Is Apple ripe for picking?

The tech giant recently became the second-biggest US company by market value, but the stock has faced booms and busts before.

It is 1989 and Apple's market value has just overtaken Microsoft's for the first time. At the same time, the technology company is also hailing tablet devices as the computing industry's next "revolution". If this sounds familiar, it is: Apple's market cap once again outstripped that of its old rival at the end of last month, topping US$222 billion (Dh815bn) and giving it the second-highest market value of any other US company apart from oil giant Exxon, which has a market cap of $278.6bn. Apple is now shipping another tablet computer, the iPad. And once again, the Wall Street bulls are out in force.

But bulls have short memories and may need reminding that, by the mid-1990s, Apple's Newton tablet computer was a commercial failure and the company was on the verge of bankruptcy - and had to be bailed out by a $150 million investment from Microsoft in 1997. Nevertheless, Wall Street is now convinced that Apple is on a roll and that the seemingly insatiable consumer appetite for any electronic device bearing its famous logo has not yet been fully tapped.

"We continue to believe investors under-appreciate Apple's future growth opportunities," says a Morgan Stanley report that cites four reasons why the stock will continue to rise: further penetration of the mobile phone market by iPhone; better than expected iPad demand; investment for growth in China and increased adoption of Apple by business users. Industry analysts believe the icing on the Apple cake will be the launch of its new 4G iPhone, which they hope to see unveiled at Apple's World Wide Developers Conference (WWDC) on Monday in San Francisco. The new iPhone was recently unofficially reviewed in the technical press after a prototype was accidentally left in the restroom of a California bar by an Apple employee. It included new features such as the hardware needed for mobile-video conferencing.

In the short term, the launch of the 4G iPhone is likely to boost sales and increase investor confidence. According to Morgan Stanley, 58 per cent of iPhone customers expect to upgrade their iPhone in the next year, a dramatic improvement on the 18 per cent increase in 2008. This would generate sales of an additional 18 million new iPhones globally next year. Morgan Stanley also expects iPad sales to exceed expectations. A survey it conducted points to 7 million to 9 million shipments in the first 12 months as opposed to the consensus forecasts of 5 million to 6 million. Morgan Stanley also predicts that, while consumers represent "the vast majority" of Apple revenues, increased iPhone adoption could enable the company to make new inroads into the enterprise market.

But while the launch of the new iPhone will boost Apple's fortunes in the short term, industry analysts are wary of the fact that the company now has to keep delivering hit products. "Apple's success is built on a series of hit consumer products and the company has to keep replicating this in what can be a fickle market, whereas Microsoft's software is deeply embedded in business culture," says Adam Leach, a principle analyst at the research firm Ovum.

This is better reflected in the two tech giants' balance sheets than by the recent fluctuations in their respective share prices. Microsoft's most recent annual profit of $14.6bn was almost three times as high as Apple's $5.7bn, with Microsoft also reporting higher revenues than Apple. In the medium term, Apple will also face competition from its old rival in the consumer market. "There is reason to believe there will be something of a Microsoft renaissance with the company aggressively attacking the consumer market and following on from the success of the XBox. Windows Phone 7, for example, should start to have an impact by the end of 2011 and the start of 2012," says Mr Leach.

The downside of Apple's transformation into a consumer electronics company is the volatility of its new market. While consumers in developed countries all have iPhones or iPods in their pockets and purses or know someone who does, consumers are fickle. A generation ago, millions of people never left home without their Sony Walkman. Today, the 1980s Walkman can only be found in a technology museum and Sony is struggling to compete with Apple in the mobile media market.

Apple may also face increased competition from some unexpected sources. China's shanzai bandit phone makers, for example, have already been manufacturing iPhone clones that some users say are as good as the real thing for less than $100, some of which are reported to be being illicitly exported to Russia and India. The bandits, many of whom are now becoming licensed and branded, are also known to be making iPad-like tablets.

But Mr Leach believes that Apple's offering of services as well as software and hardware is a barrier to most legitimate new competitors. "Cloud-based services such as iTunes and the App Store cost billion of dollars to develop and are hard to replicate ... Apple will also face competition from other cloud-based services such as Google," he says. Another question mark hanging over Apple is the future health of its chief executive and founder. Steve Jobs was unable to attend last year's WWDC due to ill health. In 2009, Mr Jobs had a liver transplant following an earlier battle with pancreatic cancer. If his health forced him into early retirement from the company, the Apple brand itself could be irreparably tarnished.

While Apple is on a roll with its latest products, the stock has always been something of a roller-coaster ride and is likely to fluctuate in the future as a result of factors such as competition from a new generation of Asian manufacturers or its charismatic and talented founder's health problems. But in the short term, Apple's ability to innovate and create fashionable new consumer products will continue to underpin investor confidence in the company's stock.