Summary:
- Apple keeps itself in growth markets by identifying unmet needs
- Apple expands its markets every quarter
- Apple deeply understands its competition
- Apple knows how to launch new products quickly
- These skills allow investors to buy Apple with low risk, and likely tremendous gains
Apple’s recently announced sales and earnings beat expectations. Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily. What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.
Forget about the concerns. Buy the stock. The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.) The story is not about “expectations.” Its about a team achieving phenominal success, and still early in the development of their opportunity!
Move beyond the financial forecasts and really look at Apple. In September of 2009 there was no iPad. Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose. Others thought that maybe it might sell 1 million, if it could really catch on. Last quarter it sold over 4 million units. No single product, from any manufacturer, has ever had this kind of early adoption success. Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago. Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day. Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business. While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!
The best reason to buy any stock is NOT in the financial numbers. Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter. Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections. Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year. And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item. If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.
Investors need growth. Growth in sales that leads to growth in earnings. And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings. If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor. Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least? At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!
Apple has developed a very good ability to understand emerging market needs. Almost dead a decade ago, Apple has now achieved its first $20 billion quarter. This was not accomplished by focusing on the Mac and trying to fight the same old battle. Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.
And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead. He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers. Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.
Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month. And that is why you should own Apple. The company keeps itself in new, growing markets. And that’s about the easiest way there is to make money for investors.
After the last decade, investors are jaded. Nobody wants to believe a “growth story.” Cost cutting and retrenchment have dominated the business news. Yet, those organizations that retrenched have done poorly. However, amidst all the concern have been some good growth stories – despite investor wariness. Such as Google and Amazon.com. But the undisputed growth leader these days is Apple. While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny. Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk. Just look beyond the numbers.
