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Analyzing the iPad as a computer: from a whisper to a roar

[Goldman Sachs analyst Bill] Shope also expects both iPad and iPhone sales to exceed expectations in 2011; he sees sales of 37.2 million iPads next year, “which could potentially make Apple one of the largest vendors in the global personal computing market,” if you include both tablets and PCs.

via Apple: Goldman Pounds The Table; Sets $430 Target – Eric Savitz – Tech Musings – Forbes.

Apparently, it’s not just the crazy ones who dare to think the iPad is computer.

My forecast for iPad in calendar 2011 was set at about 33 million since last summer. I may raise it if Q4 units top 6 million.

Meanwhile…

He re-launched coverage of the stock for Goldman this morning, setting a Buy rating and $430 price target, while placing the stock on the firms “America’s Conviction List.”

I don’t make stock price forecasts as they are based on a random number called ‘sentiment’. But by forecasting earnings and assuming a range of P/E multiples between 15 and 20 (essentially in-line or below the S&P 500) values Apple’s stock at between $360 and $480 by this time next year.

Goldman’s target of $430 is about in the middle of this range so I don’t see it as requiring much in the way of conviction.

  • Joe_Winfield_IL

    Why did Goldman decide to stop coverage in the first place? I understand when a small boutique investment firm doesn't have adequate resources to put out good reports on a company, but GS is the premier investment bank in the world and AAPL is the second largest market cap on the planet.

    The only reason I can conjure is that GS knew its "new" coverage and placement on the conviction list would provide the necessary catalyst to sway sentiment to the upside. AAPL has been rangebound since the last earnings call, even as the sales growth trends across all product lines have continued unabated. Hopefully, this gives more than a one day jump-start to the stock and scares away some of the shorts.

    • asymco

      Coverage was dropped because the analyst doing it left. Being dropped from their "conviction" list can happen if a stock goes up too quickly.

      • Joe_Winfield_IL

        That makes sense. So ultimately, it just works out that AAPL was never removed from the "conviction" list over valuation, but it got to be put back on a second time due to personnel. Thanks for the clarification.

        Either way, the word of GS seems to carry much more weight than that of a smaller analyst. It is a welcome jolt on a Monday morning to see them back in the Apple cart.

      • dcb

        GS wants banking business. Apple has a ton of cash on the balance sheet to disburse in the event of acquisitions.

      • Russell

        Good point to add to the GS report. Perhaps its a win-win on both accounts. New analysts has conviction about what he's saying, and a shot at future banking business offers it more business. They get their cake and maybe get to eat it, too.

      • Joe_Winfield_IL

        At the risk of being naive, I don't think it works that way. There are countless analysts tracking AAPL, and most are giving favorable opinions with no expectation of brokering a deal for Apple. Of the top 13 Analysts tracking AAPL (according to my Fidelity account), 11 have buy recommendations, and the other two recently downgraded to hold based on the elevated share price. Such a thin motivation by GS would get them back into trouble with the SEC, and in a much worse way than the recently settled Paulson case.

  • davel

    technically the ipad is a computer.

    i understand your point. more broadly to make the ipad a computer apple needs to do a better job of doc management. you also have the real estate issue.

    but i consider it a computer and a superior one at that for most functions that i use it for.

    • Hamranhansenhansen

      iPad is a mobile PC in the same way iPhone is a mobile phone. If a notebook PC is a computer then so is a mobile PC. A 10-inch 1024×768 screen is a PC class screen, OS X is a PC class core operating system, native C apps are PC class, and apps like Safari, Mail, Calendar, Pages, Keynote, Numbers, OmniFocus, StudioTrack, iMS-20, Brushes, Sketchbook, and others are PC class apps. In 2000, I had a desktop PC and a notebook PC and a mobile phone. In 2010, I had a notebook PC and a mobile PC and a mobile phone. The PC's just moved down a notch toward mobility, while still moving up in power.

      Apple finally has a $500 PC that gives them a complete PC lineup, and they are finally going to take their rightful place as the highest volume PC vendor sometime in 2011. Apple passing Microsoft in revenue and buying HP's recently vacated Cupertino campus is emblematic of this change. People who pretend that is not happening are denialists.

