Courtesy of Paul McWilliams at Rivershore Capital. Originally published in Forbes.Â
Introduction by Matt Schifrin
A few weeks ago I put up a guest post from technology stock expert Paul McWilliams on Alibaba and why its long tail makes Amazon.com’s seem like a bobcat’s (click to read). With all the news coming out about Apple – from its Beats acquisition announcement to its new operating system release — McWilliams sent me the following update on the stock. McWilliams thinks Beats is a small positive but what he is really excited about is something no one seems to be focusing on. It’s the potential for Apple to use its success in fingerprint technology and its giant user-base to disrupt the $500 billion credit card business dominated by duopolists MasterCard and Visa. Read on:
By Paul McWilliams
With Apple now trading a couple percent above the high side of the estimated full value range I last published in a March 2014 report, it’s time to take another look.
After I first suggested thinning Apple allocations in first quarter 2012 at a price similar to what it trades for today, and then encouraging Next Inning readers to sell in total when it moved above $700 in third quarter 2012, I maintained a cautious view of the stock as we watched CEO Tim Cook gain his footing. What bothered me most about Cook then was there was no evidence that he understood what I viewed as Apple’s core ecosystem business model.
With the price of AAPL then below $400, I noted the low valuation as a reason to consider AAPL in my second quarter 2013 State of Tech report, but I didn’t get constructive on the stock until September 2013 when AAPL released its new iPhone models. As I noted in a report published right after the presentation, it wasn’t the new iPhone models as much as it was evidence that Cook was focused on leveraging the AAPL ecosystem that encouraged me to take a bullish stance again.
While products are clearly important in the Apple equation, the core business model that led me to suggest buying AAPL when it was trading for less than $10 per share (split adjusted) more than a decade ago was the ecosystem Steve Jobs initiated with the creation of iTunes. As I saw it then and continue to see it today, it is the AAPL ecosystem that delivers 30% plus operating profit margins and customer loyalty, and it is the ecosystem that I think AAPL will leverage to open new markets and deliver future growth.
Leveraging the Ecosystem:
I’ve written extensively in the past about what I thought Apple should and should not do to extend its ecosystem. Obviously, AAPL is delinquent in expanding the scope of its iPhone offering to include not just a large-format screen, but also establishing a more meaningful low cost solution for emerging markets. Almost as obvious is the fact AAPL has viable opportunities in wearables (particularly now that it has embedded a hub processor in the iPhone 5S), with products like an iWatch that I think we’ll see later this year.
