Apple's Greatest Idea Yet

by: Jason Schwarz November 19, 2008 | about stocks: AAPL    

Jason Schwarz

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There is an Apple (AAPL) story that I don't want you to miss. It's bigger than the Mac, it's bigger than the iPod, and it's bigger than the iPhone. Steve Jobs briefly mentioned it in the quarterly conference call and it deserves repeating, "We've never seen anything like this in our careers".

Of course, I'm talking about the App Store. This store is causing a sea change in both the mobile phone industry and the gaming industry that threatens the viability of all competitors. There have already been approximately 250 million apps downloaded among the 6000 applications available. Mr. Jobs adds:

Competitors are scrambling to copy our App Store but it's not as easy as it looks and we are far along in creating the virtuous cycle of cool applications begetting more iPhone sales, thereby creating an even larger market which will attract even more iPhone software development. It is clear that customers are now attracted to iPhone not only for its amazing functionality and revolutionary multi-touch user interface but also for its unique ability to let users easily purchase, download, and use thousands of different applications, ranging from free games to financial planning and health management -- all of this in only 102 days.

Apple has brought the Internet to the next level. That level that everyone expected during the tech bubble has arrived. The efficiency of distribution is impossible for the traditional model to compete with. Consumers are eating this thing up. During a quarter in which consumers supposedly quit spending, Apple grew real revenue by 54.5% and grew net income by a staggering 81.2%. That kind of growth is absurd for a company as mature as Apple. That kind of growth is absurd during an economic collapse. But it happened. And it's just beginning. The $199 price tag on the iPhone was a brilliant move by Apple as it allows them to fly below the radar of the economic downturn. The iPhone is the must have item for the holidays; teenagers and adults don't even want any other gifts and they'll be happy as long as they get their iPhone, and it's not just because of the touchscreen or the safari internet browsing. It's because the App store is the gift that keeps on giving.

Apple brought a new twist to an aging industry and it worked. Steve Jobs further remarked on the conference call:

I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors.

The competition is too late to the party. The snowball has begun. There will come a time when Apple stock will no longer be bogged down by its sector. I don't know exactly when that day is but it's coming. Investors ask, where can I make money? Apple offers the best answer in the market. During the last 13 months of this bear market Apple has proved itself again and again. It maintains record sales even in the worst of times. Modern day society values its computers and phones above all else. These items are more important than cars, jeans, jewelry, entertainment, vacations, etc...

When looking for market leadership, look no further than the App store. Just imagine what is going to happen when this gets introduced throughout China. The iPhone as a $199 laptop will set all kinds of records among the Chinese. Apple in the $80 range offers a unique wealth building opportunity. Definitely time to buy and hold.

Disclosure: Long AAPL 2011 calls.

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This article has 48 comments:

  •  
    Nov 19 08:36 AM
    You tell 'em, Jason!
    (But make that the $90 range--Apple closed yesterday at 89.91)
    Reply | Link to Comment
  •  
    Nov 19 08:58 AM
    Only goes to show that AAPL is a super super stock not only for the short term but also for the long haul. Aren't those people lucky who own this stock and those aspiring to come on board the AAPL express. Go AAPL all the way! No second thoughts.
    "attenuation"...
    Reply | Link to Comment
  •  
    Nov 19 09:13 AM
    nice article, but i can't for the life of e figure out why no love for the ipod touch...
    not everyone needs a smartphone-the touch gives you access to the app store without the contracts...it's just as big.
    Reply | Link to Comment
  •  
    Nov 19 09:23 AM
    Another astounding chapter in the Apple story. What apple Inc. continues to do, which is a TOUGH act to follow, is create stories that capture the imagination while totally revolutionizing technology and how it is percieved: Redifining music with the ipod and offering an act of purchase with itunes that contextualized the device and rendered the CD redundant is, alone, a remarkable achievement of pure and elegant brillance. Now we see how the consumer imaginaton wraps itself around a divice that can out perform your average PC, allows you to telephone, is an ipod, gaming device, and server that fits into your pocket. Will people start buying LCD screens for their iphone's and forgo even a laptop? Does the iphone render the netbook redundant? As the app store develops into a kind of interactive itunes for just about everything, the apple story is already the stuff Thomas Jefferson, Henry Ford or Howard Hughes were talking about: It's about bringing the dreams of the modern man to life and then some. Apple Inc. is an American story of the finest character that simply cannot be ignored.
    Reply | Link to Comment
  •  
    Nov 19 09:39 AM
    While I agree with the general assertions of the article, Jason, your hyperbole undermines your credibility. Tone down your enthusiasm a notch and you'll attract more believers.
    Reply | Link to Comment
  •  
    Nov 19 09:43 AM
    AAPL is the ONLY stock in my portfolio I feel is a "sure thing". People don't see change when they are in the middle of it. Buggy whip makers thought buggy whips would always be important and that new-fangled automobiles wouldn't catch on; IT guys, raised on DOS, think Windows will always be important, even though it has dreadfully primitive development tools and hasn't even made the transition to UNIX (even the free-love hippies writing LINUX out code Microsoft!). One must appreciate that people who learn to write apps for the iPhone, as a side effect, would know how to write apps for the Mac! iPod = stealth marketing for the Apple Brand; iPhone = stealth marketing for the business executive; XCode for iPhone = stealth marketing for new developers.
    Reply | Link to Comment
  •  
    Nov 19 10:13 AM
    There's no such thing as a "sure thing" when investing - otherwise everyone would be in it. Apple is a consumer stock and just as any technology company they're at the mercy of consumer trends. What might be hot today might be stone cold tomorrow and unless you can continuously stay ahead of the game then you're exposed to risk. Margins are declining so unless sales increase at or above that proportion investors should be cautious. We're entering a period where demand for high-end goods might not be as feverish as investors think. Yes they have great products, great management and have compelling fundamentals but they are just as exposed to the consumer as any other company who sells a product/service to that market.
    Reply | Link to Comment
  •  
    Nov 19 10:19 AM
    At last - someone other than Andy writing something intelligent about Apple.
    Reply | Link to Comment
  •  
    Nov 19 10:23 AM
    Dividends Anonymous,

