9 Financials - Capex Growth Rate Ignoring 2002, we assumed CAPEX growth rate of 3%
10 Financials Capital Structure – 100% Common Equity $34 Bln in Cash Reserves
11 Competitive Landscape AAPL derives a competitive advantage from its focus on innovation APL entered the consumer device market with the iPod in 2001, and in FY 08, it sold almost 9.2 million iPod units. In mid-2007, AAPL introduced the iPhone, and in June 2008, it introduce the iPhone 3G. As of the end of FY 08, the company had signed agreements to ship iPhones in 70 countries. Own Operating System Unique in the industry for its control of the development of its hardware, operating system and many software applications. iTunes download service and App Store – differentiated offerings AAPL's retail strategy As of the end of FY 08, it had 247 stores, including 205 in the U.S. The strategy behind this retail presence is to attract foot traffic in order to expand the customer base for all product lines (now emulated by Microsoft) Happy Meal iPod Touch marketed to pre-teens and teens before they own a mobile phone, eventually, will lead to iPhone sale (lock-in kids now as future customers)
12 Competitive Landscape Happy Meal iPod Touch marketed to pre-teens and teens before they own a mobile phone, eventually, will lead to iPhone sale (lock-in kids now as future customers) - SWITCHING COSTS
13 Trends, Forecast and Insights The unit sales of mobile phones have increased from 904 million -> 1250 million units at an annualized rate of 11%. Around 1 billion mobile phones sold globally (projection: 1.8 Billion by 2016), smart phone shipments worldwide today – 140 million The iPhone was launched in June 2007. 270,000 iPhones sold in 30 hours on launch. iPhone Market Share increased from 0.3% in 2007 to 1.10% in 2008. Currently, AAPL has 8 % market share of smart phone market. 300,000 iPhone Applications by 2010 – Platform Strategy Increasing Wi-Fi and Mobile Broadband Availability – 4G in 2011: Speeds - 2 MB – 20 MB Availability of mobile TV shows, films, games, photo sharing, software applications, and video conferencing are potential points of differentiation among smart phone competitors.
14 Trends, Forecast and Insights The Smartphone space has a lot of potential in emerging markets Apple has announced a deal with China Unicom, China's #2 mobile phone provider, to distribute iPhones by Q4 2009. China Unicom has over 140 million subscribers within the 700 million subscriber Chinese mobile phone market. 2 million iPhones in gray market in china. India has total wireless subscribers base of more than 525 million now. Extraordinary consumer-friendly interface and features rich products Enter untapped new segments – soccer moms, elderly, etc. – blue ocean strategy Halo Effect – Share of wallet The larger the number of application, more compelling for people to buy iPhone (versus competition) iPhone/iPod sales will lead to increase in iMac sales due to superior integration between the two Users who buy iMac desktop will be compelled to buy MacBook (notebooks) due to ease of integration iMac sales will lead to AppleTV sales (now you can watch your content on TV)
15 Trends, Forecast and Insights Notice the higher profit margin Source: IDC, Gartner, Strategy Analytics
16 Trends, Forecast and Insights Shift from Desktops to Notebooks and Net Books (and Tablets) A really fake picture
10-inch multi-touch Tablet – LCD or OLED – new product family
Textbooks are sold new at a few hundred dollars, and resold by local stores without any kickbacks to publishers. A DRM'd one-time-use book would not only be attractive because publishers would earn more money, but electronic text books would be able to be sold for a fraction of the cost, cutting out book stores and creating a landslide market share shift by means of that huge price differential. Textbook market
Hybridized content that draws from audio, video and interactive graphics in books, magazines and newspapers
17 Trends, Forecast and Insights Bearish Factors Eggs in one basket – desktop, portables, ipod revenues are dropping or flat, currently growth is only coming from iPhone RIM, GOOG, NOK – strong competitors in smartphone market Pricing - AAPL charges premium pricing compared to competition Steve Jobs is no longer there Black-Necked Swan type event
18 Key Parameters for Valuation - WACC Current Capital Structure: Common Equity Only WACC = (11.7 + 11.3)/2 = 11.50%
24 Conclusion Under-value or Over-valued : Blue Pill or Red Pill If we believe iPhone will keep up with innovation and grab market share from Nokia and others GOOG will not bring out change the game substantially with Android Company can function effectively without Jobs in future iTablet (or whatever it gets named) will more than compensate for drop in desktop and portables growth Then, AAPL is undervalued. The value should be closer to $240.