AAPL - a stock worth watching

I will preface this by stating I am not a stock trader.  Do not take any recommendation as advice.  I am merely discussion a particular stock.

Apple's next quarterly earnings estimate is scheduled for October 25, 2012.

What do I predict?

I estimate that Apple's revenues will increase 26.0% and EPS will grow 24.5%.

My estimate for revenue is $33.88 billion. On the bottom line, the average EPS estimate is $8.05.

In general Apple will have a good quarter.  The launch of the new MacBooks and their increased availability, coupled with the iPhone 5 launch, although dampened by limited supply will all help boost the numbers.
With an aging iMac line and darn near derelict pro line, Macintosh sales will be flat of not lower.  The iPod is slowly fading, but iPhone and iPad is still the breadwinner.
As is typical, there will be some profit taking and a stock drop.  Given the all but confirmed launch of the iPad mini on October 23, the buzz for this event will exaggerate the trades.
Here is a brief overview of my long term finding on AAPL.

Business Model

“Apple Inc. designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (Mac), iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores. The Company sells to education, consumer, creative professional, business and government customers. “ (Form 10-K, November 5th 2008).

Industry and Competition Analysis of Apple

Peer Group

    o Microsoft

    o IBM

    o HP

    o DELL

    o Sony

    o Panasonic

    o Sun Microsystems

Business Overview

Apple focuses heavily on the design and marketing of its products and services, creating a profitable competitive advantage, which we’ll highlight in this paper. Apple strives for vertical integration; it out-sources most of its product manufacturing and remains vertically orientated towards customers, doing most of its business in its retail-locations and online properties. Because of this concentration of power and its proximity to the customer, it also has more power over its suppliers, is able to make relatively strong demands, and it's also better equipped to compete with horizontal peers like HP or Sony, who are not as vertically integrated towards the consumer. Apple is able to leverage its customer centricity and continually create new products and services that exceed consumer expectations. For example, after seeing the tensions between record labels and consumers around distributing music via the internet (e.g. music pirating), they created iPod and iTunes to capitalize on the failure of the music industry to identify a viable solution.

In 2009, many consumers will have less discretionary income. This will result in less overall spend on non-essential purchases; such as the consumer electronics and services sold by Apple. Apple’s business plan will be influenced by the general reluctance to consume. For example, Apple has better positioned itself in the market through the introduction of new, lower priced models of the popular iPhones and iTouch devices, as well as selling products through discount retailers such as Walmart and Target, reflecting a sales strategy to accelerate consumption. Apple has successfully sustained an industry leading profit margin in the last few years despite global economy slow down.

Additionally, since the name change from Apple Computer Inc to Apple Inc., the company continues to expand its products range from computer hardware to more software, online services, portable music devices and mobile phones. While Apple's Mac computer still makes up 42% of net sales in 2007, and the manufacturing and selling of computers still dominates Apple's business, it is heavily focused on other consumer electronics product lines. (Source: Apple 10K FY2007 Annual Report PP 42)

The iPod product line has nearly monopolized the portable music device market since it’s 2001 introduction, and provides a good revenue conduit to it’s iTunes media download service. However, it’s anticipated the demand for iPods will begin to dry-up, with expectations of a 20% drop in sales in 2009. The problem is everyone who wants an iPod already has one and there’s no significant reason for consumers to upgrade devices.  IPhone on the other hand is still early in its growth curve. Demand for iPhones is expected to spike in 2009, from 16MM units 2008 to 45MM units in 2009.

Apple Strategy

Apple's current primary strategy is a continued shift away from computers towards diversified consumer electronics. The company's intention to move from a Mac Computer and iPod-driven business model to one that includes several different product lines and markets such as TVs, Phones, and iTunes/media distribution. Apple is already the 3rd largest music retailer and 3rd largest cell phone provider in the world. The brand is very strong globally, with notable exceptions in emerging areas such as India and China.

