Could the iPad be Apple’s key to gaining a bigger slice of the global personal computer market? If you consider it a PC like Goldman Sachs does, then yes.
Goldman Sachs on Monday resurrected its analyst coverage of Apple with a note from the newly hired Bill Shope, formerly of Credit Suisse. The note, packed with praise for Apple and bearing a stock-price target of $430, has created a stir — including on Wall Street, where Apple’s stock popped on Monday before drifting back down a bit today to about $321.
Shope noted the growth in the “global PC personal computer market,” but he includes tablets such as the iPad in that market – including when he tracked the growth of Apple’s share of the “PC market” over the past 15 years.
While there is overlap in the markets for tablets and computers (some people are buying the former rather than the latter), it seems strange to just lump them together for purposes of historical analysis. He wrote that “Apple’s share of the PC market has been below 5 percent for most of the past 15 years,” but that, with tablets from all vendors now in the mix, that share will rise to 12 percent next year.
However the data might be framed, it does show why other PC makers are (or should be) stepping up their development of tablets. Shope forecasts that Apple will sell 37.2 million iPads next year, which would give it a 68 percent share of the tablet market.
Macs, meanwhile, are more than holding their own, despite the iPad’s cannibalization. NPD Group on Monday said Mac sales will break a record this quarter, with more than 4 million being purchased. Sales are up 20 percent so far this quarter compared with the same period last year. Growth is faster overseas than in the United States, NPD said. About half a million of those sales will be of the MacBook Air.
For Shope, the key to Apple’s growth story is the “ecosystem” of software and content the company has created. In his 59-page report, he says that people buy Apple hardware products for their design, but once they buy in, they stay because of the “switching costs” involved with moving to another platform. He says Apple’s revenue growth relative to operating expenses – nearly triple since iTunes launched in 2003 – is traceable in large part to this lock-in. Once you buy an Apple product, you’re likely to buy many more Apple products because they’re all tied to the platform.
John Melloy of CNBC took note of an otherwise-overlooked aspect of Shope’s report: the $50 billion in cash Apple is sitting on. So far, the company has “steadfastly refused to part with this cash hoard,” Shope wrote. He predicts a big dividend.
Some observers say the cash is best used to improve efficiency, which improves margins. Others note the incredible growth in the stock, and the missed returns that represents for Apple.
But Dan Nathan, an options trader quoted by Melloy, said that “Apple invests only in Steve Jobs’ ego. “They have made a monumentally horrible decision on this cash management issue, and believe it or not it has cost investors in a serious way. Their arrogance will be the thing that brings them back down to the stratosphere with every other once dominant tech company.”
That might be more than a bit harsh, but, as noted by Fortune‘s Philip Elmer-Dewitt, revenues have grown seven times faster than operating-system R&D spending. Dewitt chose to characterize this as being evidence of the “bang [Apple] gets for its R&D expenses.”
Apple hasn’t reported how much it spends on Jobs’ ego.