Saturday, June 19, 2010

Bunkum and Balderdash: The iPad Is Not A PC

Bunkum and Balderdash: The iPad Is Not A PC 
I took the title to this post from the the words I used to describe the comments in a report from Forrester Research about the Apple iPad as quoted by Philip Elmer-DeWitt in a recent Apple 2.0 column
In the referenced report Forrester Research suggests tablets, such as the Apple iPad, are PCs and in quotes from the report the research firm suggests a market for the Apple iPad essentially doesn't exist because the product's feature set is a mismatch with consumer desires for a PC. I consider Forrester's views on the iPad nothing but bunkum and balderdash. Forrester Research does see a market for tablet PCs. But if the Apple iPad doesn't meet the criteria for what Forrester Research suggests consumers want in a PC, why call it one?
Who Said the Apple iPad is a PC?
The Apple iPad isn't a PC. While the iPad may perform some general computing tasks, it's primarily a content conduit for music, movies and apps. The PC era is over. Based on revenue share and operating profit share, Apple won the PC war similar to the way the company won the digital music player war. The company is continuing to win the smartphone war and has engaged competitors on new turf with the release of the Apple iPad.
Classifying the Apple iPad as a PC represents a conspicuous and common misperception of Apple's market and monetization models. I've said many times before Apple doesn't sell products and services. Apple creates customer relationships and the customer relationships sell Apple products and services. This is among the reasons Apple continues to invest heavily in broadening the reach of its global retail stores franchise. The stores are bricks and mortar community centers for  creating and expanding customer relationships. A customer purchase of an iPad is an extension of that customer relationship similar to the purchase of an iPod, an iPhone or a Mac.
Friday's Record High
No matter Friday's record high for AAPL, the shares continue trading at a modest 23 times trailing 12-month earnings. In mid-May I forecast Apple would realize 50% growth in revenue this fiscal year and in late May I forecast eps growth would reach 65% or more, quickening the 63% growth rate in eps experienced in the first six months of this fiscal year.
What's remarkable about Friday's closing high is the early success of the Apple iPad is not reflected in the share price. The current valuation and price-earnings multiple also does not reflect the expected growth in iPhone sales following reports of overwhelming pre-order demand for the fourth generation of the popular smartphone.
Apple Product Integration
What the iPod, the iPhone and the Apple iPad have in common is content availability for the devices.  Apple's iTunes stores serve essentially as digital community centers for Apple's growing base of product users. Growth in Macintosh unit sales and the Mac's growth in market share and revenue share is a direct outgrowth of Apple's expanding retail store presence, the associated expansion of Apple's customer base and and the ability to share content available through iTunes among the company's hardware devices.  From a revenue share and operating income perspective, Apple has won the PC war with its hardware competitors by providing consumers with the PC of choice for the post-PC era. 
AAPL and The Next Four Quarters
With the introduction of the Apple iPad and the pending release of the fourth generation iPhone, Apple is positioned for three consecutive quarters of record revenue and earnings.  I now forecast fiscal year revenue will exceed $65 billion and earnings will leap well over $15 per share. 
Contributing to Apple's frenetic pace of revenue and earnings growth is the massive expansion of content available through the iTunes stores and the continuing expansion of the company's retail store franchise. The growth in Macintosh unit sales and sales revenue is greatly influenced by the proximity of Apple retail stores, the associated growth in customer relationships and the popularity of Apple's handheld digital devices. iTunes serves as the digital community center that extends the customer relationship beyond the Apple retail stores and provides the content that drives hardware sales. 
In late April I published a 12-month price range forecast for AAPL of $405 - $440 by late April 2011. I will revise this price range forecast following the release of Apple's June quarter results in late July. I expect the share price to move above $300 immediately following the release of Apple's June quarter financial reports. 

