Winnipeg Free Press - PRINT EDITION

Apple's unique quandary won't hurt bottom line

At least not yet as company continues to soar

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Apple is the most valuable company in the world, with a value of US$540 billion and a share price of almost $600.

You may find this strange, but although that's a lot of money, one could argue Apple's valuation isn't expensive.

For starters, the company has about $100 billion in cash. So if you were to buy the whole company, besides all its other assets, you'd get $100 billion. Effectively, you can reduce the cost of the company by that amount so Apple's valuation is actually "only" $440 billion.

What do you get for that tidy sum? Some real estate in Cupertino, Calif., a lot of patents, some high-tech gear and office equipment. Most important, you get a loyal, enormous and growing customer base that delivers steadily rising revenues and profits.

Apple is expected to earn $45 billion this year. It earned about $33 billion last year. So if you were to buy the whole company, assuming it grows about 10 per cent a year (that's less than the current rate) you'd be paid back in about eight years, including the cash in the bank. After that, all of the profits would be yours, so you'd be making about $80 billion a year. The company's valuation isn't very expensive, frankly.

So the question is why is this amazing company, that's so good at research and development and marketing, and owns one of the most powerful brands in the world, available for sale at such a modest price?

It's because of a unique problem that, as far as I can see, only bedevils Apple: The company invents brilliant and elegant products, but the products "cannibalize" sales of other Apple products.

Take the iPod. Apple sold 54 million iPods in fiscal 2009 (the company's year end is September). In fiscal 2011, it sold only 43 million. This year it will sell even less of them. Why are iPod sales drying up at such an alarming rate? Simple: People who buy an iPhone don't need an iPod, because the phone plays music and videos.

The good news is faltering iPod sales aren't that costly. In 2009, sales of iPods totalled $8 billion. This year they might be $5 billion. But total sales are running north of $100 billion. And iPhone sales were almost $50 billion last year, about twice the year before.

But this cannibalization is happening elsewhere, too. For example, laptop sales were $15 billion in 2011, up nicely from the year before. But iPad sales were $20 billion, up fourfold. Since most of us use our laptops almost exclusively for email, web browsing, word processing and entertainment, I guarantee you iPad sales are already eating into laptop revenues, and that will probably accelerate as many Mac users decide not to upgrade their computers because they've got an iPad and don't need to. The iPad does what most of us use our computers for. Keep in mind the iPad was only introduced in fiscal 2010.

The iPod and laptop sales account for a fifth of total revenues, so this self-inflicted erosion isn't trivial.

The good news for Apple is none of its new products, so far anyway, is stealing dollars away from iPhone sales. The truth is Apple is now a phone company, like RIM and Nokia. Almost half its business and even more of its profits relate to iPhone sales, which will be more than $50 billion this year alone.

It's impossible to predict what products the company will introduce next -- some kind of a television device has been rumoured -- but whatever it is, it will likely create revenues and claw some back in another area. That's why this wonderful company can be had for a mere $540 billion.

Fabrice Taylor is an award-winning financial journalist and analyst, and author of the President's Club Investment Letter. Email him at:

fabrice.taylor@gmail.com

Republished from the Winnipeg Free Press print edition March 17, 2012 B8

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