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Tickers in this Article: AAPL, RIMM, NOK, GOOG, VZ
In October, 2009, Apple (Nasdaq:AAPL) delivered record fourth-quarter earnings, generating $1.67 billion in net income on revenues of $9.87 billion. These numbers are a big reason why its stock is trading at 31.8-times earnings and five-times sales. But are they warranted? Investors need to ask themselves whether the good news is enough to merit these lofty valuations.

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Fiscal 2009 saw revenues increase 12% and net income 18%. Anytime you can deliver numbers like these, it's a good thing, especially in the middle of a recession. However, if you exclude its iPhone sales, which jumped 266% from $1.84 billion to $6.75 billion, revenues actually dropped 2.8%. Imagine what would happen to revenues if iPhone sales were to stall or competitors were able to create exceptional products that took a bite out of Apple's 17.1% smartphone market share. The stock price would tank. Is this a likely scenario? Let's take a look.

Gaining Market Share
Apple is actually gaining market share in the smartphone segment. In the latest quarter, its market share year-over-year increased 420 basis points from 12.9%. Competitors Research In Motion (Nasdaq:RIMM) and HTC saw market shares year-over-year increase 490 and 200 basis points respectively, while Nokia (NYSE:NOK), the biggest player in the smartphone market, saw its share of business slip 300 basis points to 39.3%.

The iPhone and Blackberry revenues combined are approximately equal to the Finnish giant. Where it's apparent that the battle for smartphone supremacy is between Apple and Research in Motion is in the growth in unit sales. As of the third quarter, iPhone's increased 49.2% versus 46.9% for RIM and just 4.4% for Nokia. Clearly, any resurgence in Nokia sales would be bad for both RIM and Apple. Fortunately, for Apple, it has other product lines to cushion any drop-off in iPhone sales. RIM can't say the same.

Other Products
Apple currently has six streams of revenue, with MacBook portable computers, iPod's and iPhone's contributing $24.31 billion or 66.6% of its overall revenue. Of the three, the iPhone is clearly going to be in the top spot in a couple of years. The big question is, how dominant? In 2009, it sold 20.7 million units for average revenue per unit of $326.09. In 2008, it sold 11.6 million units for average revenue per unit of $158.62. Assuming it sells 29.8 million and 38.9 million units in each of the next two years; it should generate $12.68 billion in fiscal 2011.

Currently, iPhone revenues represent 18.5% of sales. If iPhone revenues double over the next two years and its other products are flat, Apple should have overall revenues of $42.47 billion in 2011 with iPhones representing 30% of its overall total. At five times sales, Apple's market cap would be $212.4 billion in fiscal 2011. It's currently $180.1 billion. That's a return of 18.2% over the next 24 months. (For an in depth analysis of Financial Statement reading, refer to Financial Statements: Introduction.)

The Bottom Line
Anyone considering Apple stock should recognize there are a number of significant obstacles to it achieving projected iPhone unit sales. While it's a great company with great products, the iPhone has some serious competition to fend off including Google (Nasdaq:GOOG) and its Gizmo5 technology, which allows it to bypass mobile services from Verizon Communications (NYSE:VZ) and the other wireless providers. If it doesn't meet the numbers above and its other products stumble, it's a long way down from $200.

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