Finding the Next AAPL: 15 Stock Ideas with Similar Qualities

North America Equity Research
05 April 2012

Circle of Life
15 "Apples" not far from AAPL in TMT

Please join us for a conference call on Thursday, 4/5 at 12:00pm ET on “Finding the Portfolio Strategy
Next AAPL in TMT”. Joining us will be Mark Moskowitz, J.P. Morgan IT hardware AC
Thomas J Lee, CFA
analyst, Doug Anmuth, Internet analyst; Alexia Quadrani, Media analyst; and Paul
(1-212) 622-6505
Coster, Applied and Emerging Technologies analyst.. Dial-in details: 800-593-9988 thomas.lee@jpmorgan.com
(US); +1-312-470-7406 (outside US); Passcode: Strategy. Replay through 4/12: 888-
Daniel M McElligott
566-0438 (US); +203-369-3047 (outside US); Passcode: 4512. Replay available (1-212) 622-5598
approximately one hour after the call ends. daniel.m.mcelligott@jpmorgan.com

The S&P 500 has gained 12% YTD and reflects the favorable conditions at the start of Katherine C Khor
the year (see “2012 to be year of ‘contrarian optimism’…” dated 1/6/12) given (i) a (1-212) 622-0934
60-yr high in equity risk premia; (ii) challenged active manager performance; and (iii) katherine.khor@jpmorgan.com

investors too defensive. The setup for 2Q is less favorable. After two back-to-back J.P. Morgan Securities LLC
double-digit quarters, both investor positioning and economic momentum are at
Mark Moskowitz
different reference points today (i) greater embracement of risk by investors; (ii)
(1-415) 315-6704
macro challenges are emerging such as China, European growth and gasoline. As a mark.a.moskowitz@jpmorgan.com
result, short-term risk/reward less asymmetrically favorable (particularly compared to
Sterling Auty, CFA
the 1Q setup).
(1-212) 622-6389
 We still see more positives than negative and therefore remain overall sterling.auty@jpmorgan.com
constructive for FY2012 and see this year playing out similarly to 2009 (post- Alexia S. Quadrani
financial crisis period) (see Figure 1). History actually argues that market (1-212) 622-1896
momentum tends to persist after two double-digit quarters—79% of the time, the alexia.quadrani@jpmorgan.com
following quarter is positive (Figure 2) with Energy leading (Figure 3) most Tien-tsin Huang, CFA
instances. Cyclicals tend to be mixed, and as we noted last week, we want to avoid (1-212) 622-6632
"smoke-stack" groups right now. tien-tsin.huang@jpmorgan.com

 Active managers are having a decent start to 2012 (Figure 6). Worse than 2011 Philip Cusick, CFA
(18% are missing by 250bp vs. 14% at this time last year) but below the seasonal (1-212) 622-1444
trend of 20% by March. Last year, the real tracking error took place after September philip.cusick@jpmorgan.com

2011. Growth managers are doing particularly well, with 25% beating by 250bp and John DiFucci
only 15% missing, or a net positive diffusion of 10%. (1-212) 622-2341
john.s.difucci@jpmorgan.com
 Let’s turn our attention to Apple (AAPL-OW). At 8% of the Russell 1000
Growth Index, the stock is simply exceeding ownership limits for many funds Rod Hall, CFA
(1-415) 315-6713
(Figure 7) and as a result, investors are asking where the next Apple is. Plus, other
rod.b.hall@jpmorgan.com
investors want to buy the next Apple to hold for the next few years. The company
really hit its stride in the second half of its public history (Figure 10). Doug Anmuth
(1-212) 622-6571
 We compiled the quantitative and qualitative characteristics of AAPL (Figure douglas.anmuth@jpmorgan.com
12 and Figure 13). Among them are: (i) products that inspire a following; (ii)
Paul Coster, CFA
reputational excellence; (iii) lifestyle products that focus on what one can do with
(1-212) 622-6425
their services/products; (iv) culture of success; and (v) prodigious growth offset by paul.coster@jpmorgan.com
(vi) attractive valuations and (vii) ability to return capital.
Christopher Blansett
(1-415) 315-6708
christopher.r.blansett@jpmorgan.com

