Apple Inc. (AAPL) Poised to Gain as Mobile Revolution Enters Phase 2

Apple Inc. (AAPL) Poised to Gain as Mobile Revolution Enters Phase 2
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Apple Inc. (NASDAQ:AAPL) is headed to $600 as the company is poised to excel in the new computing revolution says Raymond James in a new report. Below are some more details on the mobile computing revolution and why Raymond thinks Apple Inc. (NASDAQ:AAPL) will be a big winner in this area.

Apple Inc. (AAPL) Poised to Gain as Mobile Revolution Enters Phase 2

Apple Inc. (NASDAQ:AAPL) – The Mobile Computing Revolution Is About to Enter Phase 2

Mobile computing is the trend, not smartphones specifically – The importance of the iPhone was not that it ushered in the era of smartphones (in fact they had existed for nearly a decade prior). The importance was that it ushered in the era of mobile computing, with a purpose-built OS for mobile devices using an ARM-based chipset for processing, an OS that assumed an “always on” mentality, and an ability to allow third party developers to write apps and monetize that investment on the platform.

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The iPhone and then iPad were simply the first incarnation of this mobile computing revolution, which we would view as Phase 1. Phase 1 of mobile computing is nearing maturation as smartphones and even tablets enter maturity in the developed world. Apple has been the dominant winner in the U.S. in Phase 1 of the mobile computing revolution and the high end of the consumer market globally. Google’s Android has successfully positioned itself as mobile computing for the masses with dominant share in countries with more price sensitive consumers. Importantly, we see very little churn from either platform and market shares appear to be solidifying globally.

Apple Inc. (NASDAQ:AAPL) Phase 2

Phase 2 and beyond – Although Phase 1 of mobile computing is not complete, and Apple has the ability to open up new carrier relationships and try some new form factors and price points for the iPhone/iPad product line, of more interest to investors should be what Phase 2 is in mobile computing, and how Apple is positioned. In our view, this mobile ecosystem, including chipsets, OS and apps, will find its way onto numerous devices in the future as devices become more connected. Of note, Apple mentioned at its WWDC that iOS7 will be built into car models at 12 different car manufacturers in 2014. We can expect a full TV at Apple in the future, maybe a watch, and who knows what other future devices.

Apple is extremely well positioned to garner incremental profits from these opportunities for two main reasons. First, these new connected devices, whether they are TVs, cars or other devices are likely to be first adopted by high income consumers, over whom Apple dominates globally.

Secondly, just like in the case of the smartphone, the power of the ecosystem is based on application developer support. It is hard to know what the “killer app” of a TV, car or other device may be, but chances are it is going to come from one of Apple’s developers, not Apple Inc. (NASDAQ:AAPL) itself. By dominating the monetization of the mobile computing ecosystem in the smartphone world (we believe 2x or more the monetization to developers vs. Android), Apple Inc. (NASDAQ:AAPL) is positioned to remain the platform of choice for developers as they make investments to create the killer app for other devices. We note that Apple will not have a monopoly, and Android will likely sell more units in smart TVs and maybe even smart cars or watches than Apple. However, much like in smartphones, Apple’s vertically integrated business model should allow it to continue to dominate the profit pool from mobile computing devices in the future by aggregating profit opportunities that historically would have flowed into separate chipset, OS, application and device vendors.

Implications for Apple Inc. (NASDAQ:AAPL)

What does this mean for Apple Inc. (NASDAQ:AAPL) financially? What this means is that as Phase 1 of the mobile computing revolution ushered in by the iPhone matures, Apple’s top-line growth will slow and quarterly results are likely to get more volatile as Y/Y EPS trends can now be materially impacted by relatively small movements in customer upgrade rates, currency movements, commodity price changes, timing of new product launches, etc… However, as long as Apple’s iOS user base continues to grow, which we believe it is (according to its metric of active credit card accounts, Apple Inc. (NASDAQ:AAPL)’s user base is growing ~30%+ y/y in 1H:13), and any products it launches don’t over cannibalize other products, its revenues and EPS should continue to trend up over time.

In retrospect, FY12 was a perfect storm of positive events for Apple financially as currency and commodity prices worked in its favor and the iPhone 4S engendered a surprising amount of upgrades (we believe due to the death of Steve Jobs creating a lot of goodwill and free branding). FY13 has been the opposite with currency and commodity prices a headwind and the iPhone 5 generating fewer upgrades. However, ultimately memory and currency prices cannot be headwinds forever, and with two-year contracts, as long as the iOS user base is growing nicely, device growth will continue.

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