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How Apple Can Keep Growing at 90% AnnuallyThe Next Growth Areas

March 15th 2012

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Table of Contents

• Isn’t Apple Too Big To Keep Growing This Much?

• How Is It Possible?

• What are the Growth Areas from Existing Portfolio?

• What are the Greenfield Growth Areas?

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Why Apple Can’t Keep Growing

• Why Apple Can’t Keep Growing:

• Unprecedented

• Too Big

• No More Steve Jobs

• Everyone likes it; it’s a bubble

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Why Apple Can Keep Growing

• Why Apple Can Keep Growing:

• Unprecedented But no company this big has had these opportunities

• Too Big Yet all Apple does is win

• No More Steve Jobs Yet Steve’s greatness masked how good rest of the team is

• Everyone likes it; it’s a bubble Still cheap with a forward P/E of 11x and a trailing P/S of 4x

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Apple Quarterly Growth Y/Y in Net Earnings

It Can’t Be Done – But They Keep Doing it

Dec 10 Qtr Mar 11 Qtr Jun 11 Qtr Sep 11 Qtr Dec 11 Qtr0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

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Projected Apple Net Income in $B – 90% Y/Y vs. 65% Y/Y

How Is It Possible To Keep Growing Earnings 90% per Year?

Y2011 Y2012 Y2013 Y2014 Y20150

50

100

150

200

250

300

350

400

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Units Sold in Millions

Apple Products Sold In Last 3 Years

Y2009 Y2010 Y20110

10

20

30

40

50

60

70

80

MaciPodiPadiPhone

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What are the Growth Areas from Existing Portfolio?

What are the Growth Areas from Existing Portfolio?

• Macs

• iPad

• iPhone

• iTunes

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Mac Growth

Mac Growth:

• One of the most ignored parts of the Apple portfolio

• Has consistently grown faster than the PC industry

• Grew Revenue 26% Y/Y in the Last Quarter and 22% for Last Year

• PC Industry growing 10% annually

• Huge opportunity to grow market share in the years ahead

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MM of units sold or projected

Mac Halo Effect to Speed Up

Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 Y20150

10

20

30

40

50

60

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iPad Growth

iPad Growth:

• New Category created from scratch 2 years ago, now 20% of Apple’s revenues

• 55 million devices sold since inception

• Likely 58 million iPads will be sold in this fiscal year

• iPad trying to achieve iPod market share

• A 500 million tablet market in 2015 means 300 million iPads with 60% share

• For comparison, 409 million PCs were sold globally in 2011

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MM of units sold or projected

From Nothing to 300 Million Units Sold in 7 Years: iPad

Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 Y20150

50

100

150

200

250

300

350

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iPhone Growth

iPhone Growth: Driven By Smart Phone Adoption

• 53% of Apple’s revenues from announcement 5 years ago

• Likely to remain 44% of Apple’s revenues by 2015

• Smart phones will be every person’s dominant computing device

• 72 Million iPhones sold last year, yet could sell 6x that in 2015, assuming 1.5 billion smart phones will be sold and Apple retains a 32% share

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MM of units sold or projected

10x 2010’s iPhones To Be Sold in 2015

Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 Y20150

50

100

150

200

250

300

350

400

450

500

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iTunes Growth

iTunes Growth:

• After Macs, the most easily forgotten part of the Apple portfolio

• iTunes had $2 Billion in net sales last quarter; Facebook had $1.1 Billion

• iTunes last quarter of revenues was 1/5th the amount of Google’s total revenues

• iTunes growth tags along from the number of active iOS devices

• If devices explode, so will iTunes $32 Billion in revenue by 2015

• Will they do something different for iTV?

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iTunes Revenue Set to Explode

iTunes Revenue Set To Explode with New iOS Devices Sold

Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 Y2015

iTunes 4.03 4.94 6.314 9.82359675 14.735395125 21.882061760625 32.09369058225

% of Rev 0.0939284465679991

0.0757378305864316

0.0583284834040037

0.055 0.05 0.045 0.04

$2.50

$7.50

$12.50

$17.50

$22.50

$27.50

$32.50

$B

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What are the Greenfield Growth Areas?

What are the Greenfield Growth Areas?

• iTV

• iAd

• iPay

• Siri

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Projected future TV and PC Growth – in MM of units sold

iTV Growth: The Market for PCs and TVs Today

2011 2012 2013 2014 20150

100

200

300

400

500

600

700

TVs SoldPCs Sold

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iTV Growth: The Meeker Effect is Real

iTV Growth: The Meeker Effect is Real

Year 1 Year 2 Year 3 Year 4 Year 5 Year 60

20

40

60

80

100

120

140

iPhone iPad iTV

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iAd Growth

iAd Growth:

• Apple has seemed to be conflicted about getting into Ad business

• Jobs referenced need to help developers and making quantum leap in ads as reason for Apple to do it

• Jobs was right though that the key is Emotion and Interaction

• We’ve yet to really see this though from ads – even from Apple

• If Apple is going play a central role in TV, they need to step this up

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iPay Growth

iPay Growth:

• Huge inefficient market waiting to be disrupted

• Unlike Google, Apple waiting to do this right

• PayPal expects Apple’s entry and has been seeking to differentiate itself as vendor-neutral mobile payment provider

• Will require more than a credit card linked to an iTunes account

• Just shaving off the percentage fees to credit card companies would save Apple billions from its retail stores

• Could decide to do something totally new in mobile location payments area

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Siri Growth

Siri Growth:

• “Google Killer” as it bleeds away reliance on desktop index search to get information

• Siri itself won’t be a money-maker for Apple

• But it will build powerful loyalty among users to Apple products

• Even more powerful when it becomes the interface to your TV and your house

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Projected Apple Product Mix in 2015

Projected Apple Product Mix in 2015:Mac8%

iPod0%

iPad20%

iPhone44%

iTV16%

iTunes5% iPay

3% iAd3%

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In $B

What Will $610 Billion in Annual Revenue Look Like in 2015?

iPhone iPad iTV Mac iTunes iPay iAd iPod$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

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Apple’s Price-Sales Ratio Over Time: Likely at a Top Now

Y2008 Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 Y20150

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

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Conclusion

Conclusion

• At a 2.5x compressed price-sales multiple, Apple can easily get to a $1.53 Trillion market capitalization by 2015 – or $1,646/share representing a 183% increase over today’s price

• iTV’s growth should exceed the success of iPad

• Feature phone decline opening door to massive iPhone growth

• iPad could be close to the current size of the PC industry in a few years

• Macs will grow share in PC industry through Halo Effect

• iAd and iPay are wildcards here; both have potential to be massive