Posts tagged ‘AAPL’
Digging for iPad Gold with Simplicity
We live in a hyper global competitive world, yet some companies manage to find gold while others unsuccessfully dig for their dreams. What is a major determinant of great companies? Apple Inc. (AAPL), and other companies, may include “simplicity” as a key ingredient. Take the iPad for example. Already the company has successfully exceeded iPad sales target thanks to the shrewd marketing of the simple touch-screen technology. Some call it a glorified iPhone because the iPad uses a very similar interface on a larger scale. Nonetheless, the device is getting rave reviews from the likes of US Today, The Wall Street Journal, The New York Times, Newsweek, and as Stephen Colbert smartly pointed out in his video (below), the iPad even makes salsa to boot. Many estimates point to more than a half million units sold in the first few weeks, making the 2010 estimates of 3-4 million units sold likely too low.
Competition Not a Game Killer
How much more competitive can the personal computer and cell phone markets be? According to the United Nations, we will reach 5 billion subscribers in 2010. With pricing pressure galore, and new Asian competitors popping up all over the place, how can companies grow, let alone make profits? Ever since the revolutionary iPhone was introduced in 2007, rivals have attempted to copy-cat the device. In the meantime, Apple continues to gain market share while they sit on close to $40 billion in cash, not to mention the flood of new cash rolling in the doors ($10+ billion in free cash flow generated in calendar 2009).
Innovation and the Remote Control
One key driver of profitability is innovation, but an elegant solution driven by an out-of-touch engineer with consumer demands will only lead to share losses and headaches. I mean how many times have you pulled your hair out trying to navigate through a 100-button TV remote control or screamed in frustration from attempting to learn a non-Wii videogame?
But Apple is not the only company to find simplicity in its quest for profit domination. In order to be a massive juggernaut like Apple Inc., a company’s product or service must gain mass appeal. A key determinant for mass appeal is simplicity. Beyond Apple, think of other dominant franchises that also operate in massively competitive markets like Wal-Mart Stores (WMT) in retail; Starbucks Corp. (SBUX) in coffee; Google Inc. (GOOG) in internet advertising; Coca Cola Co. (KO) in soda; Netflix Inc. (NFLX) in video rentals, among a host of other category killers. Many of these corporate giants offer products we cannot function or live without. I still find it utterly amazing that my children will never know what life was really like without an internet search on Google or a Caffe Misto Caramel Frappuccino from Starbucks.
All Good Things Come to an End
It’s not clear how much longer these titans of corporate America can thrive. By innovating new products that improve lives in some way, these Dancing Elephants will continue to prosper. But nothing in the stock market is static, so investors should pay attention to several potential derailing factors:
- Valuations: Valuations are extremely important in determining long-run appreciation potential, and chasing winners solely based on momentum (see related article) can lead to problems.
- Market Share Losses: What will be the next computer, cell phone, or e-reader killer? I don’t know right now, but eventually the day will come where these leaders will lose market share to a new kid on the block.
- Rising Costs: Competition is not the only factor in leading to slowing sales and declining profit margins. Inflation either related to labor or other input costs can crimp profits and decay investor appetites.
- Too Big to Succeed: There has been a lot of talk about “too big to fail,” but I strongly believe companies reach a point where they become “too big to succeed.” Either the law of large numbers catches up with these companies making simple math more challenging (think of the supertanker Wal-Mart growing its $400+ billion revenue base), or regulatory scrutiny kicks in (think of Microsoft Corp. [MSFT] and Intel Corp [INTC]).
Size: Peeling More of the Onion
Success can continue for these giants, however at some point “size” becomes a headwind rather than a tailwind. Just as simply as a train can speed down a railway at over 100+miles per hour, under the right conditions the train can derail as well. As Warren Buffett states, when referring to a company’s growth prospects relative to size, “Gravity always wins.”
However, investors should remind themselves that gains can last longer than expected too. Finding “ginormous” winners in many ways is like finding a needle in a haystack. But even if you find the needle in the haystack relatively late in a company’s growth cycle (see Equity Life Cycle story), in many instances there can be a lot of appreciation potential still available. Take Wal-Mart (WMT) for example. If you bought Wal-Mart shares after it rose 10-fold during its first 10 years, you still could have achieved a 60x return over the next 30 years.
Time will tell if Apple will strike additional gold with its iPad introduction, nonetheless Steve Jobs has found an element present in many long-term successful companies…simplicity.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, WMT, GOOG, but at the time of publishing SCM had no direct positions in MSFT, SBUX, KO, INTC, NFLX, Nintendo or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Dancing Elephants in a Challenging Economy
To many, the significant rebound in global equity markets, since the March 2009 price lows, has merely been a dead-cat bounce or simply a temporary “sugar high” from the extraordinary fiscal and monetary measures taken by governments all over the world. John Authers, columnist at the Financial Times, captures that cycnical view in his daily column. He believes we are on the cusp of financial dynamics that will “drive a bear market for another two decades.” Ouch – pretty harsh outlook.
Perception Can Differ from Reality
Throughout much of 2009, the better than anticipated corporate results were rationalized as improvements only coming from discretionary cost-cutting. Well, as of last week, 73% of the S&P 500 companies that reported quarterly results exceeded earnings expectations, with 70% surpassing revenue estimates as well. With the 9.7% unemployment improving (at least temporarily), the recovery cannot solely be attributed to cost-cuts.
