Jon Markman

SuperModels3/15/2007 12:00 AM ET

Apple rolls out a bright iFuture

The company's amazing transformation continues with a series of big surprises beginning in the next 30 days. They could make it the tech world's undisputed leader. I think shares will double again by 2010.

By Jon Markman

Even as world markets renewed their high-volatility rout this week, real business went on as usual. And for tens of thousands of companies without exposure to subprime lenders or low-end consumers, business is still very good.

A genuine leader in this regard at the moment is Apple (AAPL, news, msgs), which is on track to emerge later this year as the single most influential, life-changing and powerful company in the technology and consumer electronics universe. In a few years, it could even become the most valuable.

The latest step in Apple's amazing transformation from industry doormat to kingpin will come in the next 30 days, as investors and consumers come to recognize a set of powerful catalysts that have the potential to kick Apple's sales and earnings to levels that will shock skeptics and possibly even surprise optimists.

Apple shares, now trading around $90 after doubling from 2004 levels, could very well double again by 2010, putting the company in the very highest tier of global industrial titans. If you have ever kicked yourself for not buying Apple four years ago when you bought your first iPod, you should go for it now during this market weakness.

Apples and carats

To be sure, this idea sounds almost crazy for those who remember Apple as an also-ran perennially tripped up by maddening manufacturing mistakes in the 1990s. But it's not a freak accident of nature, like the seemingly arbitrary process of geologic pressure that can turn organic matter either into a lump of coal or a diamond.

One reason Apple has surfaced as a jewel: While industry rivals Microsoft (MSFT, news, msgs), Intel (INTC, news, msgs), Google (GOOG, news, msgs) and Cisco Systems (CSCO, news, msgs) have been locked into paths that solely leverage their expertise in software, hardware or telecommunications, Apple has uniquely innovated its way into becoming a force in each of those fields, as well as in retailing. It almost doesn’t matter that its path has been random and unintentional at times, so long as you recognize that its appeal is real and hard won, as I described in a column last year on the company’s marketing expertise, "Why Apple should tempt investors."

Although Apple pioneered the gigantic new global business of digital music players and online downloads, starting with the iPod and iTunes -- and now dominates both with stunning 85% market share -- its next five acts may be its most impactful yet.

In mid-March, Apple is scheduled to launch its first television product, called Apple TV; in April, it will release a new operating system called Leopard; in May, it will benefit from the launch of a long-awaited professional design software from Adobe called Creative Suite 3; in June it will launch its new wireless handset called iPhone; and by Christmas a full-fledged video iPod is expected to hit stores. I can't think of any company, in technology or any other sector, that has so many concurrent product cycles that can drive upside in revenues and earnings.

As Apple's business plan has become more complex, analysts have struggled to come up with new ways of describing its future. But they all come down to the fact that the company has positioned itself to expand rapidly in several directions at once without losing focus.

Andrew Neff of Bear Stearns suggests that it's helpful to think of the company as operating in four "spheres" -- PCs, music, phones and video -- which each have four separate vectors of expansion: fixed platforms, wireless, storage and software. Each overlaps and augments the others, creating a virtuous circle of reasons for consumers to remain within the family.

Indeed, Apple is creating a sort of all-inclusive "ecosystem" for the digital age -- a Holy Grail that rivals such as Sony (SNE, news, msgs) and Microsoft have attempted but failed to achieve. (Microsoft is the publisher of MSN Money.) Remarkably, it has managed to do so without alienating customers or making them feel ripped off by the increasingly closed loop, which is a neat trick. The secret appears to be its marketing team's ability to generate the sense that sticking with Apple for all your music, video, phone, computing and software needs is liberating, not imprisoning.

Analysts at brokerage UBS reported in a note this week that they believe this ecosystem will be distinguished over the next year by a patented touch-screen technology that makes all Apple devices feel and operate like no other. UBS calls this ecosystem a "mega-platform" which will allow Apple to become an open-ended business with a logical chronology of future products that can grow at a 20%-plus rate over the next five years, which is incredibly fast for a company that already has a $75 billion market capitalization.

Light on drama, heavy on growth

This is quite unlike the story of 10 years ago, when Apple was a "turnaround" saga predicated on the return of co-founder Steve Jobs and his focus on the Macintosh and cool industrial design. It is also unlike the story of just a year ago, when Apple's future appeared to center on the fantastic success of a single product line, the iPod.

As Neff points out, shareholders are now looking at multiple growth engines. You already know about the accelerating penetration of iPod sales overseas, as well as the new TV, portable video and telephony products. But the least-appreciated driver of revenue upside is the one that will happen soonest: The thousands of professional designers who use Macs to run design software have been waiting for Adobe to release a new software suite that specifically takes advantage of a new Intel chip-based computer called the Mac Pro. If those users start to buy new computers in droves next month as I expect, you can expect a ton of upside to consensus 2007 and 2008 earnings estimates.

The next biggest surprise will be the iPhone, which has been derided in some circles so far for its high price and dependence on the relatively slow 2.5G wireless broadband network at AT&T Wireless. In reality, Apple is likely to expand the range of iPhones from the $150 price point up to $600, and reinvent the category much as it did with music devices. Look for a big win here that rattles the naysayers, with the possibility of 8 million units sold in the first year.

Unlike most of its cousins in technology, Apple has beaten analysts' expectations in quarterly earnings reports for the past four years, and I think the Street continues to underestimate the company's potential. As we look forward to the company's report next month on its progress in the first quarter of 2007, we will see estimates rising due both to accelerating sales as well as to profit-margin improvements in the wake of a plunge in memory-chip costs.

Right now, the stock trades at around 18 times my own 2008 estimates, despite annualized earnings growth that is likely to come in at around 22%. That is very attractive. My target is $125 by this time next year, or 40% higher than the current quote. Plug in.

Fine Print

Here's an interesting fact about Apple's remarkable success in the stock market. From March 2000 to March 2003, Apple shares fell by 75%, about the same as the Nasdaq-100 (NDX). From mid-March 2003 to today, the Nasdaq-100 has rebounded by 81% while Apple has advanced 1,150% -- a plus factor of more than 10x. Microsoft and Intel are up just 40% in the same period, while Cisco is up 100%.

Here's another one: Since Google went public in July 2004, its shares are up 350%, but Apple's are up 450%. For a CBS video showing how the new iPhone will work, click here. To learn more about Adobe Creative Suite, read here. To learn more about the Mac Pro, click here.

Meet Jon Markman at The Money Show Las Vegas

MSN Money's Jon Markman will be among more than 100 renowned money experts, advisers and analysts sharing their wisdom at more than 250 free workshops at The Money Show Las Vegas, May 14-17, 2007, at the Mandalay Bay Resort & Casino. You can also network with fellow market enthusiasts, exchange investment ideas, share your experiences and enjoy the fellowship of like-minded investors. Admission is free for MSN Money readers. For complete details or to register for free admission, call 1-800-970-4355 (be sure to mention priority code #008096) or visit the Money Show Web site.

At the time of publication, Jon Markman owned shares of Apple that comprise less than 1% of his total market holdings. He also owned a small position in Apple call options.

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