Saturday, April 14, 2012

The company that will be bigger than Apple

Who or what can stop the seemingly irresistible rise of Apple Inc, now the world's most valuable company by quite some distance (see Top 5 below)?

1. Apple $564 bn
2.  Exxon  $391 bn
3. Microsoft $259 bn
4. PetroChina $257 bn
5. IBM $235 bn

Every quarter seems to bring a surge in sales from a new version of one of the company's smash hit products (iPhone4 in Q4 2011, iPad3 in Q1 2012 and iPhone5 due later this year).

The sales price dipped last week but is still up 600% in the last 5 years.  Crazily optimistic investors?  Not really, profits have gone up faster and the forward P/E ratio is a far from vertiginous 12.8 - lower than it has ever been; see this great chart here.

With plans to transform the TV market and a burgeoning business in content (especially app) sales, Apple is certainly in a sweet spot and the share price is justified.

But what of the longer term?  As Apple has itself shown, a huge amount can happen in 10 years.  Before introducing the iPod and a funkily-coloured range of Macs in the early 2000s Apple was almost an irrelevance.  It's share price was less than $10 as recently as 2004 (it closed over $600 yesterday).

Consumer habits and market trends can change capriciously.  Just ask Sony, which back in the 90s was as dominant in consumer electronics as Apple is now.  It's been in the news this week because it is losing billions, cutting jobs and fighting for its survival.

I can't see Apple sliding back to obscurity any time soon but there are some potential traps ahead.  The proposed move to TV is risky ; most TV makers lose money.  Apple's amazing margins (a solid 40% for several years) will surely come under pressure in the phone and tablet markets as competitors gear up.

Steve Jobs also bequeathed Apple an obsession with "walling off" content inside the iTunes world but consumers (and developers and content providers) prefer openness and freedom.  Trying to have it all might bite back one day.

As for the competitor most likely to topple Apple as the world's dominant company, I nominate Korea's Samsung Electronics ahead of the usual suspects like Facebook and Google.

Looking around a mobile phone shop at Samsung's phones and tablets you might not think them in any way a likely challenger to sleek and innovative Apple.  It sells a similar quantity of devices but not at the profit margins of Apple's premium products.

But take your eyes off those products du jour and look at the bigger picture; in many ways Samsung is a stronger and more rounded company, even though it is valued at only $200 billion to Apple's $580 billion.

Samsung is strong across a broader range of products including TVs which, rather than just talking about it like Apple, it actually does amazingly well in with about 25% of the world market. Look at this state of the art "OLED" TV that it has just unveiled which is every bit as awe-inspiring as the iPad3:

It has a dominant and growing presence in memory chips and LCD and LED screens, demonstrating a much wider range of capabilities than its American rival.  I suspect it will make a lot of money from revolutionary new lighting products over the next few years for example.

Consider too the R&D spending figures - Samsung plans to spend over $9bn this year around three times as much as Apple.  Some of this money is going into developing more software skills where obviously Apple has a great core strength.

The software gap will close however while Apple will never match Samsung's prowess as a manufacturer.  It is interesting to note that more than 25% of iPhone is actually made from Samsung components and the proportion is even higher for an iPad.

The company is part of a bigger industrial group which plans to invest  a staggering $41bn and recruit 26,000 new people this year, with 80% of this going into Electronics in the form of acquisitions, research and incubating new technology.

I predict that Samsung will be a bigger company than Apple within 5 years in terms of sales, profitability and market value.  Not an easy one for investors to play however as Samsung is not listed out of Korea.

From our website:  Spanish wealth tax guide 2012

Top 5 companies by market value (Apr 2012)

1 Apple $588.95
2 Exxon Mobil $406.56
3 Microsoft $265.15
4 PetroChina $257.98
5 IBM  $242.17


  1. Another emerging reason for the potential of Apples fall from the top of the tree is not only that they operate in a narrower market sector but that that sector is actually controlled by mobile carriers.

    The carriers are facing dwindling profits based on having to subsidise iPhone sales prices to customers - what you will start to see are less discounts and subsidies for iPhones, particularly as there are other competetive makes and brands now redaily available.

    Customers will be more likely asked to pay full price for the iPhone, leading I am sure to less sales. How many would actually pay €700.00 for the latest iPhone incarnation every 6 months?

    1. Agreed - Apple will continue to shift the two mobile products in great volume but it is the margins that may come under pressure. But they have been rock solid so far.


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