Apple Inc. Is A Buy, Period

Apple Inc. (NASDAQ: AAPL) is a technology company that operates in the industry of electronic equipment. The company's product line includes smartphones, tablets, portable PCs ,and related services. Apple has been showing impressive growth since the launch of its music player, iPod, in early 2000s. The company managed to sustain its growth trend amid innovative products; first the iPhone and then the iPad. The company generates most of its revenue from sales of iPhone. The phone segment generated 53% of the total revenue in fiscal year 2013. Tablet segment generated 18.7%, Portable PCs 12.5%, and related services around 10% of company's revenue in fiscal year ended 2013.

Segment analysis
Apple has a history of coming up with innovative products. No matter what competitors do, they fail to damage Apple's unit sales. However, going forward, the smartphone industry is slowing down, the tablets' outlook is also downgraded by several research firms. PC sales continue to shrink, thanks to the tablet and smartphone market. Furthermore average selling price of all these devices is expected to follow a downward trend amid intensifying competition and growth in "margin sensitive emerging markets". On the surface; it looks like that Apple has peaked, and there is no further upside. This is not entirely true, I believe. Apple will continue to perform well in a short to medium term amid several reasons analyzed below in detail

iPhone
Since the launch of iPhone, Apple has been consistently showing impressive performance. During 2011-2013 period, iPhone sales grew at CAGR of 40%. The competition was getting stronger every year (think Samsung and HTC) but Apple managed to post decent growth.

The reason behind this growth was design-first strategy, optimization of hardware and software, and brand perception of Apple. Speaking of brand perception, Samsung and HTC released pretty decent devices, which arguably had better specifications than Apple's products, yet Apple's sales were not dented in the past. Brand value created by Apple's design-first strategy was the main reason behind it. Moreover, consumer brand perception is heavily biased toward Apple's products. Whatever the reason, Apple managed to come out as a winner. This strategy will continue to remain successful for Apple in near future but now Apple has some added advantages.

1. The new iteration of iPhone, 6 and 6 plus, support a larger screen. Setting aside all other anticipated upgrades, large screen feature is enough to support the growth thesis of iPhone. Historically Apple lagged behind competitors when it came to screen size, yet the company outsold competitors. Being at par with competitors in this department will help Apple gain larger pie of market share.
2. Growth of emerging markets especially China will help Apple to grow in near-term. Margin sensitivity is often mentioned as a threat. However, it should be noted that lower ASP will drive unit sales thereby offsetting the affect of lower margin through revenue growth. Moreover, North American market has a habit of upgrading their devices. iPhone 6 and 6 plus will attract higher margin from sales in North America and Europe. Therefore, margin will not be pressured, not in the near term.

iPad

Tablet ambitions of Apple panned out to be successful in the past. iPad revenue grew at CAGR of 29% during 2011-2013. But most of this growth came in 2011-2012 period. See the graph below:
(click to enlarge)
It can be seen that iPad sales were almost flat in the fiscal year-ended 2013. Rising competition from several manufacturers, white box tablets in emerging markets, and closing differentiation gap resulted in this decline. Going forward iPad growth will be capped by competition and Microsoft's (NASDAQ: MSFT) tablet ambitions; case in point, surface pro 3. More importantly Intel (NASDAQ: INTC) core M (14nm) is enabling fan less x86 devices that are thinner than even iPad air; case in point, Asus T300. Long-term future of iPad is clouded. The iPad sales, in my view, will come down going forward. IDC lowered its 2014 tablet projection to 245.4 million from 260.9 million projected earlier. However in short-term, a time horizon of one year or so, tablet situation for Apple may get a boost due to following factors.

1. Apple is refreshing its product line in October. iPad refresh cycle will help lift declining tablet sales. TouchID is expected to be added in this iteration of iPad. This is a long term differentiation for iPad as on-line payments will be made easier by Apple through touch ID. Note that Apple is, reportedly,partnering with Visa to make mobile payments flexible. But then again iPhone offers the same differentiation, TouchID can't alone be used as a selling point for iPad.
2. Apple entered into a collaborative agreement with IBM; IBM will transfer over 150 of their enterprise and IT apps and tools to Apple platforms natively, and it will also sell Apple iPads and iPhones to business clients. This will boosts Apple's position in enterprise mobility market. However, enterprise will not be enough to offset the consumer sales decline in the long run.

Apple may boost iPad sales in short-term or gain a hold of enterprise market going forward, but its consumer iPad business will become largely irrelevant going forward.

MACs
Industry-wise, PC demand will remain soft going forward. This doesn't mean that PCs and Macs will be dead in coming years. When it comes to productivity or work related use-case, tablets or smartphones can't replace a laptop. Most of PC decline is coming from desktops, and desktops are eventually going to be replaced by laptops/convertibles. Hence, Mac segment is not expected to shrink drastically. It will do so rather slowly. PC refresh cycles will keep the demand stable over the long run. In a nutshell, Macs will have their share of revenue going forward.

So, according to above mentioned analysis; iPhone is invincible, consumer iPads are going away in the long run, and MACs will be stable with slightly negative growth. If that is the case, then where will Apple's growth will come from. Well lets explore.

1. TouchID and online payments; iPhone is in collaboration with Visa to make payments easier for consumer. TouchID will do the trick for Apple. By making payments easier on an iPhone, Apple is basically creating a differentiation that others don't have. This will be a great selling point for Apple in future. Goldman Sachs predicts that mobile payment industry will grow exponentially, from $133 billion last year to $626 billion in 2018. The contact-less payment option can be a revenue generator for Apple in payment services.
2. iWear and health care: Apple recently released a smart watch; the Apple watch. People are more brand conscious when it comes to watches. Apple's brand value will surely come into play.Moreover, iPhone users will not have a choice to buy other smartwatches (except standalone) as iPhone has a closed ecosystem. So, iPhone users are an Apple-only smartwatch addressable market. Now, Apple probably is thinking of leveraging smartwatches to get into health care. Apple has struck deals with several health care players including EPIC and Mayoclinic. Apple is also in talks with Cleveland clinic and John Hopkins hospital. Apple is basically trying to be the data hub for health care information. Leveraging Apple's device sensors, organizations can get real time patient specific data, with patient's consent. This could save data management costs for hospitals and health care provides. In my view, Apple will offer first viable mobile heath care data monitoring service on large scale.

Bottom line

Healthcare, smartwatches, and contact less payments will drive Apple's growth in coming years. Health care kit and contact-less payments are strong selling points for Apple iPhone 6 and iPhone will witness growth. iPads will get a boost from IBM deal and product refresh cycles in the short-term. Smartwatch sales will also make up for slowed iPad growth. All in all, Apple is buy in current scenario. Recent iPhone and smartwatch launch will drive the stock in upward direction in the short term While health care and contact less payments are Apple's long term play.