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Apple (AAPL)Stock (Computer Hardware Manufacturing Industry, Consumer Products Industry, Technology Industry)
 Apple (Nasdaq:AAPL), the consumer electronics company behind the Macintosh (Mac) family of personal computers, the iconic iPod portable music player, and, most recently, the iPhone, is known for its sophisticated, high-end products and its unique promotion and distribution strategies. The company's stream of cutting edge products and marketing acumen have been highly successful, particularly during the years marked by the return of Steve Jobs. In 2007, Apple generated revenue approaching US$ 24 billion, a substantial growth in market share for its computer product line of MacIntosh desktops and laptops and continuing to dominate the PMP market, where it captured a 50% share that year. [1] The company continued its growth in the first quarter of 2008, posting 35% revenue growth and the largest profits in company history. Apple redefined its identity in early 2007 as a broad-based consumer electronics company, removing the "Computer" from its corporate name. With its broader identity, Apple launched key products geared towards the high-end mobile market (the iPhone) and the home entertainment industry (Apple TV). While the expensive, highly touted and publicly scrutinized iPhone is seen by some as perhaps a wildcard for the company, sales of the iPhone performed well in 2007, with 2.3 million units sold worldwide. Competitors are rushing to bring products to market which match the iPhone's features.[2]Apple, however, on June 9, 2008 announced the iPhone 2, with greater power, speed, improved design, and substantially lowered pricing. Other key new products include movie rentals on iTunes and the ultra-thin MacBook Air laptop. Apple has parlayed its powerful brand and end-to-end control of the design and manufacturing of hardware, software, and peripherals into a self-reinforcing business model. The iPod has grown faster than any other music player in consumer electronics history and accounts for half of the company's revenue from the sales of hardware and content; it has also generated a "halo effect" increase in sales of Mac desktops and laptops. The company has also opened retail stores, which feature distinctive designs and emphasize product "test drives", customer education, and easily available technical help. As a result of its efforts, the company generated more revenue per square foot ($4000) than almost any other major retailer in the world, including Tiffany's ($2500), Best Buy (sub-$1000) and Neiman Marcus ($600) in fiscal 2006. In 2007, the company continued its rapid growth with a 28% yoy increase in fourth quarter earnings, driven by strong iPod and iPhone sales. Unlike many other technology companies, Apple has historically not evinced as strong a commitment to increasing its presence abroad. The Americas has accounted for a hefty 48% of total revenues, while Europe rings in second, contributing just 21%. Apple is especially weak in Asia, where its Japanese revenues have dropped 10% from 4Q06 levels (the rest of Apple's Asia/Pacific sales have grown by a paltry few percentage points.) However, strong revenue growth in Apple's retail division (nearly 42%) and its iPhone partnerships with wireless telecoms around the world can be expected to correct this imbalance and bodes well for the company's worldwide presence in the future. The company's success in the mobile phone and personal media player markets may carry over into other consumer devices, with the company using its brand to grab significant market share. 
[edit] Business FinancialsAAPL generates over $26.5 billion in annual revenues (trailing 12 months), or $30.50 per share. EBITDA over the same ttm period has been $5.6 billion, and with a debt balance of zero - yes, zero! Much of that EBITDA falls to the bottom line. AAPL maintains over $18 per share in cash on its balance sheet, or approximately $19 billion. Current analyst estimates are for March 2008's quarter to be $1.05, and that is an average with 23 published estimates outstanding on this mega-cap growth stock. YOY growth rates appear to be in the 20% plus range. Most of this growth is attributable to the iPod and iPhone lines, which continue to sell well into the marketplace.
