When Steve Jobs passed away in late 2011, many investors wondered whether Apple (AAPL) could forge ahead without its founder. Unruffled by the pressure, successor Tim Cook has delivered an emphatic response: he's released a slew of new products, embraced new technologies and temporarily sent the company's market value north of $700bn (£447bn). The world's most valuable business remains leagues ahead of runners-up Exxon Mobil and Microsoft, which both hover around the $400bn mark.
Shares in the Silicon Valley giant have surged 125 per cent since Mr Cook took the reins in late 2011. They've risen by half in the past year alone, well ahead of the S&P 500's 15 per cent return. But analysts think there's more fuel in the tank: in the past month, at least 14 brokers have raised their price target by an average of 10 per cent. And activist investor Carl Icahn thinks Apple's shares trade at "half price".
Recent events certainly lend credence to the bulls. Apple may have missed a trick by ignoring the burgeoning large-screen smartphone market, but its new iPhone 6 and iPhone 6 Plus have addressed that oversight. They've also had implications for rival Samsung: the hype surrounding their launch, together with pressure from low-end smartphone makers such as Xiaomi, precipitated a 74 per cent drop in third-quarter operating profit at the South Korean company's mobile division. In contrast, Apple's profit rose about 11 per cent to $11.2bn. Moreover, stiff competition and a slowing high-end smartphone market have prompted Samsung to shift its focus towards mid-range devices, effectively ceding the premium market to Apple.
A key difference between Apple and Samsung is the former's focus on profitability rather than shipment volumes. Although Samsung shipped more than double the number of smartphones in its third quarter, it earned about a third of Apple's profits. Analysts think Apple's profit margin may swell further due to the iPhone 6 Plus, which carries a 10 per cent larger gross margin than the base model. They also predict a blockbuster holiday season, with early evidence pointing to Apple blowing past last year's sales record of 51m iPhones, following a 16 per cent rise in unit sales to 39.3m last quarter.
Apple has also proven resilient to the slowdown in the premium smartphone market, which has weighed on semiconductor and smartphone companies alike this year. Its third-quarter shipments rose 16 per cent, while Samsung's shipments fell about 8 per cent and its market share shrunk from about a third to less than a quarter. And the broader smartphone market remains strong, with third-quarter global shipments up a quarter to nearly 328m.
If Apple can increase its market share by even a small amount, the impact on its bottom line could be substantial. Buying an iPhone means joining Apple's closed ecosystem of products and services, including its App Store. That has become a key money-spinner through a shift towards apps and services rather than music and movies, which has pushed up margins. Indeed, the App Store's estimated gross margin is about 85 per cent, compared with a fifth for iTunes. And if mobile payments service Apple Pay or the upcoming Apple Watch prove popular, there could be upside to growth forecasts.
One concern may be that iPad sales slipped 13 per cent to 12.3m units last quarter. Larger-screen iPhones threaten to cannibalise future sales, too. But Apple's recent tie-up with IBM to target the enterprise market may help matters, and strong growth in iPhones, Macs and digital content should be sufficient to offset tablet declines.
The true level of demand for new iPhones isn't yet known, says broker Susquehanna, as supply is yet to catch up with demand. The broker expects Apple's pre-tax profit to rise 14 per cent to $61.2bn this year, giving EPS of 7.56¢.
