1 Reason Apple Will Turn the World on Its Head


When Apple reported earnings last week, it proved to the world that the majority of investor worries leading into the report were grossly exaggerated. The ominous sea of Google Android devices did not stop the company from selling over 37 million iPhones or over 19 million iPads during the quarter. However, it wasn't Apple's current results that spooked investors -- it was guidance that kept a lid on optimism.

The company expects to earn only $33.5 billion in revenue next quarter, which surprisingly represents a 4% decline in revenue from the same period in 2012. This goes to show you that when you're a company as massive as Apple, growth becomes harder and harder to come by. In this context, if Apple wants to keep growing, it's forced to expand its addressable market. To that end, Apple could either expand its existing product lines or enter new markets... or it could do both.

Although entering new markets bears the most risk, it could reap the greatest rewards for shareholders. To help support this cause, Apple's research and development budget has grown at a compounded rate of nearly 8.3% a year since 2010, giving it enough firepower to expand its addressable market.

Source: Apple quarterly earnings press releases. Dollars are in millions.

Clearly, Apple's R&D budget is highly correlated to the amount of revenue the company earns. It should also be pretty obvious that Apple develops new products in a highly calculated manner. Since the iPad Mini's debut in November, Apple's R&D budget has increased by 11%. No matter what project this extra cash was poured into, the goal is always the same.

Increase the halo
Apple has been famously known for its ability to create a "halo effect" around its products. Simply put, once a user buys into the Apple brand, there's a high likelihood that they'll purchase subsequent products over the long term. In this context, Apple's biggest business opportunity starts with getting first-time Apple buyers into the brand and thrilling them, which over the long-term establishes that highly desirable halo effect. Rinse and repeat.

Ultimately, if Apple really wants to grow, it has little choice but to take bold risks and enter new markets.

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The article 1 Reason Apple Will Turn the World on Its Head originally appeared on Fool.com.

Fool contributor Steve Heller owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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