AAPL > MSFT

It was bound to be again as it was prior to 1990.

Apple’s Market Capitalization is once again greater than Microsoft’s.

Apple’s R&D Efficiency

In fact it’s rumored that Apple brought the iPhone to market for a mere $150 million, doing so organically without acquisition outside of a touch gesture recognition company named FingerWorks.

This begs the question: how in the world did Apple grow the iPhone platform organically from zero into the most profitable cell phone business in the world with so little investment?

via Apple’s Incredible Efficient Growth.

Apple has always spent below the industry average for R&D.

Here are Apple’s trailing 9 quarters R&D as percent of sales:

3.42% 3.86% 2.59% 2.65% 3.51% 3.50% 2.93% 2.54% 3.16%

Nokia spends at least 10% of sales on R&D and Microsoft at least that much.

But these numbers are not as spectacular as the comment above that iPhone development cost was $150 million.  To date, the product has generated $31.4B in sales.

As the article points out, Apple spent $4.6B on R&D over the past four years and Microsoft spent 7x that or $31 billion. Cisco and Intel spent 4x.

The Next Billion Users

Five weeks ago Apple forecast 100 million iPhone OS devices will be sold by summer. This was fairly easy to predict but the question comes up: when will the next 100 million be sold? And what about after that?

The iPhone OS three-legged platform is now the fastest growing platform ever and enjoying network effects which naturally accrue to platforms under solid custodianship. However, I am observing signals from Apple that they intend this platform to become the global standard for mobile computing, which, in today’s world, means targeting 1 billion users. Here are the signals that I’m noting:

1. Geographic and cultural universality. What plays in Peoria should play in Beijing.  As it has shown by being big in Japan, the iPhone crosses over cultural idiosyncrasies. Not long ago it was taken for granted that “mobile tastes” differ and “one size does not fit all” in mobile phones hence the need for hundreds of phone models in every portfolio. Apple has completely destroyed this myth. (One could ask why should mobile computers be polymorphous when their slightly larger cousins the laptops are rigidly monotonic?) By broadening the platform with multiple screens and connectivity options, Apple is cleverly spanning the jobs that he platform can be hired for.
2. Avoidance of a pricing umbrella.  Note that this does not mean being low prices, but rather, the protection of their franchise through pricing. Apple has developed a way to stretch a single product across multiple price bands, and carefully builds product to price and margin targets that have strategic placement.
3. Product cycles and product ramps. Apple has imposed upon itself a yearly product cycle for the iPhone and the iPod.  This is a brilliant move because it keeps the product fresh without having it seem disposable.  It also keeps competitors within its turning radius. However, the challenge is that the distribution network has to be filled rapidly and drained rapidly to maximize availability. This gets harder and harder as the volume grows. Imagine having to manufacture and ship into the channel a billion devices in less than a quarter.

I would point out that all these are marketing, not technical challenges. They are thinly disguised questions about product placement, portfolio, pricing, production and distribution–classic Marketing 101. (Promotion, which is what most people equate with marketing is not particularly challenging, especially for Apple who mostly does it through PR).

It is comforting perhaps to know that Apple is the best marketing organization in the industry today. So to answer the question, 100 million is in the rear-view mirror, 200 million will come up in no more than 2 years and 1 billion will take 5 to 8 years.

Apple’s Growth Scorecard

Apple’s growth and its disconnect with valuation has been a common theme on this blog. For another look at this conundrum I present here a table of Apple’s year on year sales growth by product line and its top and bottom lines.

I color coded the values so that a darker green signifies higher growth (and red, negative growth)

I call this the growth scorecard.

What does this scorecard say about the previous 24 months?

• Earnings never grew slower than 30% for any quarter except for one quarter when the comp was ridiculously high at 155% (on the back of iPhone 3G launch).
• Throughout the recession Apple grew sales.
• The worst growth performance was on peripherals which is Apple’s smallest business
• The fastest growth was the iPhone, now Apple’s largest business.
• The iTunes store grew sales consistently throughout the previous 24 months.
• Growth has been positive (green) across all lines for the past two quarters and has been accelerating.