      Finally, all you have to do is compare iPad to Samsung Galaxy Tab to see iPad is a PC. Galaxy Tab has a 7-inch screen that shows a pixel doubled mini phone browser, not a full-size view of the Web, it has mini phone Java applets not native C, none of that is PC class. When have PC's ever been Java applets on a 7-inch screen?

  • Berk

    Many thanks for NOT predicting a stock price. The shifting sands of collective sentiment really do make predictions absurd. With some of the existing "informed" predictions, why wouldn't the price have shot to those points already?

    My favorite overheard economics lesson:

    Guy 1: "How much do you think it's worth?"

    Guy 2: "I don't know. Whatever you can get for it."

  • Russell

    @Horace

    i just love how much of the street/market is still not in tune with the big picture as to what's going on here. Since i am long apple, i often wonder what is the biggest factor holding back this stock. I have this hypothetical pecking order as to how factors impede a higher multiple at this time. From most important to least.

    1. They don't get it(tech cycle, disruptive products, magnitude of mkt., etc) at this point.

    2. The law of BIG numbers will impact it in the near future. It''s too late to take part.

    3.Too many bad things(recent economic events) coupled w/ future uncertainty

    4. Android will take over the world and limit its future growth in a significant way

    5. Steve Jobs' health. Although, sometime i think this one could have a reverse affect in favor of aapl if something(sadly) were to happen, since apple at its core is such touchy, feely company.

    Accounting for all five factors( sure there are more) together is working on depressing the price obviously, but number one, by far (in my opinion) will have the greatest impact on gains once/if the market comes around.

    • asymco

      Disruptions are, by definition, unforeseeable. Apple is getting some credit for each hit but it's still seen by many as dependent on blockbusters to keep alive. It's like betting on a Hollywood studio. Everybody is worried the next movie will flop.

      The real "getting it" for Apple is that it is not just a studio but a hit factory. It developed a studio system. It's more like Pixar, which never released a dud. "Getting Apple" means getting that hits are actually manufacturable and that Apple knows the magic formula. There will always be skeptics, but just like it took a long time for high quality manufacturing to become predictable and bankable, so it will take a long time for people to realize that innovation is predictable and bankable.

      • davel

        nice linkage.

        pixar also had issues with the next hit. that and these two companies have the same ceo.

        i don't understand how innovation is predictable and bankable. i agree that apple's approach is unique in the way they go about things. others can copy it, but they don't have the vision or patience. look at palm, they got the apple engineers. many lauded the os's technical capabilities, but it failed. perhaps they did not pay attention to some important aspects of the device ( ram/speed/etc ), perhaps they were just late and got trampled.

        either way they failed taking a similar approach to apple.

      • TomCF

        Innovation is stifled in many companies through management that looks at the short term, and is not willing to cannibalize its existing products. (There are other factors as well, but these are two big ones.) Apple doesn't sacrifice its future for the next months' sales or to boost its stock price. They also don't sell anything at a loss (last I looked).

        They look at a problem (e.g. cell phones suck), and bang away at the design until it's head and shoulders better than the existing solutions. They don't measure this by a list of checkboxes. They look at what people want to get done, and they make it as trivial as possible to do it.

        Any individual component of an Apple device is not really breathtaking or cutting edge. They're taking existing technology and putting it together in an extremely well thought out manner. None of this is terribly unpredictable other than time. They control that by not releasing *any* information about a product until its done.

        It just* takes a willingness to say no to Wall St., the press, investors, salespeople and feature creep.

        *That "just" is something that very few companies are able to do. The pressure is enormous and unrelenting.

      • Hamranhansenhansen

        The trick is that both Apple and Pixar do make duds, plenty of them. They just don't release them.

        Steve Jobs has already said publicly that he was running an iPad in 2003. They iterated for 7 years, including releasing mini versions, until they had an iPad that they were willing to sign an Apple logo on and sell publicly. The 2003 iPad would have been $1500 for just Safari, and it would have been slow, and it would have sold in the thousands.

        Pixar makes the entire movie using sketches, and if the sketch doesn't make grown men cry, they make another sketch, and again, and again. They don't fire up the expensive 3D until a sketched movie comes to life that deserves to be part of the Pixar canon.

