iPhone 5 Release: The Tim Cook Era Begins at Apple

Reports have surfaced that Apple Inc. will hold a “special event” on Oct. 4 to unveil and showcase the much-anticipated new iPhone 5.

The event could mark the first public coronation of sorts for Tim Cook, the former chief operating officer who succeeded his iconic predecessor Steve Jobs as the chief executive at Apple last month.

Even if Jobs manages to make a cameo appearance at the product launch (as some reports have suggested), this will clearly be the “Tim Cook Show.” In any case, analysts are widely expecting the device to deliver record-shattering sales numbers.

However, given the recent sudden resignation of Jobs and the emergence of Samsung as a dominant player in the smartphone market, one must wonder if perhaps too much is being expected of Apple’s next iteration of the iPhone?

Might sales be disappointing, that is, somewhat less than stupendous? And in that event, could investors start to fret over Apple’s Jobs-less future?

For the moment, tech analysts and other experts don’t seem to be the least bit concerned -- they're almost universally expecting the iPhone 5 to be a blockbuster.

Mike Abramsky, an analyst at RBC Capital Markets, recently told his clients that two-thirds of existing iPhone users were very/somewhat likely to buy the iPhone 5. He described such demand as unprecedented,” suggesting the product is guaranteed to be hugely successful.

Apple is already the largest individual vendor of smartphones. According to market researcher Canalys, the company sold 20.3 million units of the iPhone in the second quarter, out of a total market volume of 107.7 million units – representing about a 19 percent global market share.

Boosted by the anticipated iPhone 5 release, Apple’s share of the global smartphone market is expected to reach 22 percent next year.

However, smartphones that use Google’s Android OS mobile device operating system -- which are sold by various companies, including Samsung, HTC Corp., LG Corp., Motorola, Sony Ericsson, ZTE Corp., and Huawei Technologies Co. Ltd. -- actually dominate the global smartphone market, with about a 48 percent share as of the second quarter.

Apple, which doesn't share its mobile operating system with other companies, is expected to sell 86 million iPhones in 2011, according to Credit Suisse. In 2012, it anticipates Apple will sell another 135 million units – a 57 percent increase in just one year.

“The iPhone has been a phenomenal success story for Apple and a watershed product for the market,’ said Canalys’ principal analyst Chris Jones. “It’s an impressive success story, given that Apple has only been in the smartphone market for four years. With the next-generation iPhone anticipated in [the third quarter], it’s likely that Apple’s position will grow even stronger in the second half of the year.”

Smartphone sales are also taking an ever-expanding portion of Apple’s overall sales profile. In 2009, about 30 percent of the company’s total revenues came from iPhone sales ($13 billion out of $43 billion). In 2010, that weighting rose to 39 percent. This year, iPhone sales are expected to generate 44 percent of the company’s estimated $106 billion in total revenue.

Erick Maronak, portfolio manager of the Large Cap Growth Fund at Victory Capital Management -- who includes Apple among his largest holdings -- believes the company is an inexorable force in the global marketplace.

“In the smartphone market, Apple and Samsung are the rising dominant players,” he said. “Nokia and Research-in-Motion are in serious decline and in danger of being completely displaced in this market.”

Maronak describes Apple as a “vertically-integrated dynamo,” with superb gross margin figures.

Indeed, in the recent quarter, Apple’s gross profit margin amounted to 41.7 percent, versus 39.1 percent a year earlier. Maronak indicated that rival tech companies like BlackBerry maker Research in Motion and Nokia feature lower margins of 30 percent or so.

Maronak also isn't worried about the end of Jobs’ reign as Apple’s king.

“Steve Jobs was clearly the front-man at Apple and had veto rights on any design issues and he was highly innovative,” he said.

“However, [the new chief executive] Tim Cook should not be dismissed. Keep in mind, that when Jobs had to take a medical leave of absence earlier this year, Cook filled in for him admirably, without any changes in operations or a decrease in quality.”

As hard as it might be to believe, Apple may only be getting started -- there's, after all, the huge market of China yet to conquer.

In July, the company’s sales in China amounted to about $3.8 billion, a six-fold leap from the year-ago period. But that’s just peanuts compared to the kind of revenue Apple could generate when the company expands its presence in the vast and populous country.

Apple said it plans to open 30 stores in the third quarter in China, as well as Hong Kong.

“China was very key to our results, Cook has said. We’re just scratching the surface. There is an incredible opportunity for Apple there.”

Maronak noted that while many other mature Western companies have already entered the Chinese market to compensate for tepid growth in North America and Europe, Apple is only beginning to make a footprint there.

“The potential upside in China is enormous,” he noted.

Ron Weiner, the president and chief executive of RDM Financial Group in Westport, Conn., indicated that Apple could be looked at as an investment/demography play on the huge new middle class in countries like China and India.

“Not only has Apple consistently delivered high-quality and innovative products, but it hasn’t even begun to expand its operations in China and some other emerging markets,” he said.

“Apple is a long-term, solid growth story. Even in the unlikely event that iPhone 5 doesn’t generate the kinds of sales expected of it, the stock might endure some brief hiccups, but overall, the company has a brilliant future. It’s in the catbird seat.”

There's, however, a very odd element to Apple’s grandiose success – why is its stock so cheap?

Apple shares trade at a 12-month forward P/E of a little more than 12 – extremely moderate for a company that routinely smashes Wall Street’s earnings forecasts, has no debt on the books, and boasts a war chest of something like $71 billion in cash.

In comparison, LinkedIn Corp., which recently conducted its initial public offering, trades at a forward P/E of almost 500.

“Apple is a veritable cash machine and I am puzzled as to why the stock remains so undervalued,” said Maronak. “Perhaps some investors feel that the company has already gotten so big, that it can’t get any bigger.”

Weiner noted that Apple’s modest valuation may simply reflect a weak environment for equities generally.

He noted that companies like Ford, and General Motors are trading at forward 12-month P/E’s of between five and six. Even tech company Siemens only trades at about 8.9 times its forward P/E.

In some ways, Apple might become victimized by its own success – yet, such a thing is unlikely to happen for many years.

In a worst-case scenario, Maronak suggested, once Apple’s growth starts to slow down, it won't be an overnight event.

“Well-managed, high-growth companies don’t implode instantaneously,” he said. “Look at Cisco Systems. Their eventual stagnation was the culmination of about five straight years of bad decisions.”

Apple, he counters, has scarcely made any poor decisions – thereby, likely giving the company a much longer life span.