J.P. Morgan Securities LLC

See page 73 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.

www.morganmarkets.com

Thomas J Lee, CFA North America Equity Research
(1-212) 622-6505 05 April 2012
thomas.lee@jpmorgan.com

15 Stock Ideas: Our analysts identified 15 ideas that possess qualities similar to
Apple within their addressable markets. Our 11 analysts identified 15 ideas based on a
comprehensive comparison of qualitative (Figure 16) and quantitative characteristics
(Figure 17) and their views are summarized in this report. These companies are different
stages of their maturity (Figure 15). The tickers are: BRCM, VMW, NTAP, INTU, DIS,
CMCSA, QCOM, ACN, QLIK, ANSS, TIBX, CREE, LNKD, AMZN, and TRMB..
J.P. Morgan Derivatives & Delta One Strategy has also created a basket for investors who
would like to leverage the theme discussed in this report. The basket can be found on
Bloomberg under ticker JPUSALTB Index. This basket should be considered separately
from the basket we created in late February (JPUSAAPL), which focused purely on
Technology stocks with a high price correlation to AAPL and did not take an in-depth
fundamental approach like this week’s basket.

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MARKET STRATEGY: 2Q altered risk/reward compared to 1Q…
1Q was about contrarian optimism....
The S&P 500 has gained 12% YTD and the strong performance speaks to the favorable conditions at the start of the year, which
we viewed as the basis for “contrarian optimism” (see “2012 to be year of ‘contrarian optimism’…” dated 1/6/12) – then, we saw (i)
a 60-yr high in equity risk premiums; (ii) challenged active manager performance; and (iii) investors too defensive. The setup for
2Q is less favorable.

But 2Q is starting with less favorable conditions…
After two back-to-back double-digit quarters, both investor positioning and economic momentum are at different reference points
today. By several measures, we have seen greater embracement of risk by investors (but not at any pivot). As for economic &
macro, some challenges are emerging at this time. The key takeaway is that we do not see the current growth scares as “thesis
changers” or at extremes, but they do make the short-term risk/reward less asymmetrically favorable (particularly compared to the
1Q setup).

 The first “growth scare” asserting itself is China and the potential for a hard landing. Adrian Mowat, JPM’s EM strategist,
asserts “Forget the hard/soft landing debate” as he sees a plethora of data pointing to contraction from passenger vehicle sales
(-1.6%), steel production (-3.5%), residential sales (-13.5%), power demand (down m/m) as signs of a contraction. But Policy
makers do have room to maneuver and thus, more a growth scare.
 The second short-term headwind is higher gasoline, which reached $3.92 recently, not far from the $3.985 high in 2011, when
we saw weakness develop in consumer spending (granted, Japan quake, Europe, Arab spring were also dampers). If decade
patterns hold, gasoline prices seasonally peak in April (most years) before declining so that this pressure will likely prove
short term and fade by May/June.
 Lastly, we attended an investor meeting with Terry Belton, head of JPM’s US fixed income strategy team, and one of our
takeaways is that we will see an eventual rise in interest rates. The trigger is a move of the unemployment rate below 7%,
leading to Fed tightening (Belton est. each 100bp of fed funds is 48bp on the 10yr). We looked at periods of rising rates since
1962, and the key takeaway is that Cyclicals outperform when rates begin to rise. Financials in the short term, surprisingly, do
not perform well.

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Plenty of positives and negatives in 2012…but more positives
Bulls and bears can cite a litany of arguments for their view. But in our recent meetings, it seems most investors generally view
this as a cyclical bull market, primarily fueled by easy monetary policy. And that “relative” value is primarily viewed through the
lens that bonds are “overpriced” but stocks are not necessarily cheap. But take a look below, we see more reasons to be bullish
than bearish:

