The Long Case For Apple

The difference between GAAP and non-GAAP earnings for AAPL has been spreading because of the phenomenal growth in iPhone sales. The iPhone is not yet 2 years old, this quarters GAAP earnings will still recognize profit from iPhones sold on the first day of release. This is because Apple spreads out the cost and revenue for iPhones in their accounting over the course of 8 quarters (because of the AT&T subsidy for signing a 2-year contract, although AT&T pays AAPL upfront at the time of sale). Many shareholders complain that this makes Apple's earning power seem less impressive. However, I think it serves to make the stock less volatile as earnings are spread out, thus insulating them from a bad quarter due to where they are in the iPhone product cycle. Regardless, anyone who knows anything about this stock understands the distinction caused by subscription method accounting. Non-GAAP earnings for 2009 are expected to come in around $7, and GAAP earnings are expected to come in at $5.

Apple has all of its competitors on its heels. The entire consumer electronics industry could not catch up by trying to emulate the iPod. Now, everyone except for Research in Motion is trying to emulate the iPhone. Guess what, it's not going to work. Their engineering teams are too good, give them a two year head start in any product category and no one will catch them. Other engineering teams can copy the product in a year, but in that time Apple will have an update with significant improvements and be leveraging market share. The momentum from the iPod and iPhone along with frustration about Vista is helping fuel sales of Macs. I assume you've seen the new Microsoft commercials. Microsoft's message in the new commercials is that they want to compete with Apple on price. I think Apple's marketing team knows they've got Microsoft in check-mate. It's admiting that a PC is a commodity, price determined by its specs, no value added other than what hardware goes in.

Finally, if i were to speculate on what the next big thing for Apple is, I'd say it's going to be Apple TV (with an app store).

Apple also has about $30/share in cash with zero long-term debt.

Dislosure: Long AAPL