In the midst of the economic recovery (+5.7% growth in Q4 GDP), other animals beyond deceased felines have joined the party, including dancing elephants. More than seven million jobs have been lost since the late-2007 recession began, yet a broad set of companies have thrived through this horrible environment. The bubble economy has certainly had a disproportionately negative impact on particular areas of the economy (e.g., housing, credit, and automobiles). However, in the midst of the global credit tsunami that engulfed us over the last two years, the largest global economic engine (U.S.A.) was still churning out about $14 trillion in the sales of goods and services. Many companies that were not reliant on the financial and credit markets used their superior competitive positioning to generate significant piles of cash. Instead of piling on additional debt (or diluting owners through share offerings), certain corporations tightened their belts, invested prudently, and stepped on the throats of other irresponsible and reckless competitors, which were forced to recoil back into their caves and bunkers.
Dancing Elephants
Times are tough, right? If that is indeed the case, let’s take a look at a few elephants that are trouncing the competition, even under extremely challenging economic circumstances:
Apple Inc. (AAPL) – Revenue growth +32% ($182 billion market capitalization): In the recent quarter, Apple pounded the competition by selling a boatload of electronic goods, including iPhones, iPods, and Mac computers. Next up, the iPad!
Amazon.com Inc. (AMZN) – Revenue growth +42% – ($53 billion market capitalization): In the fourth quarter ending December, Amazon pulverized peers in a cutthroat holiday by selling lots of Kindles (e-reader), growing +49% internationally, and adding a new Zappos.com shoe and accessory acquisition. Organic revenue growth (ex-Zappos) was still incredibly strong at about +23%.
Corning Inc. (GLW) – Revenue growth +41% – ($28 billion market capitalization): Results were buoyed by demand for its liquid crystal display (LCD) glass as consumers continued purchasing LCD televisions, laptop computers, and other electronic devices. In addition, GLW experienced a resurgence in demand for its emissions control products as the auto industry rebuilt supply. Telecom orders in China were solid also.
Google Inc. (GOOG) – Revenue growth +17% – ($169 billion market capitalization): In addition to the growth in the global search advertising market and YouTube video platform, Google also accelerated the deployment of their mobile platform, including their Android cell phone operating system, and concentrated on the expansion of the display advertising market.
Gilead Sciences Inc. (GILD) – Revenue growth +42% – ($42 billion market capitalization): Growth was catapulted by GILD’s dominant HIV/AIDS product franchise, including Atripla, Truvada, and Viread. Pulmonary arterial hypertension drug Letairis and chronic angina treatment Ranexa also contributed to stellar results.
Intuitive Surgical Inc. (ISRG) – Revenue growth +40% – ($13 billion market capitalization): This cutting-edge surgical equipment manufacturer enjoyed robust expansion from continued robotic procedure adoption and higher da Vinci Surgical System sales.
Intel Corp. (INTC) – Revenue growth +28% – ($113 billion market capitalization): The company’s semiconductor sales growth was fairly broad based across its major segments (Data Center, Intel architecture, Atom Microprocessor/Chipset) as demand recovered and depleted inventories were replenished globally.
Netflix Inc. (NFLX) – Revenue growth +24% – ($3.5 billion market capitalization): Netflix added more than one million new customers in the quarter as they continued to eat Blockbuster’s-BBI (and other competitors’) lunch. In addition, the company’s streaming “Watch Instantly” service continues to gain traction.
Although I do currently own a few of these companies, do NOT interpret this partial list of companies as “buy” recommendations – in fact, some of these stocks may be excellent “short” ideas. Regardless of how sexy growth may be, investors should never ignore valuation (read more about valuation). As stated at the beginning of the article, I mainly want to emphasize that trillions of commerce dollars are being transacted, even in demanding economic times. It just goes to show, one can turn lemons into lemonade. Or said differently, even elephants can be trained to dance.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, AMZN, and GOOG, but at time of publishing had no direct positions in GLW, GILD, ISRG, INTC, BBI, and NFLX. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Top 10 Predictions for 2010
#10. Federal Reserve Chairman Ben Bernanke decides pundits were wrong on the housing bubble, so he sets Fed Funds target rate at negative -3.0%. Small businesses start receiving loans.
#9. As part of healthcare reform, Medicare is extended to teens for collagen lip augmentation.
#8. Goldman Sachs, Morgan Stanley, and Citigroup form tri-merger to guarantee they are too big to fail.
#7. Tiger Woods poses in Playgirl to pay for pricey revised terms in his prenup. (see previous post)
#6. Gold spikes to $3,000 per ounce as government subsidizes dental chains in “cash for crowns” gold melting campaign. Consumers get extra cash, but Jujube candy sales plummet. (see previous post)
#5. Bernie Madoff escapes from prison. A cigarette Ponzi Scheme created by Madoff generates enough money to bribe guards.
#4. Apple introduces iPot – a combination iPhone and toilet.
#3. Kazakhstan pays Brazil, Russia, India and China a 5% GDP royalty to be added to the emerging B-R-I-C-K countries. A win-win for all parties, including spelling teachers around the world.
#2. Timothy Geithner retires from Treasury after making millions for being cast as Eddie Haskell in new remake of Leave It to Beaver movie. (see previous post)
#1. Oprah decides to halt her retirement plans. Instead, she signs me to a multi-million dollar deal to co-host a stock & gossip show with her.
HAPPY 2010!!
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including BKF) and AAPL, but did not have any direct positions in any stock mentioned in this article at time of publication (including GS, MS, C, and GLD). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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