        Most roll the dice and whatever it comes up, they just release it. Apple and Pixar only release when they shoot double sixes. From the outside they seem to be shooting double sixes all the time. It seems like a lucky streak. But there is no luck involved, just quality control.

      • asymco

        This is very insightful. Genius is indeed 90% perspiration and 10% inspiration.

      • FalKirk

        This is another one of your excellent analogies. People do, indeed, see Apple as having strung together a series of "one-hit wonders." If one is viewing Apple from that perspective, it's no wonder that they have no faith in Apple. After all, from their perspective, how long can Apple continue to keep stumbling from one lucky break to another?

        It's only if you believe that Apple is following a an extremely successful formula that you start to have faith in them. But a review of Apple's competitors makes it clear that, far from believing in the validity of Apple's formula for success, they've yet to discover that Apple even has such a formula. Most of them still fervently maintain that Apple is doing it all wrong and, baffled by Apple's success, they lean on rationalizations like Apple's marketing genius, or Steve Jobs ability to create a reality distortion field or the fanatical (if misguided) loyalty of Apple's customer base to explain away the discrepancies between what they think the world should be and what the world actually is.

      • Russell

        Horace

        Good way to demonstrate how so many view this unfolding of events at Apple. As for number two on the list, the law of big numbers, its the one that i least understand. I know its in the back of a lot of minds. The conversation always stops since the unknown is unknown.

        As far as any big name street anyalst having spoken on the record about this subject ( that i'm aware of), it was Mary Meeker in a recent discussion, The Handset Wars- 3/23/10. She is quoted as saying, " You can actually get the market cap that you haven't necessarily seen before". This was in reference to the sheer number of users that will adopt, but not directed at any particular company. However, a lot of ink in that report was directed at Apple.

        Having said all that, I'm content knowing that Apple will likely be a company that it valued more in five years than it is today.

      • TomCF

        Are there any other successful companies that are as willing to put aside short term goals despite pressures from Wall St.? The two that come to mind that I'm familiar with are Berkshire Hathaway and Anally Mortgage. They stick to their principles and don't change their methods regardless of how that is perceived by the market. Any others?

      • Iosweekly

        I've used the pixar – apple comparison before also, but a more appropriate comparison would be to the cirqu de soleil business.

        It completely reinvented an industry that was a low priced almost commoditized like in terms if the variety of operators. Now they are the highest per person revenue generating form of entertainment on the planet – continually creating new shows that have multiple troupes performing to sell out audiences worldwide at very high ASP. They are a 'Hit Factory' also, and never seem to produce duds.

        Be patient with the stock price, the raw financials that apple generates over the next 24 months will shoot it past $600 a share with ease, without any conviction needed.

  • http://www.brianshall.com Brian S Hall

    I find it hard to believe Apple will sell close to 40 million iPads (v1 and/or v2) next year. If so, then look out, because it's not simply well-off consumers and fan boys.

    I think most analysts have been wrongly focusing on the consumer aspects of the iPad. It's ultimate purpose is as a business/communal device, not a consumer/personal device. This is an entire new category and Apple has at least a one-year head start.

    If interested, the link is: http://brianshall.com/content/communal-computing-

    Once Apple cuts the price even further on these devices, they have a very good tablet device that can be used in logistics, healthcare, in the home. However, it's instant-on, intuitive UI combined with the form factor alter the equation. It is no longer one device per person.

    • davel

      Can you expand on why cutting the price is a requirement?

      Is it just that the price point is too hi?

      Apple is currently the low cost leader in this space if you look at features/cost vs its slim competition.

      • http://twitter.com/BrianSHall @BrianSHall

        I think people (and businesses) retain a cultural bias re ownership. This is *my* iPad. However, the nature and size and speed and usability of the iPad I think are highly conducive to 'communal' use. I don't think Apple can achieve this goal, however, until the price point drops to, say, $250 and businesses can buy them in bulk and place them in every meeting space.

      • Steven

        I think you are looking too much at device cost and not enough at time cost. If there is a business case for using tablets in the workplace (for example not having to walk back to your desk all of the time to check a prescription), then it takes very little time savings to justify a $400-$500 USD tablet.

        The real question is is there really a time savings to these devices. I would say yes in limited scope. For many, the time savings are minimal or non-existant.