Figure 1: Plenty of positives and negatives…but we think investors are FIXATED on the negatives
Notable Positives Notable Negatives
1. US equities are in a secular bull market, in our view 1. China visibility is limited and region represents 1/3 global
growth in 2012.
2. US Labor market expanding and set to add 2.5-3.0mm jobs in
2012, leading to an acceleration of household formation. 2. European sovereign markets while more stable than 2011 are
not demonstrating universal recovery.
3. US housing market is recovering and we expect starts to
increase in 2012. 3. US bank lending standards remain extremely high limiting
credit expansion in US mortgages
4. Bank capital positions are healthy.
4. US electoral outcome is still unclear
5. Equity risk premia is still near 60-year highs and corporate
profits are at all-time highs. 5. Global policy rates remain at emergency levels
6. Global Central Banks are easing. 6. Sovereign debt levels are high and will be for many years
7. US corporates are sitting on a $3.7T mountain of cash and have 7. US faces fiscal cliff in 2013
strong balance sheets and accelerating cash return in 2012.
8. Brent crude oil prices surpassed 2011 highs and are going to
8. Institutional investors are still underweight equities. deliver a notable drag to many large countries (US, China, etc).
9. Both retail and institutional investor sentiment is still not 9. Investors continue to pull money out of equities--$300b since
consistent with a secular bull market. 2007
10. Credit markets remain healthy with strong demand and inflows.
11. Profit margins have not peaked and support further upside
revisions to earnings.
12. HY P/E is 14X vs. S&P 500 P/E of 12.7X--only second time in
history.
Source: J.P. Morgan

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…and history says 2Q should be positive (not explosive)
Two Consecutive Quarters of Double-Digit Gains on S&P 500
The S&P 500 has produced two consecutive quarters of double-digit gains (11%, 12% in 4Q/1Q). And the natural question is
whether equities sustain such gains.

 Take a look at Figure 2 below. Of the 14 prior instances of two consecutive double-digit quarters, 11 of the 13 saw further
gains in the following quarter, or 79% of the time. Meaning, based on historical precedent, 2Q12 is likely positive.
 In fact, this is also true in recent history. Take a look at 2009 and 2010 where after two consecutive double-digit quarters, the
S&P 500 gained in the following quarter.
The takeaway is that the S&P 500 is likely to further build on its recent gains.

Figure 2: Two consecutive quarters of double-digit gains suggest strong likelihood of further gains in 2Q12
Instances of S&P 500 being up > 10% for two consecutive quarters
+6Q -3%

+5Q -14% 7%

+4Q 5% -29% 4%

+3Q negative -6% 1% 10% -1% 6% -3% -12%
negative negative
+2Q -4% 9% 5% 7% 11% -2% 12% 5% -8% 5% 0%
2 consecutive
double-digit +1Q -3% -5% 14% 29% 4% 5% 16% 7% 2% 0% -12% 5% 5% 5%
quarters… 0Q 16% 23% 22% 15% 10% 15% 13% 19% 11% 10% 14% 13% 15% 10% 12%

-1Q 12% 13% 17% 11% 14% 10% 21% 10% 11% 11% 22% 16% 15% 11% 11%

1897 1898 1904 1914 1921 1928 1935 1942 1954 1958 1974 1985 2009 2010 Current

Source: J.P. Morgan and Bloomberg

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Post 2 double-digit quarters, Energy outperforms, other Sectors are a coin-toss
But what to own today? One place to start is to look at history, in particular, the instances in the past 40-years where we saw
consecutive double-digit quarters (Figure 3).

 There is no pronounced pattern (i.e., laggards to leaders, leaders stay leaders, etc);
 But Energy is the most consistent group. And like ’75, ’86, and ’09, it has been a notable laggard in past 2 quarters.
Figure 3: Sector Perf in instances of S&P 500 being up > 10% for two consecutive quarters
Sector Perf in instances of S&P 500 being up > 10% for two consecutive quarters Cyclicals do
Buy Buy Buy Buy badly…
Energy Defensives Cyclicals Energy
1975 1986 2009 2010 Current
During 2 During 2 During 2 During 2 During 2
Double- Following Double- Following Double- Following Double- Following Double- Following
Digit Qtrs Qtr Digit Qtrs Qtr Digit Qtrs Qtr Digit Qtrs Qtr Digit Qtrs Qtr
S&P 500 Abs Perf 39% -12% 31% 5% 32% 5% 22% 5% 24% ??

