Apple has faced many negative headlines in recent months, but we still view the company as the world's premier smartphone maker. We still expect strong iPhone growth, thanks to robust smartphone adoption in both developed and emerging markets. iPad revenue should also grow at an outstanding rate as consumers continue to adopt tablets over, or in addition to, PCs.
We think adoption of these devices could even raise the switching costs associated with the iOS platform, which could potentially spur market share gains in other iOS products. Pricing and gross margins for these devices may not hold up well in the long term, perhaps stunting the firm's EPS growth, but Apple should still generate tons of free cash flow in the years ahead. Finally, Apple must avoid missteps in its new product launches and fend off Samsung and low-end smartphone makers, but we still see it as a leader in the smartphone pack.
|Economic Moat||Fair value||Stewardship Rating|
Technology - computer hardware
KEY INVESTMENT CONSIDERATIONS
- We anticipate healthy, but not exponential, iPhone growth as the firm still attracts new smartphone users, gains share from other platforms, and generates repeat sales to current iPhone users.
- Apple faces intense competition in hardware and software, but even its largest rivals mostly compete on price as they essentially give away hardware (Amazon) and software (Google Android) to drive other revenue streams.
- Samsung's Android-based devices appear to be compelling iPhone alternatives, but Apple's brand loyalty and simple iOS interface may help the firm fend off this competition over the next few years.
- Gartner expects the smartphone market to essentially double from 2011 to 2014, so Apple could see tremendous revenue growth even if it only grew at the market rate.
- The iPad has been Apple's fastest-growing product line ever, which is a tremendous achievement given previous hits like the iPod and iPhone.
- For each iOS device purchased, customers may be less likely to switch to another provider and more likely to buy another Apple product, which could be a good sign for Mac sales, even in a soft PC environment.
- Apple's retail stores provide a platform for exposing new consumers to the breadth of the company's expanding product lines.
- Few firms have been able to maintain Apple's strong position in the handset market, as short product cycles and intense competition typically lead to new, innovative products that have historically prevented any single firm from dominating the marketplace.
- Apple faces a strong, well-capitalized competitor in Samsung in the premium smartphone space, and we view the high-end smartphone industry as a two-horse race between these two firms in the future.
- Apple may have lost much of its vision and creativity with the passing of cofounder Steve Jobs in October 2011.
- Apple is reliant on partnerships with third-party software providers like Google and Facebook, and it may struggle to sell premium products if it severs ties with these partners or offers inferior substitutes to these apps.
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