        Going to $250 bargin basement is not really a requirement IMO.

      • chano

        You are right. Time is money and so the instant-on, always accessible nature of iDevices is a cost-saver. 10 years ago, I suggested to a client that installing 17" screens instead of the 12" models offered by the supplier would save time and money simply because 2,000 users would not need to scroll at all to see all of their workspace, all of the time.
        The payback was immediate – in less than six months.

      • Joe_Winfield_IL

        I can see how this would be altruistically positive, but why on earth would Apple cut the price of its products in half, only to encourage sharing rather than individual ownership?

    • Hamranhansenhansen

      You are totally missing the point. iPad is not a toy, it is a PC. It is the only mobile PC that exists right now, it has no competition. Even so, it is cheaper than many mobile phones. The subsidized pricing of mobile phones is hiding this from you. Even so, it has lower TCO than many netbooks.

      The main things that have been holding iPad back are: lack of availability (3 week wait, 2 per customer, limited countries only for most of its life), lack of user familiarity (people don't realize it is a PC until they try it), lack of maturity (multitasking just added a few weeks ago, 3rd party software library is all 1.0). All of these problems are 2010 problems only. But even in 2010, iPad sold very well, so 2011 will be a much bigger year. Selling 3:1 2011:2010 is a very reasonable estimate. Especially with a new model and the old model selling for even less.

      No, it is not fanboys buying iPad. It is the first Apple product for half its buyers. It is the first non-Windows PC for many companies. It is a huge hit with business people. Bankers love it because it is more secure for financial transactions than a Windows PC.

  • Russ Louisville

    I don't hear much talk about what I think may be a very important aspect of the i pad.
    I used to commute to NY cityon the train every morning and watch people struggle with their newspapers. It seems to me that soon they will all have i-pads and sbscritions with newspapers and magazines. Won't this be a huge revenue source for Apple at some point in the not too distant future?

    • Xavier Itzmann

      Russ,

      So, the wife got an iPad we totally don't need. Whatever. Here's the thing we discovered: all three journals we read (WSJ/The Econ/NYT) have superb iPad editions.

      Bye print media!

  • JP Chicago

    This debate shows how old categories do not work in a new world.

    What is a personal computer? Where do computers end and iPad begin? We can go on but this is semantics.

    What if in reality iPhone is in every category, or in none, or just two? I have read industry professionals casually running growth rates of phones v computers, as if there is no question.

    The computer has been reduced to just the essential elements. No more mouse, hardware bulk, wireless, etc. An interface, virtualized. While most people assumed a computer was one thing, iPad is everything that one makes it to be.

    When the hardware does not interfere, we can go about our business. Computers started to die out when the world saw iPad, for good reason.

    iPad replaces redundant technologies, and shows by comparison how poor other computers are, and how little imagination they have.

    It is easier to segment out iOS units, than to see it as a single unified category that transcends the old divisions, because then the numbers seem less in favor of Apple. The fear is palpable.

  • davel

    By technical definition both the iPad and smart phones are computers. They are digital binary machines.

    From the laymans point of view this may not be. But all of the above are computers by any classical definition of what a computer is.

  • Berk

    Fascinating article in the NYT magazine on urban growth: A physicist finds mathematical patterns in the growth of cities leading to greater efficiencies. He sees, however, that corporations don't have the same life expectancy. Is this the market's current 'intuition' about Apple (or any other large corporation)?

    "After buying data on more than 23,000 publicly traded companies, Bettencourt and West discovered that corporate productivity, unlike urban productivity, was entirely sublinear. As the number of employees grows, the amount of profit per employee shrinks. West gets giddy when he shows me the linear regression charts. 'Look at this bloody plot,' he says. 'It’s ridiculous how well the points line up.' The graph reflects the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy. 'When a company starts out, it’s all about the new idea,' West says. 'And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line, and so all these people are hired to keep track of the paper clips. This is the beginning of the end.'

    "The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility. Since the company now has to support an expensive staff — overhead costs increase with size — even a minor disturbance can lead to significant losses. As West puts it, 'Companies are killed by their need to keep on getting bigger.'"
    http://www.nytimes.com/2010/12/19/magazine/19Urba

    Does your data on productivity contradict this?