Apple Inc. (AAPL) is expected to achieve sales growth of above 50.0% in the next two years aided by higher demand for mobile applications and devices such as iPad and iPhone that run them, according to research firm Forrester Research Inc. (FORR).
According to Forrester, Apple is expected to earn more revenues than International Business Machines Corp. (IBM) in 2012 and Hewlett Packard Co. (HPQ) in 2013. Forrester forecasts Apple to generate revenues of approximately $200.0 billion at current growth rates by 2012.
HP witnessed sales of $126.0 billion in the year that ended in October, 2010 while IBM’s revenue was $99.9 billion in the year ended on December 31, 2010, thus making them the largest technology companies, in terms of sales. Apple touched $65.2 billion in the year ended in September 2010.
However, it is worth noting that Apple is the #1 technology company in the world, by virtue of market capital and trails only Exxon Mobile Corp. (XOM) among all industries in that measure.
Apple’s Key Growth Catalysts
Apple’s net sales in 2010 increased $22.3 billion or 52.0% from 2009. Assuming an annual growth rate of 50.0% year over year, Apple will generate close to $100.0 billion in revenues in 2011 and $150.0 billion in 2012.
This strong growth is expected to be driven by the mobile applications boom. According to research firm Gartner, worldwide downloads in mobile application stores will exceed 21.6 billion by 2013, from approximately 4.5 billion in 2010. Mobile application stores’ worldwide download revenue is expected to grow to $29.5 billion by the end of 2013.
Games will remain in the #1 position, but Gartner is predicting that mobile shopping, social networking and productivity tools will grow and attract higher revenues.
We believe Apple is enjoying its first mover advantage in the mobile application market, based on strong demand for its mobile devices iPhone and iPad and its App store. App store continues to witness unparalleled success with more than 300,000 apps and over 9 billion downloads to date.
iPhone: The company launched its flagship smartphone device iPhone back in 2007. According to Apple, the original iPhone took just 74 days to sell 1 million units. Apple came out with 3 new iPhone models, namely iPhone 3G in July 2008, iPhone 3GS in June 2009 and iPhone 4 in June 2010 through its then exclusive carrier, AT&T Inc. (T).
Apple sold more than 1.7 million iPhone 4 units in just three days after its launch. The new iPhone 4 features FaceTime, a video chat application that enables multitasking, such as simultaneously listening to music and reading email via updated iPhone software (OS 4).
Apple has sold approximately 40 million units of iPhone (all generations taken together) in fiscal 2010, up 93% from 2009. Revenues totaled $25.2 billion, up 93.0% year over year. In the first quarter of 2011, ending in December 2010, total units sold were 16.24 million, up 86.0% year over year. iPhone sales during the quarter amounted to $10.1 billion.
The iPhone continues to be a major success for Apple, given its strength in overseas markets, particularly Asia, Europe and Japan. The company had iPhone distribution agreements with 185 carriers in 90 countries at quarter-end. iPhone 4 is currently being offered through AT&T and Verizon Wireless in US.
We believe the upcoming release of iPhone 5 (expected in June 2011) will be a major catalyst for Apple, as the platform remains Apple’s key growth driver. Its continuous effort to expand into international markets (two-thirds of iPhone sales are now coming from overseas) will drive much higher revenues going forward.
iPad: Apple launched its tablet computer iPad in April 2010. Apple sold more than 300,000 iPads on the very first day of its launch in April, 2010. The company sold more than 15 million units in the first nine months of its launch, which included 7.3 million to holiday shoppers during the December quarter.
Recently, Apple launched its much-hyped tablet computer iPad2, which received strong response in its debut weekend. The analysts believe that Apple may have sold more than 500,000 iPad2s, after retail outlets ran out of the tablet-style device since its arrival on March 11, 2011.
On March 25, 2011, Apple began selling its iPad 2 in Australia and New Zealand, as part of a release program in 25 countries including the U.K., France, Switzerland and Germany.
We believe that the iPad has the potential to help Apple sustain its recent growth momentum and will bolster the company’s long-term earnings. We also believe that the international roll out will lead to increased revenues and higher margins from additional sales.
However, Apple is facing strong competition from Motorola Mobility (MMI), Samsung Electronics Co., Research In Motion Ltd. (RIMM) and Hewlett-Packard Co. in the tablet computer market.
Overall, there are 102 tablets from 64 makers either on sale or in development, according to consulting firm PRTM. iPad 2 faces stiff competition from RIM’s PlayBook and Motorola’s Xoom.
According to research firm IDC, Apple’s tablet market share slipped to 73% in the December quarter, from 93% in the September quarter. Despite this, IDC expects Apple to maintain 70%–80% market share through 2011, primarily due to the launch of iPad2. Based on IDC estimates, Apple will ship a minimum of 35 million tablets in 2011.
According to Forrester, the iPad 2 will account for at least 20 million tablet computer sales in the U.S. this year (83% of the market). One analyst, Sanford C. Bernstein & Co. forecasts revenue of $16.3 billion from iPad 2 in 2011.
However, Apple is facing component shortages after the March 11, 2011, earthquake and tsunami in Japan. According to the research firm IHS ISuppli, the iPad 2 comprises five parts made in Japan — NAND flash from Toshiba Corp., dynamic random access memory from Elpida Memory Inc., an electronic compass from AKM Semiconductor, the touch-screen overlay glass likely from Asahi Glass Co. and the system battery from Apple Japan Inc. This could be a dampener.
Conclusion
Currently, the Zacks Consensus Estimate is pegged at $99.95 billion (53.2% year over year) for 2011 and $117.54 billion (17.6% year over year) for 2012, which reflects sluggish growth in 2012.
We believe Apple is well positioned to achieve strong top-line growth over the long term based on product innovation, strong sales from iPad and iPhone and helped by growth in Macintosh.
We expect Apple to introduce new products in 2011 to compete against new Android-based phones and tablet PCs. We are also positive on the addition of Verizon as a carrier that will help it double its customer base.
However, Apple thrives on new product innovation and we believe it will be challenging for Apple to maintain its dominant position in the industry once its founder Mr.Steve Jobs steps down. Although, research firm Forrester believes Apple probably has built a product pipeline to last three to four years after Jobs leaves, it will be interesting to see how the new management responds to the growing demands of the industry.
We maintain an Outperform rating over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the near term.
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