Apple

I am considering adding Apple (aapl) to my portfolio. Here are some of the reasons for the record.

A dear friend of mine who works in a big bay area chip company suspects that Apple is on to something big. Apple is a client of theirs and they have ordered chips which combine three different functionality in a chip which has never been done before. One of these is bluetooth so you get the picture where it is headed.

I don't see anyone getting tired of updating ipods. I probably am the owner of the oldest ipod on earth from the prehistoric era. It is a 15GB first gen brick from Apple for which I paid upwards of $350. At the time I bought it, to say that it was a head turner it would be a gross understatement. It was an eye-popping, saliva-inducing, heartbeat-skipping, reality distorting instrument just as intended by Steve Jobs. And even though it serves my music needs still, I feel a bit awkward carrying it around. Its like a gorgeous mistress that has grown old and ugly and more of an embarrassment to keep. We live in such times! The new ipods, well, they get sexier by the day not just in style but in functionality as well and are merging with cell phones, video, and what not.

Iphones - Most of the issues with the iphone is lack of 3rd party software due to proprietary format and lack of Java Runtime on the phone. Though I think that is a concern, but maybe not so for the not-techie masses. And even for techies like me the sex appeal of the phone masks this shortcoming. Proprietary formats haven't stopped the Itunes and Ipods form becoming a success for sure. And it aligns well with Apple's philosophy, do a few things, keep it simple but do them very well.

Network partners like ATnT in the US are paying hefty fees for each iphone sales to Apple and this should generate a good revenue source. Not sure if this is a better strategy then tying with all the networks and accessing larger markets with small commissions per phone, time will tell. But there might be more than meets the eye here, maybe Apple plans its own network in the future. Kind of redo the synergy between the Itunes and Ipod?

As a side note, emerging markets might have a great growth potential for the likes of Apple. The well-healed in India seem to be crazy about gadgets, especially cell phones. With rising incomes and dispensable spending power, a rising rupee, and a rapidly growing consumerist economy, the growth projections in these markets might be a tad short of reality.

Another side note, well maybe not so much a side note, there is something to say about the mushrooming satellite industry around ipods like chargers, car adapters, speakers, audio systems, etc. Even the newer luxury cars come with ipod compatible features. Even a few airlines are integrating ipods with their in-flight entertainment systems.

Apple earns more on the Macs then the Ipods with something like 40% y-o-y growth. I had always lusted after Mac Mini. But it seems to be passe now, I hear talk about Mac Nano. I do love my Macbook though and I think the growth will continue especially more so after Mac OS X Leapord comes out next week. From what I hear, Vista has taken a beating so far and old timers still prefer using XP to Vista, this might be a great opportunity for Apple to gain some turf in the OS arena. And one can run Windows on the Macs but not run OS X on PCs so there.

Is this the tipping point for Apple?

The risks

Obviously Stevie is a central point of failure. If anything were to happen to him, it might be hard to replace him.

More of the obvious, competition is immense, be it cell phones, mp3 players, etc. Apples success depends on staying ahead of the curve, exemplary marketing and brand management and a constant slew of amazing products with a little RDF thrown in.

My reality perception might have been severely distorted by Apple (read Steve Jobs) and others might recover faster from their hallucinations while I pump my hard earned money into this thing.

I haven't done much of fundamental, technical analysis of this stock but just a quick few notes.
The PEG ratio for Apple is 2.03 which is pretty high.

Macro economically, the US markets have been in a bull run for the last 4+ years. Faceobooks apps are selling for millions. All this is somewhat reminiscent for the dot com bubble and makes me queasy. I started investing at the height of the bubble in summer 2000 and bought tech companies like Cisco, Sun, AOL, Qualcomm etc! All above 100$. The idea was to buy and hold good companies for long periods and reap benefits. I had put in roughly 2000$ which became a couple hundreds after the bust and even in 2005 they amounted to around 600$.

The lesson learnt is that if the markets go for a free fall then no matter how good your holdings are, you might be looking at a loss for even long time periods. So I will buy some Apple but with a trailing stop loss of around 15%. Go Apple.