Robert Paul Leitao

Saturday, June 12, 2010

The Flash Debate: How Adobe Got It Wrong

There are few companies I've followed as closely over the past 20 years as Adobe Systems. The company's PostScript technology was instrumental in the success of the Macintosh and assisted in bringing commercial publishing power to the desktop computer. Adobe Photoshop and the creative products that now comprise the Creative Suite series of products brought the company into another era of success.
I've followed Adobe Systems from the time fonts were the company's revenue mainstay through the acquisitions of Aldus and Macromedia and its position today as a world leader in desktop creative software solutions. Like many Apple enthusiasts, I have a sentimental attachment for the company that stems from the early days of the Macintosh when the Apple and Adobe worked hand-in-hand to deliver compelling and even revolutionary desktop publishing solutions. 
Like all giant Silicon Valley tech companies Adobe Systems has made its share of mistakes not the least of which was the essential abandonment of the Macintosh platform starting in the mid 90's as the company's preeminent platform for commercial product development. Apple didn't chose to compete with Adobe Systems through the development and release of Final Cut Pro and Aperture because Adobe Systems remained attuned and attentive to Apple's software needs for the Macintosh platform. This lack of attention to Apple and Apple's emerging mobile platform has lead to the latest public spat between the two companies over Adobe Flash.
Adobe's latest strategic error in what has now become a contentious relationship between the two former partners occurred with Adobe's decision not to handle the Flash dispute with Apple in a quiet way. From the start, the battle over Flash is one Adobe Systems can not win. Adobe's highly public expressions of vitriol over Apple's decision to exclude Flash from its iOS platform has only heightened awareness of Adobe's product model vulnerabilities. 
Adobe makes desktop products. Flash was a product add-on from the Macromedia acquisition and found a place as a stopgap solution for the playback of video on the Web. Flash as a mobile playback solution is not how the product was designed and it's a awkward transitional solution as the world's consumers migrate to handheld computing products. It's not as if Adobe hadn't been advised by Apple its product wasn't suitable for the way Apple was optimizing its mobile hardware products. Apple's decisions concerning Flash should not have drawn a response as if Apple's actions were somehow a surprise. It wasn't until the release of the Apple iPad that Adobe chose to raise a public fuss.
Perhaps one of Adobe's biggest mistakes in the Flash feud with Apple is pretending Flash represents a platform that should be a standard impervious to competitive forces and impenetrable in a market moving quickly to ultra-mobile hardware devices. Oddly, it's Adobe's responses to Apple in the Flash feud that has made HMTL5 and its development more commonly known.
Apple will not change its position regarding Flash no matter Adobe's grandstanding and claims Apple is working against "open" standards. In my view Adobe's problems with Apple aren't about Apple and aren't about the absence of Flash operability on iOS devices. The problems are all about Adobe and how the company intends to rework its product model in a dynamic marketplace for computing devices.
When I encounter someone who has recently purchased a new smartphone and the person trumpets the fact the phone can play Flash videos as a deciding factor in the purchase decision I consider it an obvious indication how little the person understands smartphones including the one they just purchased. 
Flash is a transitional stopgap no matter Adobe's wishful thinking. Adobe now trades at a p/e multiple of a bit over 47 times trailing 12-month earnings. The release of CS5 is expected to boost revenue and earnings over the next few quarters. But what will drive Adobe's continuing growth? I suspect the company will quietly embrace the emerging HTML5 standard and move beyond its seeming intransigence on Flash to better optimize the product for mobile devices. But the bigger question is how Adobe intends to transform its product lines to embrace the move away from desktop computing and the PC-centric paradigm the company helped to create. That has nothing to do with Apple and ultimately very little to do with Flash. 

Robert Paul Leitao

Sunday, June 6, 2010

WWDC: Hindrance of the Hoopla

Apple's annual Worldwide Developers Conference begins tomorrow. Apple CEO Steve Jobs will deliver the event's keynote address and speculation suggests he will introduce the fourth generation iPhone to the crowd and to the world. 
There's much talk ahead of the address on whether or not the new iPhone will wow the crowd or disappoint those with lofty expectations. The fact that a prototype iPhone was lost by an Apple employee (or stolen from his bag) at a bar and ended up sliced and diced for the world to see by an Internet publication has dampened some of the enthusiasm for the new phone's introduction. Few expect new features outside of those already detailed through the great iPhone caper. 
Whether or not the announcement of the fourth generation iPhone includes surprise announcements about unexpected hardware features should really be a secondary or tertiary concern for Apple shareholders and independent analysts. What matters is the continuing growth of the iPhone OS eco-system and the halo effect growth in iPhone sales has on all Apple product and service including Apple's profitable line of Macintosh computers. 
No matter the new features of the fourth generation iPhone, the product is designed to exploit the iTunes content distribution system and deliver post-purchase revenue to Apple, developers and distributors of digital content. Consequently, as important as the new iPhone handset is to many of us who follow the company and the stock, the release of iPhone OS 4 is at least equally important. 
The new iPhone OS provides for multi-tasking Apple style and is designed to meet the usage and security desires of IT managers and retail consumers. The value of hardware enhancements to the next generation iPhone should be evaluated on a scale weighted in favor of enhancements to the the post-purchase monetization of the handset.
The release of the Apple iPad that began in early April,  the release of the new iPhone handset and iPhone OS 4 will assist in pushing revenue growth this fiscal year to at least 50% and earnings growth by 70% or more. Understanding and appreciating the importance of iPhone OS 4 should not be overshadowed by the hoopla generated by the year's new iPhone handset. Apple's overall revenue and earnings growth transcends any one product or product line. 
As an independent analyst I'm interested in the growth of iTunes revenue and new revenue generated by Apple's iAd service. While the hoopla surrounding the announcement of the new iPhone handset may sway sentiment and the trading price of AAPL this week, it makes no long-term difference in the value of the shares.
Content drives hardware device sales. The growth in iPhone OS-related iTunes revenue and growth in other post-purchase monetization activities are bellwethers of the success of the iPhone OS eco-system. For investors and independent analysts, succumbing to the hoopla surrounding the new iPhone's hardware feature set might be a hindrance in understanding all of the important announcements to be made this week at WWDC, especially those announcements concerning iPhone OS 4 and the revenue and earnings growth opportunities that transcend any one product line or product refresh.

Robert Paul Leitao