Apple's competitive strategy is, however, not focused on the cost-leadership as most of its competitors are all trying to reduce both the cost and price. The company pays close attention to a differentiation strategy, as the market is fiercely competitive and full of identical products. For example, Apple’s unique operating system, called Mac OS X, provides a platform for powerful graphics and audio technologies, enabling Apple to provide consumers a different experience compared to the other low-cost computer vendors.

Summary of Competitive Advantages

    • Industrial Design/Hardware design

    • Apple’s focus and vision

    • Product integration

    • Vertical integration

    • Patents covering technology, look/feel and interfaces

    • Strong legal team

    • Ease of use

    • Strong brand

    • Brand loyalty

    • Marketing

    • Steve Jobs – Apple’s President and CEO  (although some see him as liability due to perceived dependency between he and the companies innovation)

General Trends

      • Buyer bargaining power – weak (low corporate leverage on phones, solid consumer leverage)

      • Product Substitutes – emerging (personal media players, smart phones, feature rich phones)

      • New Entrants – high threat (established technology giants vying for market share, software giants Google, Microsoft)

      • Rivalry – strong (more companies entering, strong brands and financed operations)

      • Supplier Bargaining Power  – weak (vertically integrated, phone service carriers (ATT examples), hardware manufacturers etc.)

Rivalry among existing firms

    • The PC and portable music player markets are two most important market segments for Apple Inc. These are all well developed and highly competitive markets.

    • Firms involved in this market are all big names, such as Dell, HP Compaq, Gateway, and Apple.

    • The competition has driven the PC price down which eventually hurt the profit of everyone in this market. However, Apple has sustained a better market position by continuing invest in R&D. Its name and innovative design has long been attracting customers, which helped Apple to gain a higher price for its product.

    • Apple's portable music player faces relatively low competition, as a result of being perceived as having the most innovative design and product technology. It is reported that iPod and its related products take up 58 percent of market share.

Threat of Substitutes

Threat of substitute products or services is high when there are many product alternatives. Threat exists when a product’s demand is affected by price of sub product (elasticity). Threat of substitutes is a growing concern for Apple.

    • Apple operating it’s own mini-economy…doing most everything themselves

    • Difficult for competitors to enter the market or copy ideas.

    • 6-12 month releases for ‘hip’ new products. Cutting edge designs and evolving concepts are to keep up with and forced some competitors, such as Dell, out of the market. (e.g. ipod to itouch (new customers)

    • Apple's products are full of competition. ipod, imac, itunes, iphone are key product areas. iMac computer and iPod player are a products in a  rapidly growing industry, although Apple has sustained a better position by offering consumers a different operating system, OS X Operating Systems, while others rely on Microsoft Windows Operating Systems. Apple owns the OS X Operating Systems, enabling it to differentiate its software from competitors. A unique feature set in its products have helped Apple obtain a greater loyal from users.

    • For the portable music market, Apple's iPod is facing significant competition. There are many alternatives for consumers to choose from, however, Apple's product is generally viewed as having the superior design. Other portable music devices such as radio and CD players are not viewed as comparables or substitutes with iPod and the market for personal media players.

Threat of new entrants / competitors

Threat of new entrants is high when it is easy for new competition to enter the market.  Thread of competition is high, but being controlled.

 • Starve off competitors with customer loyalty and R&D

 • Company pays no dividends, all RTE goes back into the company largely funding R&D)

    • 6-12 month media buzz cycle, creating perception of innovation

    • The personal computer market is a very well established market with very large companies in it, such as Dell, HP Compaq, and Lenovo. There are basically two important barriers for new entries, which are extremely difficult to obtain. First, the start up of such a company requires an enormous capital investment. The large economies of scale and price war in the personal computer market require new firms to hold a massive investment to keep itself active in comparing price and technology strength with others. Second, the giant firms in the PC market have copyrights for patents and technologies making new entries difficult.

