins. Apple's market share has more than doubled in recent years and IT HAS NO COMPETITION. Nobody else can make a Mac, iPod, or iPhone. Now that Macs can run Windows too, those who want a more high end system have fewer qualms about getting a Mac now since they have the option to run either. Apple's not looking for the lion's share of the market, it's looking for the consumers who will pay for quality. Their stated goal for the iPhone is 1% of the cell phone market. As long as their profit margins stay high and their sales are increasing, I'll be one happy little shareholder.
I wouldn't look to Google's Android to hurt the iPhone. No one's going to be able to match what Apple has developed. It will do much more damage at the lower end. Microsoft and Palm should be far more nervous.
11-26-2007 @ 9:16AM
AUGUST said...
For all those here who are declaring Apple may have reached a dead-end, I offer the guidance of "hindsight."
When I bought Apple at $77, all the negative dialogues were eerily similar.
BUT... you could be right and Georges could be wrong! Wanna bet?
Thanks for listening,
AUGUST
12-08-2007 @ 8:58AM
TNS said...
I bought into Apple just a little over a year ago at $55. a share, do you think I'm happy with my decision to move away from GE into AAPL after taking a massive loss?
I'll simply reply with an effortless... "Hell yes"
12-28-2007 @ 7:58AM
Bellman said...
Any guesses on when the stock will split, and if it will, or if they are having fun chasing the Google price? I get the feeling they want to go for a high price like Google, or, see the stock priced at $40 again, after a 5 for 1 split, or something like that, maybe as they announce great Xmas 2007 figures.... ???
12-30-2007 @ 9:57PM
Ingrid Bengis Palei said...
I am a tech dinosaur, never owned a computer until two years ago, hardly ever use a cell phone BUT my husband bought me a G4 laptop, and my son, after yakking that Apple was overrated, went out and got one for himself. Last March, when I had $5,000 which I could spare to invest somewhere, I put it all on Apple. Of course, my son wanted an IPOD for Christmas, and I've been salivating over friends' IPHONES, just because they're so beautiful. I've been thinking alot about the way in which aesthetics have pretty much vanished from contemporary life, and along comes Apple to cheer me up. I don't demand a lot of fancy gadgets. I just want to feel comfortable with the ones I have, and for it to make me feel that way. So what more can I ask? All I hope is that Apple stock keeps soaring.