Apple could be entering new part of corporate cycle

By DAVID MOON, Moon Capital Management, LLC
August 5, 2012

My 12-year-old son just bought an iPhone 4s. He paid for it with real money – not birthday money or other cash someone gave him. He mowed lawns, painted fences and saved the hundreds of dollars needed to achieve what I thought was a fairly silly goal. He’s not a spendthrift, so I let him do it.

His was one of 26 million iPhones Apple sold last quarter. Although the company is expected to release a new version later this year, at what point will everyone who wants an iPhone already have one? How long can Apple continue to sell 100 million or more iPhones a year?

There are roughly a billion people living in developed countries. Annual worldwide smartphone sales total almost half that number.

In one sense, Apple is a company that sells only four products: the iPhone, iPad, Mac computer line and iPod. Everything else at the company is a rounding error. Only sales of the iPad and Mac are clearly growing, however.

But in another very real sense, the company is almost a cult. Just ask my son. People almost worship Apple products the same way a redneck worships either Ford or Chevy trucks.

But if Apple is the Chevy Silverado, Samsung is the Ford F150. In the first quarter of this year, Samsung overtook Apple in smartphone shipments.

There is nothing wrong with a company having mature products. Like other businesses, Apple has experienced this before. It has also experienced long periods of uninspiring financial performance, leading to similarly uninspiring stock performance.

Is it happening again?

Unlike what often happens with companies that sell products with passionate customers, Apple does not sell at an exorbitant price relative to its current earnings. Its P/E of 14 is fairly reasonable, assuming it can continue modest growth from its current level of earnings and interest rates don’t change. However, even zero growth requires a dollar earned on existing customers to be replaced by a new dollar next year. While Apple has strong near-team prospects, the company will have to maintain an extremely high adoption rate for current products merely to avoid zero growth. If it can continue to introduce a blockbuster product like an iPad every three years, the stock is underpriced.

There is no reason to believe it can do that, however. Even famously optimistic Wall Street analysts don’t expect that, else the stock would be selling at 30 times earnings, not 14.

We will eventually see if Apple falls into the category of perpetual technology superhuman businesses, a category in which companies do not stay perpetually. Or is the company a merely mature business – the corporate equivalent of being a mortal human?

Yes, there are billions of people in developing countries without smartphones. Clean water is a bit more important for them than FaceTime, however. Apple could be entering a more dangerous and vulnerable part of its corporate life cycle, where to justify even its modest valuation half of the world’s developed population will have to continue to buy a smartphone every year.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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