Cyclicals
Materials 17% -1% 11% -5% 17% 4% 26% -1% 1% ??
Industrials 14% -3% 3% -6% 10% 0% 5% 3% 5% ??
Discretionary 20% 0% 14% 2% -2% 2% 6% -3% 2% ??
Technology -3% -1% -7% -9% 7% 6% 2% -2% 7% ??

Near-Cyclicals
Energy -6% 4% -37% 0% -9% -1% 12% 10% -2% ??
Financials -3% -9% 19% -4% 21% -8% -7% -3% 7% ??

Defensives
Staples -1% -2% 8% 12% -9% -1% -6% -2% -10% ??
HealthCare -9% -6% 11% 11% -14% 3% -10% 0% -5% ??
Telecom -22% 2% -3% 6% -24% 0% 5% -2% -16% ??
Utilities -4% 2% -1% -4% -16% 0% -10% -3% -19% ??

Cyclicals 12% -1% 5% -4% 8% 3% 10% -1% 4% ??
Near-Cyclicals -5% -3% -9% -2% 6% -4% 3% 4% 3% ??
Defensives -9% -1% 4% 6% -16% 0% -5% -2% -13% ??
Source: J.P. Morgan, Bloomberg, and Datastream

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And active managers are having an “average” year
2012 has actually been a better year for active managers, particularly compared to 2011. As of 3/31, about 20% of large-cap
managers are missing their benchmark by 250bp, while 17% are ahead by a similar amount. This is a decent performance and
means that while there are fewer managers slightly behind, their plurality is small. And thus, the pressure to chase is small.

 Looking at “Growth” managers, specifically. This tells a story of managers ahead of their benchmarks. See below that 25%
of Russell 1000 Growth funds are ahead (vs. 15% behind) and 19% of Russell 2000 Growth funds are ahead (vs. 13% behind).
Again, less pressure for growth managers to chase.
 The opposite is true for Russell 1000 value managers. There we can see that significantly more are trailing.
Figure 4: YTD Active manager summary performance
Performance of mutual funds relative to their respective benchmarks
Relative Performance (2012 YTD)
Growth managers are
Missing Beating
doing better in 2012…
% %
Missing Missing % Beating % Beating
# of AUM by at least by at least by at least by at least
Benchmark Funds ($b) 500bp 250bp 250bp 500bp
Large Cap
Russell 1000 491 $1,168 7% 20% 11% 4% Value doing poorly…
Russell 1000 Growth 432 $861 6% 15% 25% 9%
Russell 1000 Value 316 $643 8% 26% 16% 3%
Large Cap Total 1,239 $2,672 7% 20% 17% 6%

Small & Mid Cap
Russell Midcap Growth 215 $196 6% 19% 15% 4%
Russell 2000 199 $191 5% 13% 16% 7%
Russell 2000 Growth 196 $121 3% 13% 19% 7%
Russell Midcap Value 110 $118 5% 13% 15% 5%
Russell 2000 Value 101 $85 4% 15% 18% 8%
Russell 3000 11 $14 9% 18% 64% 55%
Small & Mid Cap Total 832 $724 5% 15% 17% 7%

MSCI / Other 682 $608 11% 20% 43% 29%

All Funds 2,753 $4,004 7% 18% 24% 12%

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2012 is starting off on a better note than 2011….
We have compared the performance of Russell 1000 managers against seasonal trends (tracking those trailing by 250bp). A
couple of things stand out:

 First, 2012 is tracking in line with historical patterns as 18% are trailing, compared to 20% on average.
 2012 is very similar to 2011, with perhaps only slightly a greater number of managers behind.
 Notice in 2011, that the massive slippage really took place between October 2011 and YE11—at that time, every investor got
too defensive.
Figure 5: 2011 month-by-month comparison (2011 vs. historical avg) Figure 6: 2012 month-by-month comparison (2012 vs. historical avg)
% missing by 250b Problems after % missing by 250b
Oct ‘11
2011 Historical Avg 2012 Historical Avg

50 48 40
45 35
47 42
40
37 30
35 40
30 25
25 20
20 25 15 18
22 22
15 18 10 13
10 14 14
5 7
5 7
0 0
Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec

Source: J.P. Morgan and Bloomberg Source: J.P. Morgan and Bloomberg

Similar to 2011…slightly
worse…

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SECTOR STRATEGY: does the apple fall far from the Apple?
For many active manages, they have an Apple problem, even if they own the stock. With the stock up 48% YTD, on the heels of
a 3-yr cumulative gain of 474%, Apple is not only the largest stock in the world, it represents a very large share of many indexes.
Take a look at Figure 7 below.

