What's up next for Apple?

By Jon Markman

Let's say you have created the most useful, the most beautiful and arguably the most profitable tool in the history of mankind. A device that spans the range of modern human existence from entertainment and communications to business, education and art. A device that has no equal despite ample attempts at imitation and that ceaselessly expands to fulfill needs that you didn't know you had.

"Well, then," the stock market would say. "That was nice. What else ya got?"

That is the dilemma faced today by Apple (AAPL, news, msgs), whose iPhone, at a mere 2 years old, is inarguably the best computer and media device, ounce for ounce, that has ever graced the globe. It so surpasses previous notions of what a telephone, media player, handheld computer, pathfinder and personal gaming device could be that it continues to astonish owners and observers alike.

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The electronic love that blossoms among iPhone users is not immaterial, and I would argue that there's a good chance it will help propel Apple shares to $335 (about twice their current price) by mid-2012 -- and with a kick-start this fall as more groundbreaking products emerge as soon as next month. That makes Apple one of the best stocks to pick up on any upcoming weakness. Here's why.

Major-league profits

First, you must recognize that practical products that thoroughly delight consumers are exceedingly rare in our age of instant obsolescence, a time when it has become increasingly hard for companies to raise prices and demand brand loyalty because of the ease with which imitations are created and the speed at which jaded ennui sets in.

Companies that cannot demand excess value through useful products paired with imaginative marketing are condemned to bruising battles for market share through price wars that eat up capital, reputation and profits.

By creating a software platform in its iTunes App Store on which tens of thousands of profit-incented third parties can essentially create new versions of the device every day, Apple has essentially created alchemy out of aluminum and silicon: The iPhone has become a self-perpetuating machine that changes itself to fit new opportunities and spins off profits with little effort from the home office. It's never been done before, though every company on the planet wishes it could duplicate it. Imagine the margins that Kellogg (K, news, msgs) could achieve if it could find a way to grab a 30% royalty every time someone made Rice Krispie treats.

I'll give you an example: I am a huge baseball fan who follows my hometown Seattle Mariners but also likes to keep close track of all other teams, particularly while on the road. The Major League Baseball application on the iPhone, at $9.99, is a brilliantly executed piece of Web and video software, and it serves this purpose to a T.

The MLB iPhone app not only provides instant box scores and game-casts featuring pitch-by-pitch results that automatically update during a game, but for an extra $35 per year gives me access to live high-definition video (or audio) of every contest in progress. The app also provides 10-minute HD video versions of games 90 minutes after they're over. Now check out why this is important: Apple has provided the platform for a media product that is actually better than cable or satellite TV and radio, and obviously more portable than a desktop PC. It has created a new form of mobile entertainment with long-term profit streams for itself, MLB and the phone carrier. And Apple happily takes in $2.99 for every download of the baseball application.

Waiting for the iNetbook

Of course, Apple is much more than the iPhone, and its earnings report last month showed that its desktop and notebook Mac sales continue to enjoy a halo effect as consumers worldwide continue to seek out the ease with which it marries technology with functionality.

Money is absolutely pouring into the company to the extent that it now has a cash hoard of more than $28 billion and annual free cash flow of nearly $10 billion more. This astonishing profitability -- which competitors ranging from Microsoft (MSFT, news, msgs) to Nokia (NOK, news, msgs) and Sony (SNE, news, msgs) have tried but failed to dent -- gives Apple almost unlimited opportunity to invest in developing products. (Microsoft is the publisher of MSN Money.)

Continued: A potential blockbuster product

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