What the iPad 3 tells us about Apple’s competitive strategies (and how it will use that $100 billion in cash)

By now every techno geek in the known universe has weighed in on what everyone but Apple (AAPL) calls the iPad 3. The general impression I get from reading the comments is the rather typical wish that Apple had done more. The quad-core processor isn’t as fast as the one on the iPhone. Apple didn’t significantly reduce the weight of the new iPad. The form looks the same as the current iPad. There’s even the wishful longing for Siri to talk to.

What interests me, however, about the iPad—since I’m a geek of a different colour—is what it tells us about Apple’s competitive strategy.

I’ve reached four conclusions. Read more

After Apple (AAPL) blew away analyst consensus earnings estimates of $10.07 a share on January 25 by announcing December quarter earnings of $13.87, Wall Street analysts rushed to push up their price targets for Apple stock. FBR Capital put in a one-year target of $525. Morgan Stanley said $515. Citigroup went wild and said $600 a share.

How quaint.

The stock, which closed at $446.66 before the company announced earnings, hit $509.46 a share on February 14. It pegged a high of $526.29 the next day. And despite some amazing volatility recently, shares closed at $516.29 on February 23.

Wall Street analysts rushed back to their models. $570 a share said Oppenheimer. Credit Suisse upped that with $600. Morgan Keegan and Canaccord went to $650.  Searching on February 22, I found a price target on SeekingAlpha.com of $790.

It’s enough to remind you of the heady days just before the dot.com crash in 2000 when analysts raced to see who could get 15-minutes of Internet play by topping the audaciously higher target price of yesterday with one even more outrageous today. In October 1998 it was Amazon.com (AMZN) to $400. By December 1999 it was Qualcomm (QCOM) to $1,000.

We all know how that came out. The technology-laden NASDAQ Composite Index hit its all time closing high of 5048.62 on March 10, 2000—and then fell off a cliff. By May 2007, it had clawed its way back to half of its 2000 high. On February 22 the index closed at 2933.17.

Investors who remember the technology crash of the NASDAQ fear that if they buy Apple now they’re jumping in just before the plunge. And even more frightening, some investors who remember the 2000 crash also think of Apple as company built on fashion. They worry not just about a replay of 2000 but what happens when Apple misses the next fashion trend.

To these investors I’d say, Hey, it is different this time. Apple stock cheap right now. Yes, you heard me, cheap—because of these very worries. I think $600 a share is a very conservative target price for Apple. I think you have to go out to $650 before you come up with any barriers that might limit the stock—and even then the barriers are mostly in the heads of investors.

Apple sports the biggest market cap of any company in the world–$478 billion–but it trades at just 12.1 times projected fiscal 2012 earnings per share. (Apple’s fiscal year ends in September.) Take away net cash of $100 billion (yes, that’s billion) and the stock is even cheaper. Sales grew by 66% in fiscal 2011 and Standard & Poor’s forecasts 48% sales growth in fiscal 2012. And gross margins are climbing, not shrinking, with size. Standard & Poor’s forecasts that 2012 gross margins will climb in fiscal 2012 from Apple’s 40% in fiscal 2011. This isn’t a stock trading at 100 times revenue and on the distant promise of earnings.

Here you’ve got a company that has grown earnings per share by 82.7% in fiscal 2011, by 66.9% in fiscal 2010, and by 69.4% in fiscal 2009, and it trades at a trailing 12-month price to earnings ratio of 14.6? The price to earnings/growth rate (PEG) ratio for this stock on the projected five-year earnings grow rate is just 0.62. (The PEG ratio divides the PE ratio by the earnings growth rate to give an investor an idea of how cheap of expensive a company’s growth is.) Know what kind of companies have trailing 12-month PE ratios like that? Solid but stolid Blue Chips like 3M (MMM) at 14.72 or electric utility like American Electric Power (AEP) at 12.77. And you know what the PEG ratios on projected five-year earnings growth are for these stocks? For 3M it’s 1.38—growth at this stock costs more than twice as much as at Apple. The PEG for American Electric Power is 3.37.

If there’s an expensive stock in this bunch, it’s not Apple but that solid utility stock.

And to these investors I’d say, despite all the hype around Apple, I think it is one of the least understood stocks on the market. Apple isn’t a gadget company at the whim of fashion. It has built at least two major competitive advantages. It keeps investing heavily in each. And it looks like each advantage is just getting stronger. I don’t see anyone out there ready to eat away at Apple’s two major edges.

And what are those advantages? Read more

Apple (AAPL) reported December quarter (first quarter fiscal 2012) earnings yesterday after the New York close that blew away Wall Street estimates. And then the company raised guidance for the March 2012 quarter. The stock is up 6.9% as of 11:45 a.m. in New York in a generally lackluster U.S. market.

Should you buy? Well, the stock is still very cheap—especially once you subtract the company’s nearly $100 billion in cash. But you might get a better entry point sometime in the next three months—the March quarter is always weak for Apple. And while that weakness is absolutely predictable, many investors still sell on that worry. The only reason to rush in today is if you think that Apple will do something soon with its cash—like pass out a special dividend—that would send the stock up even further in the short-term.

Earnings for the December quarter of $13.87 a share handily beat Wall Street expectations of $10.07 and the company’s guidance of $9.30. (You might think that the company set guidance so low to make sure that new Apple CEO Tim Cook would be able to report a huge surprise to make up for Apple missing Wall Street projections last quarter, Cook’s first as CEO after the resignation of Steve Jobs. If you think that, I wouldn’t argue with you.)  Revenue for the quarter came in at $46.3 billion, well above Wall Street projections for $38.8 billion in revenue.

I can’t find a product segment that disappointed in the quarter. Read more

Apple’s shares start to recover from their earnings miss–but I’m still in bargain-hunting mode

Could today mark the turn for Apple (AAPL)? Apple shares are up 2.3% today, November 15, as of 2:45 p.m. New York time. An up day has been unusual for the stock ever since it fell short of analyst expectations when it announced earnings for the fiscal fourth quarter (that ended on September 24) on October 18. But today the shares have advanced on reports of October retail sales that show solid growth in sales of consumer electronics. And that has raised hopes for holiday sales of electronics—including the iPhone and the iPad.

Even with today’s gain the shares are down 8.2% since the October 18 high at $422.24.

I think it’s too soon to say that Apple shares are headed straight up from here. A stock doesn’t shake off its first earnings miss in six years quite that easily. I think Apple still has to prove that last quarter was a fluke by reporting stronger than expected earnings for the fourth quarter.

But I think we’re seeing the beginning of the retreat of the pessimism that has surrounded the shares ever since the death of Steve Jobs.

The molehill problem in third quarter earnings—that Apple had sold fewer iPhones than projected probably because the new iPhone 4S had cannibalized sales of older models—has somehow turned into a mountain that Apple shares haven’t been able to climb. Read more

Serves Apple (AAPL) right for selling 4 million of its new iPhone 4S handsets over this past weekend. Yesterday after the market closed Apple announced that anticipation for the new phone cut into iPhone sales for the company’s fiscal fourth quarter that ended in September and held the company to a 54% gain in earnings.

That kept earnings per share to just $7.05, well below the $7.38 a share that Wall Street had been expecting. (But up from the $4.64 a share reported in the fiscal fourth quarter of 2010.) Revenue climbed to $28.3 billion, a 39% increase. Wall Street projections had called for revenue of $29.7 billion.

The iPhone problem started with Apple’s developer conference in June when the company introduced a new iPhone operating system and set off rampant speculation that a new iPhone was in the works for ….

Well, that was the trouble. Read more