 Apple is 4.5% of the S&P 500, but it is even larger share of these other indices. Why does it matter?
 It is 18% of the Nasdaq 100 and more pertinently, it is 8% of the Russell 1000 Growth benchmark (see Figure 7). Many funds
have individual stock constraints of 5%--meaning an individual stock can only be 5% of the portfolio, due to concentration
concerns. Even if the weight in the benchmark is larger.
 In other words, to own track Apple for a Russell 1000 Growth manager means to basically exceed concentration
requirements.
As a consequence, for those who own Apple. They probably do not own enough of it and thus, need to find other Apples to own.

Figure 7: Market weighting of Apple in various indices
% total
20.0% 18.2%
18.0%
16.0%
14.0% 11.7%
12.0%
10.0% 7.9%
8.0%
6.0% 4.5% 4.0%
4.0%
2.0%
0.0%
S&P 500 Russell 1000 Russell 1000 Nasdaq 100 Nasdaq
Growth Composite

Source: J.P. Morgan.

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Apple’s financial market dominance is a misperception
Maybe too much Ado about AAPL….There are bigger “Apples” in Europe and Asia
The S&P 500 is more diversified than other global indices on both market cap weighting and volume weighting.

 Based on market cap weighting, the top stock in the S&P 500 (AAPL) is only 4% of the index, well below the weightings of
top stocks in other indices, such as Nestle in the SMI index or ENI SpA in the FTSEMIB index (see Figure 8).
 From a volume perspective, the top 10 stocks in the S&P 500 are also a much smaller impact than in other global indices. The
top 10 stocks in the S&P 500 represent only 18% of trading volume (based on avg over past 6 months), well below the 40-
80% of volume that the top 10 stocks represent in other indices.
Figure 8: Weighting of Largest Stock in Index by Market Cap Figure 9: Weighting of Largest 10 Stocks in Index by Volume
Weighting of Largest Stock in Index by Market Cap AAPL much Weighting of Largest 10 Stocks in Index by Volume
smaller than
Nestle 83% AAPL much
other indices smaller than
76%
ENI SpA other indices
Fast 64%
25% Samsung Vale Retailing
Total 55% 54%
21% HSBC SA PetroSiemens 50%
China HSBC
16% 15% Total 41%
14% 36%
SA
11% 10% Apple 29%
9%
7% 6% 6% 21% 20%
4%
11%
FTSE MIB (Italy)
SMI (Switzerland)

Nikkei 225 (Japan)
CAC (France)

BOVESPA (Brazil)

FTSE 100 (UK)
Hang Seng (Hong
KOSPI (Korea)

Shanghai (China)

DAX (Germany)

Euro Stoxx 50

S&P 500 (US)

SMI (Switzerland)

CAC (France)
FTSEMIB (Italy)

DAX (Germany)

Euro Stoxx 50

Nikkei 225
BOVESPA

FTSE 100 (UK)

Shanghai (China)
Hang Seng (Hong

KOSPI (Korea)

S&P 500 (US)
(Europe)

(Japan)
(Brazil)

(Europe)
Kong)

Kong)
Source: J.P. Morgan and Bloomberg.
Source: J.P. Morgan and Bloomberg.

