Apple Inc. (NASDAQ:AAPL)’s Phillip Schiller responded to critics of Apple’s recent line of products by stating “can’t innovate? My ass!” Well, I for one was very disappointed with what I have seen so far from Apple’s developers conference. I’m certainly not going to recommend dumping the stock, but following Tim Cook’s recent keynote speech, I think investors should stand on the sidelines and wait to jump in when the company inevitably innovates again.
Does Apple have the greatest advantage in business?
Apple Inc. (NASDAQ:AAPL)’s 500 million iTunes and App Store account holders is up 55% from the end of 2011, and is projected to hit 600 million by the end of 2013. Many of these accounts also use Apple’s other services, and purchase the newest hardware devices. This user base is second only to Facebook Inc (NASDAQ:FB) in the world of tech. The difference between Apple and Facebook is that Apple users are spending money, to the tune of an average of $329 per account, which translated to $95 in FCF last year. Facebook Inc (NASDAQ:FB) might have more users, but Apple Inc. (NASDAQ:AAPL) has what Facebook can only dream of: paying customers. In fact, Facebook recently stopped showing search ads in its search features, which will reduce the number of its ad products by over 50%. A major transition like this could increase risks to the company’s near-term revenue prospects. As Facebook Inc (NASDAQ:FB) is moving past peak monetization and beginning to see a declining user base, investors should stay clear of Facebook shares.
So what exactly is Apple doing with this advantage? The potentials seem endless, yet this goldmine remains relatively unexplored. One of the opportunities is mobile payments, where Apple Inc. (NASDAQ:AAPL) can leverage its large user base, secure platform, and acquired AuthenTec technology.
iRadio isn’t a Pandora Media Inc (NYSE:P) killer
An Apple radio has been highly anticipated as being a Pandora-killer. Analysts predicted that Apple could easily attract more users than Pandora Media Inc (NYSE:P)’s 200 million users. Pandora’s stock saw a lot of selling pressure in the days before the iRadio announcement. Pandora is already an established player in the internet radio market, with a net addition of 700,000 paying subscribers up 114% year over year bringing the total to 2.5 million. Pandora Media Inc (NYSE:P)’s revenues are expected to rise 48% this year, and unlike Apple Inc. (NASDAQ:AAPL) shares are up in 2013, delivering an almost 100% return compared to Apple’s 20% loss.
The Apple conference has come and gone, and with iRadio officially announced it is clear that the limited and somewhat disappointing features pose no threat to Pandora. The iRadio shares many features with other web-radio products that already exist. Though there is no doubt that that the iRadio increases the competitive pressure, Pandora Media Inc (NYSE:P)’s service still has a longer reach because it is available on other platforms besides Apple Inc. (NASDAQ:AAPL) including 100 new car models. Moreover, Apple’s deals with the major record companies are similar to those of Pandora. Shareholders can breathe a sigh of relief as the $14 billion radio market is large enough for multiple internet players. A declining Pandora Media Inc (NYSE:P) price can prove to be an attractive entry point for new investors.
Product refresh and new toys
Apple Inc. (NASDAQ:AAPL) should be delivering new iPhone and iPad refreshes in the fall, just in time for the ever popular holiday season. A new iPad would be a welcome move as the tablet market is projected to be larger than the PC market.
New products investors (and clients) are waiting for include a potential smart TV or watch product.
Cheap iPhone? Tens of millions of people in China are waiting
A new low-end iPhone intended for emerging markets can drive Apple’s emerging market sales in countries like China. China is currently Apple’s second largest market after the United States, and if things are done properly can easily surpass the U.S to be the largest client. Most notable announcement from Apple Inc. (NASDAQ:AAPL) is support for Tencent Weibo, the addition of a Chinese-English dictionary, and improved Chinese-language input, which includes handwriting recognition for multiple Chinese characters.
Investors looking to play the Apple expansion to China should invest in China Mobile Ltd. (NYSE:CHL), the largest carrier in the world in terms of users with over 730 million, and the fastest growing carrier in China. How big is China Mobile? For starters they added 4 million users in April alone, and their entire user base is larger than the world’s second and third largest carriers combined. Apple is losing ground in China to competitors like Samsung, so an agreement between Apple Inc. (NASDAQ:AAPL) and China Mobile Ltd. (NYSE:CHL) would be a match made in heaven. A mid-priced iPhone available to a price sensitive market (that can even be given out for free on a contract) is a huge win win for both sides.
So what can investors expect?
Simply speaking, there are three scenarios. A bull case where Apple fires on all cylinders, a base case where Apple hits on some notes, and finally a bear case where nothing goes right.
Bull case: Apple maintains its dominance in the tablet market, even as it establishes a new dominance in the lower priced smartphone segment with carrier expansions. In addition, Apple Inc. (NASDAQ:AAPL) launches differentiated services that target their half a billion strong user base to boost up revenues. I wouldn’t be surprised to see an EPS of $48 a share and trading at a 15 times multiple, which translates to a $670 share price.
Base case: Apple launches new products in the fall but new carriers, product categories, and services do not immediately materialize. EPS will still be a respectful ~$40 a share, and trading at a 14 times multiple will make today’s shares cheap compared to a hypothetical valuation of $560.
Bear case: Apple loses market share big time to their competitors across all fronts. Revenue is flat, shipments of new iPhone and iPad fall year over year. EPS can ring in at $35-$38 a share and a disappointing turn of events would justify a lower multiple valuation, perhaps 12, pricing the shares at a range of $420-$456.
Closing remarks
Apple Inc. (NASDAQ:AAPL) is the type of company that investors need to watch very closely. Any one of the catalysts I have mentioned above can bring a huge boost to the company’s shares and restore the confidence that was lost. I believe that the growth prospect for Apple is limitless – upgraded hardware, new products, new markets, new services can all be a reality that will make both shareholders, investors very happy.
Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL), China Mobile Ltd. (NYSE:CHL), and Facebook Inc (NASDAQ:FB).
The article Apple Should (And Could) Do So Much Better originally appeared on Fool.com.
Jayson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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