Supplier Bargaining Power

Supplier power is higher when buyers have fewer choices from whom to buy; for Apple, supplier concentration is kept low. Supplier bargaining power is generally controlled.

    • Importance of volume to suppliers keeps their power low

    • Switching Costs of Apple are low

    • Presence of substitute inputs exist to Apple

    • Threat of forward integration (vertical integration (distribution)) has kept Apple supplier power low

    • Apple has been obtaining supplies from a large number of vendors to assemble its products. In most of the cases, Apple hedges supplier risk by using multiple suppliers for common components and is subsequently able to negotiate profitable terms.

Buyer Bargaining Power

Buyer power is high when buyers have more choices. Businesses are forced to add value to their products and services to get loyalty. Buyer bargaining power is low.

    • Apple's OS X Operating System reduces buyer bargaining power. Apple’s Operating System is one of the very few alternative operating systems for consumers wanting to avoid using Microsoft products. If a consumer wants to use Apple products, they must use Apple’s OS. Analysts agree Apple could have obtained significantly more growth if they had given the copyright of the OS to other firms, as did Microsoft.

    • Apple retails its new products via multiple channels all at the same time at nearly an identical price point. Apple is able to ensure high initial sales for new products, creating both top line growth and media buzz.

Summary

The computer industry is very competitive. Due to the expected recession of world economy and inflation, performance of the business may  be negatively impacted this year. Bargaining power of buyers and suppliers are comparatively strong despite Apple's effort to increase its bargaining power. The constant price war and quick innovation in the personal computer industry has made companies more and more difficult to obtain earning spikes. Apple is not likely to keep its high profits due to these constraints.

Superior Apple product can eliminate substitutes, increase development costs (reduce new entry threats) and decrease supplier power. Consumers generally move away from closed systems (which and leads to substitutes) of products/services. They want interoperability and ease of use.

The market for PC, portable music player, mobile phone and other consumer electronic products are subject to huge competition and fast technological changes. The short product life, frequent introduction of new products and the continual improvement in product performance and design requires the company to continue to invest in R&D -- in order to stay in the top of the industry. Apple's control over the entire production procedures of personal computer and the continual innovation on iPod and iPhone is a clear advantage. Increasing cost on R&D causes Apple to spend its capital compared with its competitors. For example, Dell uses Microsoft's operating system in all of its products while Apple develops and manages its own operating system.

   1. The strategy to stay close to customers is crucial in this environment. Increasing value proposition for customers (personalized experience), maintaining a significant amount of loyalty and capitalizing on awareness when customer attention moves to different types of products and services in the market should remain Apple’s focus.

SWOT

Strengths

    • Innovation

    • Product Diversification and Differentiation

    • Mac OS X operating system

    • World market capacity

    • Apple is a very successful company. Favorable brand perception. iPod gives the company access to a whole new series of segments that buy into other parts of the Apple brand. Sales of its notebooks products are also very strong, and represent a huge contribution to income for Apple.

    • Brand is all-important. Apple is one of the most established and healthy IT brands in the world

    • Customer Loyalty - has a very loyal set of enthusiastic customers that advocate the brand. Powerful loyalty means that Apple not only recruits new customers, butit retains them i.e. they come back for more products and services.

Weakness

    • High Price

    • Quality control – iPods reported technical issues (batteries, screen displays, etc)

    • Pressure to raise iTunes download prices by music industry (who makes more from downloads than CD sales).  Dominates legal downloads. Price increases could turn away customers to lower cost providers.

Opportunities

    • New stake in the mobile phone industry

    • Entry to the emerging economy

Threats

    • Strong competition in the technology market

    • Substitute products are widely available in the market

    • The popularity of iPod and Mac are subject to demand, and will be affected as economies falter and demand falls

    • High product substitution in the innovative and fast moving IT consumables market. iPod and MP3 rule today, but only yesterday it was CD, Tape and Vinyl. Tomorrow's technology will be completely different. Wireless technologies could replace need for PMP devices.