My estimate for the current (June) quarter is that Net Sales will grow by 47% y/y and Earnings will grow by 60%.

Apple’s Valuation Struggle

I don’t know how many times I can re-write this story but here goes another try.

In the graph below I show Apple’s historic share price overlaid Apple’s P/E (with and without cash).

The share price is the line in green with the scale on the right and the P/E (trailing twelve months ex-cash) is shown in blue with the scale on the left.  The P/E including cash (which is what is usually cited) is shown in yellow.

As the graph shows, while the stock has risen, the P/E has fallen.  This is due to earnings accelerating faster than the stock price. As valuation is usually correlated with growth, it stands to reason that Apple continues to be discounted as a growth stock.

Apple P/E Briefly Drops to 20

Apple’s Price/Earnings ratio (trailing twelve months) based on restated (non-subscription) accounts.

Grey line is P/E ex-cash.

Analysts predict iPad sales

After 1 million units sold in 28 days, it’s time to review the analysts’ predictions:

First year iPad unit forecasts (sourced from TMO Finance Board)

• Brian Marshall, Broadpoint AmTech   7.0
• David Bailey, Goldman Sachs           6.2
• Kathryn Huberty, Morgan Stanley     6.0
• Shaw Wu, Kauffman Bros.              5.0
• Mike Abramsky, RBC Capital Markets   5.0
• Gene Munster, Piper Jaffray           3.5
• Ben Reitzes, Barclays Capital           2.9
• Keith Bachman, BMO Capital         2.5
• Jeff Fidacaro, Susquehanna           2.1
• Chris Whitmore, Deutsche Bank       2.0
• Scott Craig, Merrill Lynch               1.2
• Peter Misek, Canaccord Adams       1.2
• Doug Reid, Thomas Weisel             1.1
• Yair Reiner, Oppenheimer             1.1

Looks like at least half of these guys have already blown it.

For the record, in January I forecast 6 million units for calendar 2010 (and 10 million in first year).

Thanks to MfH for the tip.

iPhone OS download rate 10X Blackberry

Today, Research in Motion co-CEO Jim Balsillie said his BlackBerry App World has 20 million registered users and nearly 1 million daily app downloads.

via Apple Doing 10-20X As Many App Downloads A Day As BlackBerry.

As previously stated, The App download rate increased to a record 10,753,000 per day during the last 90 days.  That makes the download rate for the iPhone platform 10x that of the Blackberry Platform.  The iPhone platform is nearing 100 million installed base.  Blackberry is citing 20 million registered users.  I think everyone is pretty clear on where this is going.

Tim Cook on iPad vs. Netbooks: “It is sort of 100 to zero”

In terms of the iPad competing for customers who are considering a netbook, you know I am the wrong person to ask that. To me it is a no-brainer. iPad/Netbook, it is sort of 100 to zero. I can’t think of a single thing the netbook does well. iPad does so many things very, very well. I am already personally addicted to mine and couldn’t live without it.

via Apple Inc. F2Q10 (Qtr end 03/27/10) Earnings Call Transcript — Seeking Alpha.

Tim Cook on Apple TV: 34% growth but tiny addressable market

The units were up for the quarter 34% year-over-year but the absolute number of units are still small and we still classify the product as a hobby for the company. I would just repeat what I have probably said before. If you look at the other markets that Apple is in, the Macintosh competes in a market of 300 million or so units a year. The iPhone competes in a market if you look at all phones of maybe 1.2 billion a year. The iPod competes in a market that has 100 million plus or minus units per year.

So these are enormous sized markets and clearly the market that AppleTV is in is not in our view nearly that large as yet. That is the reason we classify it as a hobby so that no one gets the wrong impression that we have a vision that it is anywhere close to the size of the other businesses. However, a number of us love the product, use the product and we continue to think there is something is something interesting there and we continue to invest in it.

via Apple Inc. F2Q10 (Qtr end 03/27/10) Earnings Call Transcript — Seeking Alpha.