[edit] History and ProductsAfter a decade of stagnant sales at Apple, original founder Steve Jobs returned as CEO in 1997 and began a period of reinvention, resulting in the release of several highly innovative products, notably the all-in-one iMac PC (1998) and the iPod (2001). An aggressive subsequent advertising campaign put Apple squarely into the public eye, and today Apple remains known for its catchy, clever ads. Apple builds its product portfolio with vertical integration to provide seamless compatibility between hardware, software and peripheral products. The company's ecosystem of products--closely related by design and functionality--has allowed it build significant brand equity, and Apple products are especially popular with middle- to high-end consumers as well as the graphics/design industry. Apple's current products can be divided into two main categories:
Source: Company Data  iPods were the primary growth engine for FY05 and FY06, responsible for roughly 58% of Apple’s total revenue growth for both years. In FY07, iPod segment generated only 14% of overall sales growth. As a percentage of total revenue, iPod accounted for 33% (FY05), 40% (FY06), and 35% (FY07). Despite the common view, Apple's revenue has not shifted away from its traditional Mac hardware and software towards iPod, iTunes, or other Music-related products. As demonstrated in the table above, while the sales of Music-related products has fluctuated unstably (and dropped) from around 50% to 40%, the sales from Computer-related products have actually risen from low 50s to 60% by the third Quarter of 2007. Apple is vigorously working to expand its portfolio outside the Computer-related business, however, and two of its most recent products were launched in two unexplored categories:
[edit] Trends and ForcesApple's current primary strategy is a shift away from computers towards diversified consumer electronics. The company's intention to move from a Mac/iPod-driven business model to one that includes many different product lines puts a spotlight on Apple's forays into several new markets. [edit] iPod CannibalizationThe iPod took a giant leap with the Touch. The display is much larger than other iPods and includes touch screen navigation. Touch iPods also include WiFi, users can access the web, e-mail, and utilize the widgets to grab updated weather, stock prices, maps, as well as watching YouTube Videos. It also has PDA applications, such as calendar and notes, as do other iPods, but the Touch’s qwerty keyboard significantly enhances functionality. The evolution of the iPod line creates a higher possibility that an iPod owner would want more than one model. For example: Touch for PDA/internet, Classic as repository to store all content, Nano (or more likely a Shuffle) for carrying a small device (during exercise). The iPod potential market is expanded by the Touch’s new capabilities, which may attract new consumers who had little interest buying a device strictly for music and video. Current iPod owners may buy a Touch for its PDA and web functionality. When third party applications arrive in June, the Touch will be revolutionized into an entirely new device as it will receive a massive boost in capabilities. Given below is the graph for iPod Sales-(trailing 4 qtrs):
The iPhone will cannibalize a sizable amount of iPod sales, specifically the Touch. However, since a single carrier in the US offers the iPhone and only available in few foreign markets, the Touch provides most of the iPhone features to consumers who can’t feasibly buy an iPhone. This is especially beneficial for consumers who are locked in a wireless contract with a carrier other than AT&T, or for someone working at a business that doesn’t support iPhone. The Touch lets them become acquainted with a device similar to the iPhone, and when conditions permit, enhances the likelihood that they will purchase an iPhone. [edit] Dependence on new productsApple's maintains an aggressive product innovation cycle which permits the company to maintain its unusual but highly profitable system of product pricing (not lowering prices until a new version is released). The company is notoriously tight-lipped about new products, carefully controlling the release of new product announcements. [edit] The iPhone CrazeThe subject of intense media scrutiny and hype, Apple's iPhone is the newest home run of its product lineup. Apple first dipped its toe into the immense mobile phone market in 2005 with the ROKR, a Motorola-made phone that licensed Apple's iTunes and yielded disappointing sales. This time, Apple designed and produced the iPhone hardware and software in-house in its second attempt at tackling the massive $300 billion global market for mobile phones. A company known for deep integration across its own products, Apple launched the iPhone with AT&T, the largest mobile phone service provider in the U.S, on June 29th, 2007. The iPhone includes a touch-screen system, wireless Internet browsing capability, and iPod functionality. These advances come at a hefty price--approximately US$ 400--and target the decidedly high-end smartphone market. Apple's focus on the high-end market limits its growth and market capture opportunities in several key respects:
[edit] Apple TV: less promisingTouted as the future of digital entertainment, the Apple TV nevertheless faces significant competition from on-demand and traditional TV/video offerings. At a hefty US $229 (US $329 for 160GB model), Apple TV targets a consumer group that probably already has access to either cable TV, on-demand, or a DVR/TiVo. The limited video selections (fewer than 1500 titles (est) were available on iTunes as of April 2008) could be significant downsides for many buyers. Because the Apple TV has no optical drive, all media content must come from the user's computer or web-streamed via internet connection. Movies may be rented or purchased via the Apple TV using the infrared remote and an iTunes account. Music and TV shows may be purchased as well. When the user runs the iTunes application on his/her PC, content bought and downloaded to the Apple TV is synced to the PC. Alternatively, content downloaded from the PC itunes store is synced to the Apple TV hard drive. (through iTunes or YouTube[4]). Despite numerous comparisons between Apple TV and the iPod, a number of vital differences cast doubt on any anticipation of iPod-like success. For one, Apple TV