Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
When BlackBerry Ltd. pre-announced disastrous second-quarter results and 4,500 job cuts, I was en route to Ottawa with my wife to participate in the Army Run. That day – Friday, Sept. 20 – will go down as Black(Berry) Friday for the one-time smartphone giant. But it was also launch day for Apple Inc.'s new iPhone 5c and iPhone 5s.
I've been a die-hard BlackBerry user for almost 13 years. But after I read the bad news on my BlackBerry while my wife navigated the roads, the two of us promptly checked into our hotel, walked over to the Rideau Centre Apple store and bought an iPhone.
Mind you, it wasn't for me. My wife, who had also carried a BlackBerry for years, had decided to switch. Consider her move one more example of how much the smartphone market is tilting in Apple's direction.
Over the next three days, the company sold over nine million of the new iPhone models, breaking last year's record of five million when the iPhone 5 was launched. This tremendous unit growth is in stark contrast to the company's stock price, which has dropped from about $650 (U.S.) last year to below $500 now. And it's a major reason I'm still enthusiastic about the stock.
It's absolutely true that earnings growth at Apple has disappeared over the last few quarters. But I'm not that interested in short-term results. I'm interested in where the company is taking its business over the next decade or longer. The record sales (not to mention my wife's change of heart) say that iPhone demand is at record levels despite high prices – and I think this could be just the beginning.
What happens if Apple can turn the iPhone into a replacement for the traditional PC? Author and tech guru Robert X. Cringely wrote a fantastic post last week entitled "The Secret of iOS 7," that points out how Apple's latest mobile operating system could shake up the mobile and PC industry yet again. His case is based on four observations:
- Apple CEO Tim Cook announced that the iPhone 5s runs a 64-bit “workstation class” processor;
- Apple’s productivity software, iWork, is now free on all new iOS devices;
- Apple’s mobile operating system, iOS 7, now incorporates Bluetooth support for both keyboards and mice;
- Most industry pundits expect an Apple TV display of some kind to hit the market soon.
Put it all together and you can begin to sense where Apple thinks the digital world is headed. We're now verging on a point, 13 years after BlackBerry invented the smartphone market, that we have enough computing power in our pockets to eliminate notebooks or desktops.
For now, there's no way I'm giving up my huge office monitor. But Mr. Cringely makes a strong case that the situation may soon change.
"Jump forward in time to a year from today," he writes. "Here's what I expect we'll see. Go to your desk at work and, using Bluetooth and AirPlay, the iPhone 5s or 6 in your pocket will automatically link to your keyboard, mouse, and display. Processing and storage will be in your pocket and, to some extent, in the cloud. Your desktop will require only a generic display, keyboard, mouse, and some sort of AirPlay device, possibly an Apple TV."
It's not rocket science to consider a smartphone operating system and applications that know when they're hooked up to a large display, and therefore switch to a user interface that fills the screen and looks more like a desktop.
In fact, several years ago, when I was a sell-side analyst at TD Securities covering Research In Motion, I helped a startup company pitch this exact strategy to the BlackBerry maker.
Imagine the appeal to a business: You could connect your smartphone to a cheap monitor and the operating system smartly converts your e-mail and other enterprise mobile apps to full-sized desktop experiences. The cost of supporting remote workers drops tremendously.
As far as I know, BlackBerry failed to take action on what could have been a brilliant plan. But this strategy – if it is what Apple is planning – sets the stage for a whole new leg of growth in both the consumer and enterprise markets for Apple.
Of course, it won't be easy or painless. I agree with Mr. Cringely's assertion that Google will also be all over this PC replacement strategy, so Apple would be smart to act quickly. I expect this will lead to both companies dominating the future of computing.
Microsoft and all Windows box makers should watch out. On the other hand, Apple shareholders could do quite well over the next three to five years.
According to S&P Capital IQ, Apple stock trades at 11.5 times next year's earnings estimates. Investors are paying less for Apple than they are for the S&P 500 index, with a 14.2 times multiple on forward year earnings. So while Apple may have been one of the weakest performers in my Strategy Lab model portfolio over the last year, I'm still very much a fan of the stock.
Chris Umiastowski