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Apple price performance history shows transformation of
company
The Apple story of the past few years belies a transformation of the company in the past decade (Moskowitz has written
extensively about this). But this change is apparent in price history of Apple (Figure 10) below. Apple went through several
phases in its public trading history:

 The last decade has seen remarkable consistency reflecting the transformation, product cycles, secular growth, and supply
chain initiatives of Apple;
 The earliest stages of Apple were much rockier--note that in the first decade and a half of its public trading history, the stock
had more down years than up years.
 And as shown on Figure 11, its price appreciation CAGR since its IPO at 19% is not substantially higher than the S&P 500
overall. Jobs iMac, iPod , iPhone
returns as transformation…
Figure 10: Annual price performance of Apple (relative to S&P 500) CEO Figure 11: AAPL and S&P 500 CAGR
Annual change since IPO. % performance relative to S&P 500 AAPL and S&P 500 price perf CAGR
AAPL Rel Price Perf LT Avg AAPL price S&P 500 CAGR AAPL CAGR
192% 85% 79%
Post-IPO Controversial period 185% $1,000 Notable
75%
(Sculley, transition) performance
165% 8 of 15 yrs DOWN years.. 65%
gap…

Price Perf CAGR
132% 130% 123%
120% 55% 48% 45%
AAPL YoY Rel Price Perf

105%

AAPL price (log scale)
115% 45%
$100
69% 35%
60% 21%
65% LT Avg 25% 19%
34% 27% 40% 43%
29% 23% 26%
20% 18% 15% 8%
15% 5% 1% 4% 2%
$10 5%
-5% 0%
-35% -17% -11% -18%
-25% Since IPO 10yr 5yr 3yr
-36% -40%
-51% -58% -52%
-55% Source: J.P. Morgan, Bloomberg, and Datastream
-85% -68% -61% $1
1/80
1/81
1/82
1/83
1/84
1/85
1/86
1/87
1/88
1/89
1/90
1/91
1/92
1/93
1/94
1/95
1/96
1/97
1/98
1/99
1/00
1/01
1/02
1/03
1/04
1/05
1/06
1/07
1/08
1/09
1/10
1/11
1/12


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Apple: Qualitative Differentiators
Qualitative differentiators…
There are many ways to identify what distinguishes Apple qualitatively. In fact, this has been well documented. We came across
some commentary of a Ted Talk by Simon Sinek and found his extractions of what makes Apple unique very illustrative. We
have summarized those 4 characteristics below:

Figure 12: Qualitative differentiators of Apple
Based on comments from a Ted Talk with Simon Sinek
Customer loyalty: Products/services that inspire a following.

Reputational excellence: Products are dependable. And meet customer expectations fully and beyond.

Lifestyle products: Company always talks about challenging the status quo. Think differently. Does not make
grand forecasts. They focus on what customers can do with the products. Not how they
will “take over the world”

Culture of success: The golden circle of why, how, when. Motivating and growing employee

Supply chain management: This is not something other companies can replicate, but Moskowitz has extensively written
about Apple's investment in the supply chain.


Applying these to find the next Apple
We used the above as a qualitative template to identify the next Apples (talking to our analysts). Their ideas are summarized on
Figure 14 to Figure 16. And those names reflect a combination of qualitative and quantitative characteristics.

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Apple: Quantitative Differentiators
The quantitative summary of Apple is below.

 The obvious characteristic that stands out is Apple’s prodigious growth rates for both top line and earnings. Apple’s revenues
have growth at 57% CAGR since 2010 and at 6X that of the Technology sector.
 The company’s P/E and P/E to growth rate are well below that of the S&P 500 and Technology sector overall. In other words,
the stock does not fully reflect its impressive growth rates.
 The company remains institutionally underowned. Only 73% of the shares are held by institutions compared to 88% for the
S&P 500 overall and 85% for Technology.
 Finally, R&D surprisingly is not that high. This likely reflects the work Apple did on working with its supply chain partners,
resulting in investment in that channel of production as a substitute for R&D. Or put another way, Apple is not as much of a
"tech" company as its R&D belies.
Figure 13: Quantitative differentiators of Apple
S&P500
AAPL Tech ex-Fins Comments

Growth Revenue Growth CAGR ('10-'12E) 57% 10% 9% 6X that of Technology

Earnings Growth CAGR ('10-'12E) 72% 13% 9% Margin ex pansion delivers lev erage

Investment R&D Spend as a % of Sales 2% 13% 6% Less on R&D, focus on products

Valuation 2013 P/E (Current) 10.4x 12.3x 11.8x Low P/E

PEG (2012 P/E vs 2013 Growth) 0.8x 1.1x 1.2x Discount to growth

Cash as a % of Assets ('10-'11) 31% 31% 14% Conservative

Cash as a % of Market Cap ('10-'11) 9% 20% 12% Due to price rise

Ownership Current Institutional Ownership 73% 88% 85% Low ownership by institutions

Source: J.P. Morgan and FactSet.