    Consider this, Apple stands to have an even better result with the fall in input prices. Flash memory is falling like a stone - and who in the world is benefiting from that than Apple??

    If Apple grew laptop sales 28% last month it's obvious Apple products are being treated differently to everything else.

    If your world needs cheering up don't go and buy a Dell or a Nokia, buy an Apple product.
    Reply | Link to Comment
  •  
    Nov 19 11:33 AM
    Why would he tone down his enthusiasm? I think this is the exact reason why the iPhone is a trend-setter, it's not because of the cool technology that eventually the other companies will copy... it's the whole ecosystem that allows to have very competitive prices for software that you had to pay around 40-60USD and now it can go down to 10USD. It is something to be really excited about, if you're in the technology business of course.


    On Nov 19 09:39 AM the AdMan wrote:

    > While I agree with the general assertions of the article, Jason,
    > your hyperbole undermines your credibility. Tone down your enthusiasm
    > a notch and you'll attract more believers.
    Reply | Link to Comment
  •  
    Nov 19 12:03 PM
    App Store is a brilliant concept and a gold rush. There's no other way to put it. I pull out my iPhone and show people Ocarina or the new Google Mobile App, and boom, done. They are off the to Apple Store. And yes, the store is just only 5 months old in this formulation. Imagine what happens after a year.

    Buy and hold - now there's a novel concept. Once the air clears of one horrible financial story after another every day, people will get comfortable with holding stocks.

    I completely agree with your assertions and I think that what Apple will put together for their Q1'09, in the midst of this downturn, will create a stampede to get into the shares.
    Reply | Link to Comment
  •  
    Nov 19 01:15 PM
    Thus the love/hate relationship with the markets continue. It has been apparent for a number of years that any market Apple is in waits to see what the company will do next, literally waiting for Apple to drag them to the next level. Then when Apple goes ahead and makes the leap the criticisms fly furiously followed by a frantic scramble to catch up (ie. copy) what Apple has done.

    Apple is a truly amazing company and always has been.
    Reply | Link to Comment
  •  
    Nov 19 01:36 PM
    When the iPod succeeded, I never thought Apple would have another hit as big as that. Honestly, how many gamechanging devices can any one company create in a short period of time?

    With the iPhone, I think they are going to exceed what they accomplished with the iPod. No, not 70% marketshare. Just look at Jason's article, he's effusing like a little boy. It's just like the movie, Field of Dreams, when the brother-in-law looks up and asks "when did they get here?" referring to the ballplayers. All of a sudden, they are the biggest cheerleaders around, as if they discovered gold.

    Look at the iPhone, it already generates more in non-GAAP revenues than the iPod, ever did. The iPod had iTunes to drive follow-up sales. You loved your iPod when it shuffled to a song you hadn't heard since highschool. The iPhone is better. It has Apps to drive follow-up sales. Anytime you want to fall in love with your iPhone, just download a new App, a free one or a 99 cent one like Ocarina. Pure joy, that's what it is.

    And, what's great, is it builds on top of the existing iPod ecosystem. The 3rd-party mfrs are already making iPod cases and speakers have very little retooling to make iPhone and Touch cases and speakers. How many iconic devices have a Billion-dollar ecosystem, a virtuous cycle?