Tim Cook on iPhone Distribution: eight new carriers, three remain exclusive, total of 151

You can look at the number of carriers we added which was eight as I had mentioned, and out of the 151 carriers at the country level it is a good number but not a significant number. Obviously the existing carriers performed very well in addition to the adds.

… There are three main countries where iPhones have a contractual exclusive relationship. That is the United States, Germany and Spain. There are a few smaller countries where we have an exclusive or co-exclusive but those three are the ones that are the major markets. Over the past year we have moved a number of markets from exclusive to non-exclusive. In each case as we have done that we have seen our unit growth accelerate and our market share improve. But that doesn’t mean we view that formula works in every single case. I would just sort of reiterate what I did last time that this is how we are learning so far. That is the result we have seen so far. We think very carefully about each of these at the country level to conclude what is in our best interest.

via Apple Inc. F2Q10 (Qtr end 03/27/10) Earnings Call Transcript — Seeking Alpha.

Tim Cook on iPhone in China: 900% growth

China has been interesting. If you look at greater China which we define as mainland China, Hong Kong and Taiwan, the iPhone units were up year-over-year over 9 times. We added another 800 points of distribution in China. The revenue, we have never released this number before but I will do this in this particular case, through the first half of the fiscal year that we just completed for the six month period our revenue from greater China was almost $1.3 billion and this is up over 200% year-over-year. So we are well pleased with how the company is positioned to take advantage of the growth in greater China.

via Apple Inc. F2Q10 (Qtr end 03/27/10) Earnings Call Transcript — Seeking Alpha.

Peter Oppenheimer, CFO added:

We are very excited about China not only for retail but for Apple. Tim talked about the success we have had in greater China to date with revenue being up about two time’s year-over-year. With regard to retail stores we will open two stores in Shanghai this summer and with targets of having about 25 stores open in China by the end of calendar 2011.

As a point of reference, the Mac business growth in Asia is also pretty impressive: Mac units in APAC grew 67% vs. 20% in the Americas, 18% in Japan and 37% in Europe.

Apple Business Review: Cash Growth

Apple’s cash continues to grow.  This quarter it reached $41.7 billion, a sequential increase of $1.9 billion.  This time last year, the cash was about $29 billion with a y/y increase of nearly $13 billion.  This is equivalent to $45.19 per share.

Many financial sites  report this figure incorrectly (e.g Yahoo finance with $24.8 billion) and are often cited by journalists.  This error is because Apple holds much of its cash in “Long-term marketable securities” and some choose to report only “short-term” holdings as cash.  Apple’s “Long-term” securities are the same as their “short-term” securities, namely US Treasury bonds.  The distinction is in the maturation date, not their liquidity.  Apple makes a clear statement of their cash position every quarter and highlights the composition of their holdings.

Note that more than one third of cash is currently in Long-term securities and exclusion of that item would indicate a decrease in Apple’s cash.

Note also that cash grows in a seasonal pattern. Q1 is typically the lowest growth, and Q4 the fastest.

The graph below shows Apple’s cash by security.

Apple Business Review: Product Line Prices

Apple’s ASPs have been holding quite steady.  Gains in the iPod are offset by losses in the Mac. Here are the current ASPs.

• iPhone $622.15 (includes accessories)
• Mac $1,278
• iPod $171

A historic perspective for ASP growth is shown in the graphs below:

Apple Business Review: Product Line Margins

Apple’s overall gross margin reached 41.67%, the second highest ever.  The highest was 41.82% last Fall.  This should not come as a surprise as the iPhone continues to make up an increasingly larger percent of Apple’s total sales.  The gross margin on the iPhone continues to be well above all its other product lines (except for software).

Although Apple does not provide product line GM break-out, some intelligent guessing can be made.  Here are my estimates:

• iPhone 59%
• Mac 27%
• iPod 28%
• iTunes 10%
• Periph 45%
• Software 80%

A historic perspective for gross growth (iTunes, Peripheral and Software sales growth) is shown in the graph below.