Should You Buy Apple Before the iPad Launches?

“Apple (Nasdaq: AAPL) will become the most valuable company in the world. Bet on it. In fact, go out and sell all your personal belongings… and buy Apple stock with every last dollar you own.”

That was the intro to an article I wrote on Sept. 12, 2010 on the inevitability that Apple would become the most valuable company in the world; Apple has risen 107% since then and recently did secure its place as the world’s most valuable company. While the intro was a bit sensationalistic – on purpose – the message of the article was clear: Go and buy Apple. And less than a week later, I followed it up by issuing a buy recommendation.

All this to say, I’ve been a huge Apple bull the past year and a half, and I’m hardly alone in my opinion. Wall Street has nearly unanimous buy recommendations on the company. But so much changes when a company sees huge gains the way Apple has across the past year. During its torrid 2012 run alone, the company has already notched a 35% gain in just two months.

The $500 billion question has become whether Apple shares have any fuel left in the tank.

The incredible iPad mania

It might be stunning to investors who witnessed iPod and iPhone mania, but it’s the iPad that has claimed the title of Apple’s fastest-selling product in history. As of last quarter, it’d already moved 55 million units, far outpacing other iconic Apple products.

The iPad contributes about 20% of Apple’s revenue today, second only to the iPhone. It’s a central force in pushing Apple into business, with nearly every US Fortune 500 company deploying the iPad in some form. By 2013, Forrester Research estimates that about 17% of all global business and government PC spending will be on iPads. Any way you slice it, the iPad is an essential component of Apple’s meteoric rise.

No-one really knows exactly what new features and capabilities will come with the next generation iPad, but you can click here for our best guess on what an iPad 3 might contain

I just gotta talk about the iPhone

Although I’ve started with the iPad ahead of its unveiling this Wednesday, the question of whether to buy Apple veers back toward the iPhone.

It’s quite simple: While most consumers pay only $200 to $300 for their iPhones — which is roughly half the cost of an iPad — the heavily subsidised nature of the mobile industry means Apple actually collects more revenue on each iPhone sold (roughly $660 per phone) than on iPads ($590). This despite the fact that iPhone costs are generally regarded to be in a range where the average phone has about $200 worth of “guts” inside. Compare that with the iPad, where the iPad 2 was closer to $300 in components in each unit. Because of the economics of the wireless industry, the iPhone sells for more and costs quite a bit less to make.

Secondly, while the iPad is Apple’s fastest-growing product ever, that’s largely because Apple was very careful about building out the iPhone’s carrier partnerships and was less aggressive about its pricing during its first few years on the market. Now that the iPhone has opened up to more carriers and is taking advantage of the global demand for smartphones, its sales have skyrocketed.

Tablets are a key area of growth for Apple and remain a near monopoly for the company, but the smartphone market is just staggering. We’re still on target for a billion smartphones shipped in 2015. It wouldn’t surprise me if tablets and PCs put together were roughly only about 60% of smartphone shipments in that time. And with the iPhone costing the same as the average PC and more than the average tablet sold, well … you get the picture.

Enough, already! Is Apple still a buy?

Put it all together and yes, I still think Apple’s a buy. It can be nauseating to buy a company at its all-time high, one that’s been running up for weeks, and one attaining an unprecedented size for technology companies. However, it’s worth noting the majority of times buying Apple in the last decade required buying it near all-time highs while it had seen strong gains across the past year. Wall Street is constantly catching up with the realities of the opportunity in front of Apple.

I outlined in a previous article why I believe Apple is still a buy north of $500, and it really hits on three main opportunities for the company. Combined, I believe these opportunities will push Apple ahead of already lofty expectations across the next two years.

Emerging-market growth: Apple has pushed hard into China, and its efforts are bearing fruit. China accounted for 16% of Apple’s sales just a few quarters ago. With the iPhone not having launched in China last quarter, its momentum in that country should push Apple to another blowout quarter when it next releases earnings. However, China is just one (very large) component of the emerging-market opportunity. Apple focused on the country first but is now expanding out to markets such as Brazil, Russia, India, and Indonesia. All those markets have relatively large amounts of consumers with enough discretionary cash to buy Apple products and present an added opportunity across the next two years.

Business spending: The iPhone has been on the vanguard of an idea called the “consumerisation of IT,” but the iPad and Mac are now pulling their weight in businesses as well. Rather than having IT departments dictate what their employees use, they’re now opening up. Essentially every major company is testing iPad use across their organization. Business spending growth in Macs and iPads alone could account for 25% of the growth projected for Apple in the next two years.

Apple TV: While Apple is expected to also unveil a new Apple TV box this Wednesday, the larger opportunity will be its own television set, which is likely to hit in 2013. This is an opportunity to once again leverage the iOS ecosystem and could disrupt several industries in the process.

So there you have it: Three reasons for Apple to keep up its momentum in front of the iPad’s unveiling overnight.

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The Motley Fool’s purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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