    @Dividends, margins are not declining. The more iPhone revenue that hits the bottom line lifts gross margins, as the GM on the iPhone is 47.8%, far above Apple's normal GM of between 30 and 33%. Now, GMs have been guided lower, as the cost of mfring the unibody Macs is expensive, but Apple CHOSE to spend more on mfring. That's a key difference.
    Reply | Link to Comment
  •  
    Nov 19 01:49 PM
    Please don't spook the stock by mentioning "GM".

    All kidding aside buy the stock with Jan 2010 120 put for $133. (9% risk)

    At least you're guaranteed $120 in 14 months and may profit.

    If it falls to $30 take your cash out and triple up...
    Reply | Link to Comment
  •  
    Nov 19 02:25 PM
    The Apps store success is a nobrainer..... it's time to focus on the next wave of projected success...... Apple University!!!!! Is this not a platform for serious computer education the way Steve Jobs intended from the beginning? The MS-PC world has nothing that would be able to compare with this
    Reply | Link to Comment
  •  
    Nov 19 02:28 PM
    Apple's status has gone from a virtual nothing to a media darling in the past few years.

    But I think the iPhone will put them into another category within the next six months.

    iPod touch is brilliant in that it's contributing a great deal to the app store success. Still a few apps require iPhone, such as the amazing new google mobile app for iPhone. And internet everywhere is very cool, as is not paying for that with iPod. You can have the app store either way, and I don't see nintendo, msft, sony, competing with Apple.

    People simply won't pay $60 for a game when they can get it for $5-$10 on the app store.
    Reply | Link to Comment
  •  
    Nov 19 02:43 PM
    I bought 50 shares of AAPL in 1998 at $20/share. That was two splits ago.
    I still have them and I've bought more since. If this rotten market would leave me any cash, I'd buy more today.

    Take a look at the company's financials for crying out loud. The Big 3 Auto makers are looking for a $25B bailout. Apple has that in cash (and would be wise not to invest in Detroit).
    Reply | Link to Comment
  •  
    Nov 19 04:02 PM
    Just a quick question. Where does the information on the 250 million downloads from the AppStore come from?
    Reply | Link to Comment
  •  
    Nov 19 04:51 PM
    Quick question for the AAPL fans: At what price is this stock too expensive?
    Reply | Link to Comment
  •  
    Nov 19 05:48 PM
    I've got the same question as Y.I. Where does everyone think the stock can realistically go in the next 12-36 months? If you can all agree that $90/share is cheap, what is the consensus on what price would be too expensive? RipRagged says he would like to buy more shares at $90 (and owning 200 shares at $20 sure helps his average price paid) but how high can APPL go (according to its fans) before you begin to consider selling?
    Reply | Link to Comment
  •  
    Nov 19 07:46 PM
    If it's such a great company why is the stock down 50% in 2008? It's getting a real beating with no sign of light. I'm long appl but it has not been a fun year for appl holders. Perhaps the short players are the ones with the gains this year.
    Reply | Link to Comment
  •  
    Nov 19 08:17 PM
    you've been writing aapl for a long time and it looks like you're doing what i'm doing. selling the stock and buying the calls.

    you should diversify into other ideas too. stock prices dont always reflect the companies intrinsic value. my uncle put all his eggs into AGU, and i told him there were cheaper companies out there... sure enough. plop and drop.

    right now, apple is a buy. 2 reasons:

    it's a growth stock trading like it's not going to grow anymore.

    when you plant an apple in the ground, it grows a tree. johnny appleseed is back. and someone just burned down his apple orchard. he's planting.
    Reply | Link to Comment
  •  
    Nov 19 08:38 PM
    Dividends Anonymous:
    I agree with your caution, but your analysis might be wrong as well. We don't know. For example, I read recently that people of all income levels are buying the iPhone. The speculation was that for some people this replaces a laptop and a game console so is a good investment whereas the conventional wisdom pegs it as an upscale product.

    Same with the laptops. Apple is not a high-end luxury product though the selling price is higher than that of some other laptops. It may be that when money is tight people will wasting money on throw-away $500 laptops and opt for a $1,200 laptop that will last three to five years.

    Finally, I'll disagree with your characterization of Apple being a consumer trend. That sounds like we're talking about a popular color or the newest hair-style. It misses the underlying utility provided by Apple products. Yes, they might lose share someday, but analyzing their share as a fad or trend is wrong.
    Y.I. :
    As many have noticed figuring the upside to AAPL is very difficult. It is one thing to try to estimate sales of laptops and iPods but then they throw you a curve and come out with the iPhone. Then they throw a change up and come out with the App Store.

    Apple has enormous upside potential. They could become the leading purveyor of home electronics. How much is that worth? Who knows? With no road map from Apple how do estimate this?
    Reply | Link to Comment
  •  
    Nov 19 09:04 PM
    Because most analysts don't understand GAAP.
    Reply | Link to Comment
  •  
    Nov 19 10:32 PM
    Of course Apple's fundamentals indicate a "buy". All of the growth potential that was priced into Apple when it was at 200 has all but disappeared from its price. Economic recession will surely cut into Apple's growth, but not nearly as much relative to the rest of the market.

