Apple, Incredibly, Could Still Mushroom

 | Jan 25, 2012 | 6:45 AM EST  | Comments
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INTEL

Apple (AAPL), being among the U.S. stock market's top names in market capitalization, triggers an obvious question for buyers: How large can the company become? The other leaders, such as General Electric (GE), Exxon Mobil (XOM) and so forth, are considered "slow growers." At best, they can advance at 5% to 10% a year, tops, and are unlikely to outpace economic growth. With Tuesday night's blowout quarter at Apple, investors are happy -- but they're also asking whether the company is about to bump up against the law of large number.

Although Apple has grown into the dominant position in consumer electronics, and is surging in computers, the average Joe does not quite comprehend how small Apple still is relative to the markets it's addressing. Apple sells into three established markets: mobile phones, computers and consumer electronics (i.e., the iPod). I put the iPad in a separate category, since that is a new market with unknown ultimate size. Take a look at Apple's market share:

Mobile Subscribers: 11%

Computers: 13%

Music Players: 78%

While iPods have probably peaked, with units having declined 21% last quarter, the iPhone and Mac have barely begun to scratch their market-share potential. iPhone share could easily double or triple as corporations start to adopt them in place of Research In Motion's (RIMM) Blackberries. The iPhone is the leading wedge to bring the Mac into corporate settings.

Recent reports, such as the Wall Street Journal article about GE starting to allow Macs into their offices, indicates that the Wintel corporate monopoly is at risk (that is, Microsoft (MSFT) Windows and Intel (INTC)). If that floodgate opens, Macs could at least double market share or more, since the home market would now be owned by them. Then there is the iPad. Who knows how big that market can become? (That said, it is clearly cannibalizing some laptop sales.) Apple has at least a few years of stellar growth ahead, which is amazing, given its size already. At a single-digit multiple, moreover, you cannot argue that the growth is priced in.

I am especially intrigued by the headway the Mac is making in corporate settings. If GE is any indication -- and I hear this everywhere anecdotally -- companies feel they need to embrace the Mac in order to be considered "cutting-edge" for recruiting purposes. If the Wintel monopoly is broken, and this is possible, then Microsoft will obviously be in deep trouble. Right now, I am starting to consider Microsoft a "run-off" company. I borrow that term from the insurance industry -- some companies stop writing new policies and just let the liabilities "run off" over time, collecting the investment income along the way.

Microsoft simply does not have a competitive product anymore. The Apple experience is superior because the company tightly controls it via hardware and software integration. Microsoft's user experience is poor, by contrast, because this company controls neither the total stack nor the hardware. I predict Microsoft will come to this realization within three years. I forecast it will then buy a major hardware player (such as Dell (DELL)) in an attempt to restore its competitiveness by fully controlling the user experience. Oracle (ORCL) already figured this out on the server side, which is why it purchased Sun Microsystems.

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