A coverage of the iPad maker was initiated on Thursday by Suisse with a $500 price target on it, because of the most important question that was popped up “Will Apple be the most valuable company in the world,” .To answer that question there are many who believe that Apple is well positioned to command a majority share in the market expecting to grow to $120 billion over the next four years in the booming tablet market.
Analyst Kulbinder Garcha made it a point to note in his inaugural note to clients that there are many indications to suggest that the company will continue to hold onto its competitive advantage through its integrated ecosystem of software, hardware and services, as Apple could be expected to have a turn over of 50% to 46% with in the next two years.
In his note he also added that “Three years after the launch of its first iPhone, we believe few handset vendors come close to the quality of Apple’s hardware, software, and services, We also expect the company’s services offering to evolve along with its device portfolio.”
According to Garcha’s analysis for tablets, owing to the aggressive pricing, time to market advantage and a software edge displayed by Apple, there could be a raise in the market as far as $120 billion by the year 2015 with Apple will maintaining a share as high as 50% by that time. Another reason for success of the iPad would be increased user loyalty, which in-turn means a more stable market share in Apple’s handset business.
Keeping this in mind Garcha wrote “This means that iPad should become a $34 billion business by [fiscal 2012], Further, our proprietary bill of materials (BOM) analysis implies that gross margins for this business will expand to 35% by [the end of fiscal 2011] from around the 27% levels seen in fiscal 2010.”
Peering into the future Garcha stated that there are four major paths that Apple should choose to follow to make sure they achieve incremental sales of $65 billion and per share earnings of $10.10 by the year 2015. The first step would be to promote low-end iPhone, which according to the analyst is “necessary and significant.” Garcha continues to analyze and says “We demonstrate that having successfully saturated the above $500 smartphone market with an 81% share and having grown this segment of the market by a factor of 2.8 since 2008, once distribution is built out, Apple’s smartphone share is likely to plateau around volume of 120 million and global share of 12%,”
With the introduction of a more affordable handset, Garcha believes that it would generate $26 billion in terms of incremental sales and $6 billion in operating profit by 2015 versus 2010, adding incremental per share earnings of $4.47 along the way.
To make himself even more clear Garcha said that it would be best if the low-end iPhone is launched over the next 12-18 months, for there is a fear that high end devices should not over power them. Another aspect that he pointed out on was on the distribution of its retail segment in emerging markets. At present the company maintains 236 brick and mortar shops, with only 4 of them existing in emerging markets: China, meaning that its a major factor that would affect the distribution of the device.
He also added “By more aggressively building out an emerging market strategy and based upon current spend per capita on Apple products and income distribution, even after allowing for affordability issues, this could drive an incremental revenue opportunity of $19 billion from our 2010 levels along with $4.3 billion in operating profits and $3.16 in EPS,”
The next area that Garcha targets on is Apple’s relationships within the enterprise, according to Garcha, Apple plays a very small role in the corporate world when compared to that of its consumer share in every product category where the company is a major player.
Garcha further wrote- “We argue that the iPad’s rapid adoption could prove to be a Trojan horse from which Apple could see more rapid corporate adoption across its product line, Furthermore, our proprietary Credit Suisse IT Survey demonstrates that not only do CIOs rate the iPhone as the strongest of all platforms across metrics such as roadmap, distribution, and sales, but also that it is set for rapid adoption over the next 12 months.”
Apple has already given its view on the TV market and said that they are not interested in any such thing, but Garcha believes that Apple along with its services platform, operating system, and hardware strengths it would potentially drive them to pursue the lucrative broadcasting market.
Finally Garcha added-“We have refrained from estimating the revenue or earnings upside from this strategy, but given the run rate (now in other businesses) is in the billion — we think this could prove to be a large growth driver in the future.”