    On a technical basis, though, Apple is still not in a great place. It's held support at 85, but I wouldn't get in until we see an uptrend in order to avoid the risk of a collapse. Just think if it broke under the 85 level...and you could get it even cheaper. Either way, once AAPL starts heading up, it'll be tough to stop.
    Reply | Link to Comment
  •  
    Nov 20 01:25 AM
    Sounds like a bunch of Apple investors giving each other back rubs.

    First off I'm not an investor I'm a techie I don't even know how I got here but when I scanned the article I felt a sorry for you guys. Now I know why the stock market's where it's at. I'm going to school you now for free before I go to bed.

    Have you heard of something called a G1 phone by Google ?
    Have you heard of something called Open Source ?
    This is my prediction the G1 phone is going to bury the iphone.

    Snapple is proprietary they always have been and they always will be.

    They hit the market just right to take Open Source and turn it into proprietary money. That era just ended with the G1 phone.

    The game is over as far as applications built on anything but Open Source. The Snapple phone is built on Snappleware.

    The G1 is built on Open Source. Take a look at what's under the hood on those Apps you find little databases built on something called mysqlite. I'm not sure what Snapple is built on because I wouldn't waste my time looking at it but you can bet that it's got the Snappleware logo on it some where.

    As the G1 phone picks up steam the Snapple iphone will be relegated to the ash heap just like the drink it was named after.

    Reply | Link to Comment
  •  
    Nov 20 01:31 AM
    One more thing. When the G1 phone hits $139.00 around Christmas you've going to see the iphone market shares drop about as fast as GE.

    I work for non-profit and make about 36k a year. I bought a G1 phone.

    Ok no more free help go out there an buy more snapple.
    Reply | Link to Comment
  •  
    Nov 20 08:32 AM
    Nice article?? I have never read anything by this author that was nice or intelligent. This is an opinion piece with no facts. Anyone can do this type of presentation, he certainly won't make it on "Are you smarter than a fifth grader" program.
    Reply | Link to Comment
  •  
    Nov 20 10:14 AM
    Don't think in terms of text book fundamentals.

    Apple has about 8% of the domestic computer market, and about 3% internationally. MSFT Windows has MUCH bigger numbers, for historic reasons involving the evolution of Enterprise computing; and MSFT has these numbers in spite of: 1) Vastly inferior products (Windows isn't even as good as LINUX, never mind OS X) 2) Extremely high support costs 3) weak development tools. It is my expectation that Apple's computer marketshare will top 50% within 7 or 8 years, picking up momentum after Enterprise starts to capitulate. It will dawn on even the most Neanderthal IT types that Intel makes upgrading to Apple EASY; you can virtualize those nasty old Visual Basic billing and accounting programs at FULL speed on a Mac these days. Even if Enterprise moves more glacially than usual, there's ENORMOUS potential share increase ex-US as we see from the numbers above.

    This is all ON TOP of Apple's cash; it's software offerings (iApps; Filemaker: Logic: Final Cut Pro; iWorks); and the iPhone.

    I'm a nervous investor; I'll sell most of my AAPL around the time they hit 20-25% domestic computer market share. I think that's not even a "stretch goal"; it's eminently "do-able".


    On Nov 19 04:51 PM Y.I. wrote:

    > Quick question for the AAPL fans: At what price is this stock too
    > expensive?
    Reply | Link to Comment
  •  
    Nov 20 10:22 AM
    great article! Buffeted has the same phrasing and style of writing as Warren...interesting. I agree with everything in the article. I wanted the iPhone for my work in education at a zoo..people ask questions and if i don't know the answer, it's impossible to get to a computer (i'm often outside or indoors but by an animal exhibit area) so i use the iPhone to get to the web and answers. it works even better than i thought it would!

    but...here's the thing...so i tried to think of it as a work tool. um, well, then i downloaded the first game. and the next..and then some books, and then more stuff...and finally it hit me... THIS is what will change everything!! and sure enough...everywhere i am, people are interested in the iPhone. if i let them use it for awhile, they give it back...but reluctantly. heh, heh, heh. The stock is well priced. I'm long APPL and i will not tone down my enthusiasm. This company is amazing and deserves the excitement it generates. And in this crummy economy...we can use something to cheer about.
    Reply | Link to Comment
  •  
    Nov 20 11:09 AM
    Earlier this year the Schwartz made a call on oil retracting to $30-50/barrel. Well, here we are. May the Schwartz be with us all!
    Reply | Link to Comment
  •  
    Nov 20 11:54 AM
    One word for you who think AppStore is novel: Ovi

    Hint, it's a Finnish word.
    Reply | Link to Comment