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

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