« Time Warner Earnings Preview: Will The Boredom End? | Main | Insider Buying At Lionsgate »

January 31, 2006

Why Apple Is Still A Growth Stock?

Over on Street Insight, my fellow contributor Jeff Bagley and I have been tag-teaming the defense of Apple Computer (AAPL) since the company reported its December quarter EPS. We were both bullish prior the earnings release and I really feel Jeff has hit it on the head with his long-term bullishness based upon the unusually large opportunity for AAPL to enhance revenue and profits. Basically, Jeff, along with Cody Willard on Real Money, has noted that AAPL is one of the only really big cap stocks that offers the prospect for sustained 20% plus earnings growth over a multi-year period; sustained on top of the huge earnings gains being driven recently by the success of the iPod. Due to AAPL's unique status as an actual mega cap growth stock, Cody, Jeff, and I are willing to live with the high valuation and occasional significant downside volatility. And speaking for myself, trimming the position on the way up makes the downside periods less painful.

To give you some sense of why AAPL may offer such a high level of sustainable growth, consider the company today against the potential opportunity the company could have in PC and cellphone sales. Last year, AAPL sold almost 32 million iPods generating $6.2 billion in revenue with an ARPU of $195. Additionally, AAPL sold 4.7 million Macs, pulling in $6.4 in revenue at an ARPU of $1,350. Put those two together and you get $12.6 billion in revenue....

Last year, according to Gartner, worldwide PC sales grew to 218.5 million units, up 15.3%. On the basis of that data, AAPL had a market share of 2.2%. Assuming flat PC sales, each 50 basis points in market share is worth 1.1 million units, nearly a quarter of AAPL's total 2005 unit volume. Assuming the company can maintain an ARPU of $1,350 that works out to $1.5 billion in revenue, growth of 12% off the iPod plus Mac 2005 revenue base. If you believe the halo effect is worth anything, gaining 50 basis points of market share on a global each year is not such a stretch. And don’t forget, margins on Macs are higher than margins on iPods so on the operating income line any market share gains in PCs will be magnified.

AAPL hasn’t introduced a cellphone yet but many investors and analysts think that is where the company could go next. According to Strategic Analytics, in 2005, global handset sales grew 19% to 810 million units. Handsets outsold MP3 players like the iPod by more than 15 to 1 last year. Let's guess that AAPL could maintain an ARPU similar to the $145 earned by Motorola (MOT) on its handset sales in 2005. MOT's ARPU was heavily influenced by the high end RAZR and given AAPL's history of innovative design and premium pricing, you would have to expect any cellphone issued by the company to be a high-end product. Let's stipulate further that AAPL could gain a 5% market share of global handset shipments. That would work out to 40 million units at $145 or $5.8 billion in revenue. At that level, handsets would almost match the size of the current iPod and Mac businesses. In other words, the top line could grow by almost one-third from a successful handset product. Granted operating margins in this business are below Mac, and probably iPod, levels but the revenue potential is huge.

Gaining market share in PCs and cellphones is incredibly difficult. Competitors are entrenched and top notch. AAPL could fail. But as an investor, how many opportunities really exist in mega cap stocks for the type of growth AAPL could sustain? Very few. And don’t forget, iPods are still a growth industry with unit volume growth north of 40% likely in 2006. Plus iPod accessories. And maybe that digital media hub. You get the idea.

Posted by Steve Birenberg at January 31, 2006 02:19 PM in AAPL