lacks portability, a defining feature of and reason for iPod's success. For another, most consumers do not have a large pre-existing collection of high-quality digital movies/shows, while in the iPod's case, digital music use had been prominent and widespread for a number of years (illegal file sharing with p2p platforms such as Napster) before launch--thus Apple TV's market is not primed for success as the iPod's was. Finally, although Apple TV can support HD technology and actually requires a widescreen TV[4]. [edit] The "Apple Halo"Apple's self-reinforcing business model takes advantage of the technological integration of its products to turn new buyers into loyal Apple fans. End-to-end control over the design and manufacture of hardware, software, and peripherals alike makes high compatibility between products possible, and high-quality customer support ensures satisfaction and loyalty. Apple's encouragement of differentiation between product designs and its promotion of secrecy around new product launches also heightens the Apple mystique. Together, these combine to create the Apple "halo effect," where a buyer of one Apple product has a high probability of returning to Apple for other products as well. [edit] Retail store advantage Apple opened its first retail stores in 2001 and have since expanded to over 180 stores in 4 countries (U.S., Japan, U.K. and Canada). Their retail outlets have contributed to about 10% of overall sales in 2006, but the overall impact of these stores may be much higher in terms of brand presence and building long-term customer relationships. In their most recent quarter Apple's retail stores generated nearly $1.5 billion in revenue for the company.[5]
[edit] iTunes and compatibilityiTunes is the third largest music retailer in the United States. Its airtight compatibility with the iPod, along with Apple's refusal to license its FairPlay DRM security encoding technology, meant that iTunes has reinforced iPod sales -- anything bought off of iTunes can only be played on the iPod, meaning that switching costs are high for iPod users who have already spend hundreds of dollars building up their music libraries at iTunes. Apple's recent announcement that it would begin selling DRM-free media on iTunes is a potential risk for the company as DRM has worked in Apple's favor by creating an iTunes-iPod virtuous cycle that has been hard for competitors to crack. [edit] Weak brand in emerging marketsThe emergence of China and India as key players in PC sales and general technology consumption is troubling for Apple. With relatively light presence in lower-margin, higher-growth geographic areas, Apple will experience less of its halo effect and reduced product/brand recognition, lowering sales potential. With China and India estimated to make up about 66% of PC market growth through 2010, this could be a significant challenge for Apple. [edit] Public image
[edit] CompetitionAgainst the Mac: Apple's position is improving in the worldwide PC market, growing 40% in 2007, compared to 13% global growth during the same period. [6] Gartner stated, as part of their annual "Key Predictions" in January of 2008, that Apple is expected to double their market share in the PC industry by 2011 [7]. However, the Mac still represents a small fraction of the overall PC market; their market share of US domestic PC sales was 6.6%[8] for the first three months of 2008.
In June of 2006 Apple announced that it would begin shipping its computers with Intel processors. Since the switch Apple has, on two occasions, announced new computer specs that include processors that haven't been officially released by Intel. The first of these announcements came in April 2007 when Apple announced that its Mac Pro would be available with two quad-core processors that were not on Intel's price sheet or website.[9] About a year later Apple again announced a new model that would ship with a previously unreleased Intel processor, this time for the iMac. In both cases Intel has said that the processors shipping in the new Apple models are available in limited quantities. Furthermore, competitors like Dell and HP have been left without access to these processors in their early stages.[10] Apple's ability to get exclusive access to new products, like Intel's processors, could provide a significant advantage over their competition in the future. Against the iPod: Although Apple remains the industry leader in PMPs, the competition is making significant gains. The popularity of flash-based PMPs is problematic for Apple, which has much stronger market presence in hard-drive based (HDD) players. To combat this, Apple may release a new flash-based line of players, in addition to a souped-up and rehauled version of HDD iPods. Apple's main competitors in this area include:
Source: Company Data Against iTunes and Apple TV iTunes' main competitors are Napster and Rhapsody/Real Player, but the service far outstrips both of these in market share. To combat the rise of a wave of new subscription music services, iTunes may launch one of its own in the near future. Apple TV, on the other hand, may face much stiffer competition. While the concept of digital media played on the TV initially seems very promising, Apple TV actually has rather limited functionality--especially against established and well-received sources of media, from Video On-Demand to Netflix to recordable cable programming. All three of these distribution channels offer significantly higher image quality than much of what is available on Apple TV. Against the iPhone Apple's iPhone must compete with established mobile phone and PDA companies, including the likes of Motorola, Nokia, and Sony, many of which have significantly larger R&D budgets than Apple. The company also experiences challenges from BlackBerry and similar high-end PDA-phone combinations. Because it is unlikely that the iPhone will be issued by corporations as a productivity tool, the BlackBerry and similar devices may enjoy a significant edge in the corporate market. While there has been talk of a Google (GOOG) "G-Phone," this possibility is slim. Google's recent new hires from Sidekick are reported to come from its software section, making it probable that Google (GOOG) is developing new applications for mobile phones. This would put Google (GOOG) in a position to work with, not against, the iPhone.
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