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A Strategy That Could Take Apple To Greater Heights — Even Past The Trillion Dollar Target

Written by on December 12, 2014

A multi-pronged approach could take Apple Inc. (NASDAQ:AAPL) past $200 billion in net sales as well as take the Apple stock near or past $150. The Tim Cook era is definitely going well for Apple.

In such a scenario, Apple could well become a trillion-dollar company. Then the choice of TIm Cook as Person of The Year by the Financial Times of London would have been even more appropriate.

Apple’s Growth On Multiple Fronts

Some of the strategies on which Apple is banking on to continue to grow include the following.

New Products And Services

Apple’s new products, mostly the new iPhone models, continue to attract millions. The latest iPhone 6 and iPhone 6+ not only inspired the usual serpentine lines at the Apple stores and record breaking first-week sales but sustained demand ever since. So much so that Apple has been unable to keep up with demand leading to speculation as to whether this is a strategic move on the part of Apple.

Customers of new iPhone 6 and 6+ models have had to wait for weeks and even months before their online bookings materialized into real iPhones. In the 4Q2014 results, Apple CEO Tim Cook acknowledged that Apple had the “biggest iPhone launch ever with iPhone 6 and iPhone 6 Plus.”

This success has also created supply-side constraints. With Apple’s experience and expertise, they should have been able to predict the demand and make the necessary modifications to the supply chain. So, is this an artificial shortage created to increase demand for the iPhones? Probably not.

The manufacturing challenge involved in the ever-more complex Apple displays have been well documented. Apple’s Chinese suppliers are working at breakneck speed and still probably cannot keep up with demand while maintaining the highest Apple quality standards. Lots of display assemblies, for example, get discarded when they fail the quality parameters.

Apart from the hot-selling iPhones, Apple is making an entrance in the wearable device market with its Watch product which should create more excitement for Apple and bring in billions in revenue.

Apple Pay is one more new venture from Apple as it enters the mobile payments market. With Apple Pay, users with iPhone 6, iPhone 6 Plus, and other Apple devices can make contactless payments at retain and online checkouts. There were to be more than 200,000 participating vendors at the time of the launch itself and Mr. Cook announced in late October of 2014 that more than one million credit cards had been registered on Apple Pay in the first three days of its availability.

Apple has plans to embed Beats in its iOS operating system so that users won’t even need to go for a separate download of a dedicated app. At a time of growing competition in the digital music download segment from the likes of Spotify and Pandora as well as a slowdown in Apple’s existing iTunes Store downloads, this default integration/availability of Beats music subscription will boost Apple’s overall music download numbers. Also, Apple Watch users may be able to scroll and manipulate their playlists from the Watch device thanks to this Beats integration. And the Apple ecosystem thus grows even more unified.

(China And India Will Be Tough Markets to Conquer For Tesla Motors Inc (NASDAQ:TSLA))

New Markets

If Apple wants to break that $200 billion a year turnover barrier (and perhaps also the $1 trillion market cap record), then it will need to grow in new markets in countries like China and India. Low pricing would be a good strategy but Apple rarely opts for anything but premium pricing.

At least in the U.S., two-year contracts allow retailers to slash prices. Wal-Mart for example is slicing $50 off its usual rates for the iPhone 6, iPhone 6 Plus as well as the older iPhone 5 model. Retailers (and telecom operators) in China and India could adopt this and offer the iPhone 6 in the $200 to $250 range to make the iPhone a stellar hit that sells in the tens of millions.

With an Indian court banning the sale of Xiaomi phones in India, Apple has one competitor less if it wants to make serious inroads into the Indian market. For China-based Xiaomi, the Indian market represented the second-biggest market for the growing handset maker after its home Chinese market.

Apple @ $1 Trillion

If we look at Apple’s numbers for the 4Q2014 and FY2014, it reported revenue of $182.7 billion for FY2014 and net income of $39.5 billion for the same duration. Cost of sales was $112.2 billion and operating income for FY2014 was $52.5 billion.

If Apple’s revenue can grow to $200 billion in FY2015 — and Apple has made a 1Q2015 revenue projection of $63.5 to $66.5 billion — and earn $60.0 billion in operating income, it can earn a net income of around $45.0 billion after paying $15 billion in taxes. That will raise Apple’s diluted earnings per share (EPS) to around $7.50 from the current $6.45. Compared to the current P/E ratio of 17.36, if Apple shares go up to around $140 a share, that will mean a P/E ratio of around 19.

A market capitalization of $850 billion for Apple looks quite inevitable unless the company makes some crazy execution error which is highly unlikely under the capable Mr. Cook. The rest of the way to the $1 trillion mark may be influenced by other factors including how strong the global economy is — and admittedly it is not very strong.

With new ventures such as that with IBM to create enterprise-specific applications for the iPhones and iPads, Apple may be better placed to isolate itself from a slow-growing global economy than other companies.

A trillion dollar Apple may not be inevitable — but it is quite possible.