Why The Apple iPad Stands Alone

HP's recent announcement the company is extinguishing its webOS-based product lines and jettisoning its PC division highlight the ongoing transformation of the personal technology markets. Market share alone accomplishes nothing. Integrated product lines and content to support product sales mean everything in our fast-changing world. 

Although HP is currently the world's largest PC maker, HP doesn't own the operating system on which the company's consumer PC products run. Developing a strong content distribution system to support product sales for the mobile OS the company does own would have taken years and billions of dollars to accomplish. HP's global PC market share delivered no advantages in efforts to develop a market for handheld digital devices. Content sells devices. Without content and the means to sell and distribute content quickly and inexpensively, device sales will languish.

The Apple iPad now stands alone in the global market for tablets. The iPad is first and foremost an expansion of Apple's multi-device iOS product paradigm. Outside of the Apple iPad, a robust consumer market for tablet devices does not currently exist. At this time there isn't consumer demand for a tablet other than the iOS-based product Apple has released in tablet form. 

The Foundation of the iPad's Success

Underpinning the Apple iPad's success are the same factors underpinning the success of the iPhone and the iPod touch. Through the end of the June quarter, cumulative iOS-based product sales have reached 222 million units.  However, the more impressive statistic is the more than 225 million iTunes accounts backed by credit cards. The Apple iPad is building on the customer and content sales relationships the company began establishing in 2003 with the opening of the iTunes store. There isn't a competing product manufacturer that has a direct sales relationship with almost one-quarter billion customers with active accounts for content purchases. The chart below illustrates the Apple iPad's unit sales performance since the product's initial release. 

Unit Sales In The Apple Industrial Era

Introduction
Apple is at the threshold of becoming the largest US-based technology company and may soon become the largest technology company in the world. This post details the unit sales for the Apple iPhone, iPod and Macintosh personal computers over the most recent eleven fiscal quarters and iPad unit sales for the five fiscal quarters the product has been in commercial release. Apple's dynamic growth is fueled by three major product lines while the Apple iPod, once Apple's flagship product line, slowly fades into history as the product that sparked the company's renaissance and set the stage for what is now the Apple industrial era.

Over the past five years Apple's frenetic rates of growth have been derived from a changing mix of products leading to global leadership in the personal technology markets. This changing mix of products provides for years of dynamic growth as the company expands its global reach, expands the global presence of Apple's retail stores and expands product distribution into previously under served regions of the world.

In Apple's current fiscal year (FY 2011) ending in September and the fiscal year beginning at the end of that month, unit sales of the iPhone and iPad will generate more than two-thirds of the company's reported revenue. Both of these products were introduced to the market within the past five years. The popularity of Apple's iOS-based devices, including the Apple iPod touch, has masked the fact that the Macintosh line of personal computers has become a more than $20 billion global business and in FY 2012 close to 20 million Macintosh computers may be sold.

The Apple iPhone

There's no disputing the fact the iPhone is Apple's biggest revenue product. In the recent June quarter, sales of iPhones and related products and services generated about 46.6% of Apple's $28.571 billion in reported revenue. Over the most recent four fiscal quarters the Apple iPhone generated 44.75% of Apple's $100.322 billion revenue total. The June quarter's 142% unit sales growth and 150% revenue growth for the popular iPhone were well above analyst expectations. 

The chart below illustrates the consistent unit sales growth of the Apple iPhone with the June quarter (FQ3) of FY 2010 the obvious exception due to the unique issues surrounding the illicit publication of iPhone 4 photos prior to the product's release and Apple's aggressive pull back on shipments of the iPhone 3GS ahead of the iPhone 4's commercial debut in June of that year. In that quarter more iPhones were sold to customers than Apple shipped into the market for sale, reducing channel inventory in preparation for the iPhone 4's debut. 

I expect the release of the iPhone 5 to spark sales of over 30 million units (all iPhone models combined) within the 90 days of the iPhone 5's release date. A pending deal with China Mobile will propel unit sales to levels not seen before even by iPhone standards.

Apple's First $100 Billion Year

During the twelve months that ended in late June, Apple reached an important milestone. It was the first 12-month period in which the company's reported revenue exceeded $100 billion. Apple's fiscal year ends in late September, but the trends revealed in the four fiscal quarters that ended in late June provide important insights into the company's current rates of revenue growth and the dynamic nature of Apple's revenue mix.

In the four fiscal quarters ended in late June, the company reported revenue of $100.322 billion, a year-over-year increase of 75.73%. In this four-quarter period the Apple iPhone and the Apple iPad represented 60.98% of revenue and 88% of the $43.233 in revenue growth over the corresponding prior year four-quarter period. 

The Impact of the Apple iPhone and Apple iPad

The iPad's sales presence in all four quarters of this twelve-month period significantly boosted revenue growth. However, iPhone revenue growth of $23.936 billion exceeded total iPad revenue of $16.282 billion during the four fiscal quarters. The iPhone's particularly strong June quarter performance was due in part to Apple's decision to handle this year's iPhone transition on a different timetable than in the past.

The iPhone remains Apple's flagship product and is the primary catalyst for Apple's frenetic rates of revenue growth. Apple's decision to push the transition to the iPhone 5 well beyond the start of the September quarter has merit provided sufficient product supplies are available at the time of the product's release.

The graph and table data below illustrate and delineate the sources of revenue in this four-quarter period that fueled the 75.73% rate of revenue growth and the revenue total that topped $100 billion.

Apple: Rising Earnings, Rising Cash, Falling Multiple

Apple ended a challenging week on Wall Street at $373.62 per share, down $3.75 on the day and off $16.86 for the week. Friday's closing price represents a multiple of 14.79 times 12-month trailing earnings of $25.26. At Friday's closing price, the company's hefty cash position of $81.21 per share is equal to 21.73% of the share price valuation. With a current 12-month eps growth rate of 90.21%, a price-earnings multiple of 14.79 and over $81 standing behind each fully diluted share, Apple is trading at a dramatic discount to growth even with high levels of cash underlying each of the 940 million shares outstanding.

Apple: Rising Earnings, Rising Cash, Falling Multiples

The chart below tracks Apple's price-earnings multiple on dates occurring early in the first full calendar month following the release of quarterly results for the past seven fiscal periods. The chart also tracks the rising amount of cash standing behind each share in the fully diluted share count.

Cash As A Rising Percentage of The Share Price

Over an eighteen-month period beginning in early 2010, and soon after the retrospective elimination of deferred revenue accounting on the iPhone, Apple's earnings per share has risen consistently while the company's price-earnings multiple has continued to drop.

The graph and data table below illustrate and delineate the company's rising cash position, falling price-earnings multiple and accelerating rates of earnings per share growth over the past 18 months. At Friday's closing price the shares are trading at a valuation relative to earnings rarely seen over the past eighteen months, and at an increasing discount to the rates of earnings growth especially when the company's cash per share is added to the valuation mix.