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Stock Strategy: 15 Next Apples
We have compiled a list of 15 ideas for companies that our analysts view as having secular growth opportunities, a strong market
position, and attractive valuation, which make these equities attractive to own as the potential next "Apple." As we show on the
next page, these companies are at various stages of maturity (see Figure 15).

 Figure 14 is a summary of the major characteristics of each company (the darker circle is better) both on qualitative and
quantitative metrics. We have ranked them based on the overall score. But we emphasize the entire list is attractive.

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Figure 14: Summary information of Next Apples
Qualitative and Quantitative metrics summary

Source: J.P. Morgan and FactSet

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The stocks are arguably Apple at different stages
We placed the various ideas on the Apple “scale” (really the price chart) based on comparative size of the company and its growth
prospects. This provides some context for where the idea sits on the spectrum.

 We are placing companies “roughly” in a quadrant based on their size and overall market they are addressing. And we are
hardly forecasting that their pathway would match Apple.
Figure 15: At what stage is this company? Value shown is $ revs in billions
Apple stock price since IPO. Log scale
Early Apple Middle Apple Modern Apple
$1,000

ACN
$29.3B
AAPL price

QCOM CMCSA
$15.9B DIS $55.8b
$100 $40.9b
BRCM
TIBX $7.4B
$1.0B
AMZN
CREE ANSS INTU $48.1b
$1.0B $0.7B $4.1B

VMW
$10 $3.8B
NTAP
$6.0B
LNKD
TRMB QLIK $0.5B
$1.6B $0.3B

$1
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Source: J.P. Morgan and FactSet

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Comparative summary of the Next Apples
Qualitative Comparative Summary
Below is the qualitative summary of Apple based on the metrics that we discussed in earlier. Each analyst ranked their company
based on their assessment of each characteristic.

Figure 16: QUALITATIVE Grid: the next Apples


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Quantitative Comparative Summary
Below is the quantitative summary of Apple based on the metrics that we discussed in earlier. Each company was force ranked
based on the attractiveness of that particular metric.

Figure 17: QUANTITATIVE Grid: the next Apples


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Figure 18: Coverage List
NetApp — NTAP — Mark Moskowitz
Ticker Rating Ticker Rating In IT Hardware, we highlight NetApp as another company developing its own unique legion of loyal customers and partners. The
AAPL OW LXK UW company continues to optimize enterprise storage environments in an elegant approach, one built upon a software-driven
ARX N NTAP OW architecture. NetApp offers a singular operating system with a common dashboard of storage systems management features,
BRCD UW ORBK N which earn high marks from customers we speak to in the field. Overall, NetApp’s approach has resulted in a cleaner fit for its
DELL OW QLGC UW storage systems in server virtualization environments running on VMware. We believe that this dynamic has been an important
ELX UW STEC UW reason behind NetApp’s major market share gains over the past three years, and it is similar to the common user interface attribute
EMC OW STX N that has elevated Apple in mobile devices.
FIO N WDC N
HPQ UW XRX UW
IBM OW

Figure 19: Price Performance — NTAP Figure 20: Qualitative and Quantitative Summary — NTAP
Trailing 1yr Full moon indicates more like AAPL; Empty moon indicates less like AAPL


Back to NetApp, the storage competition currently offers disparate, less user-friendly system architectures. More recently,
competitors such as EMC and Hewlett-Packard have been working to replicate the NetApp model of storage simplicity, i.e., a

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common architecture across all price bands and workloads. We think it will take time, though, allowing NetApp to continue
building out its legion of loyal customers over the next few years. Our conversations with NetApp’s storage partners and
customers consistently indicate that the NetApp solutions are user-friendly and easy to manage. These differentiating attributes
have helped NetApp overcome its higher-pricing structure for low-end and midrange systems versus competitive offerings, in our
view. We point out that this relative premium in storage is similar to the premium price attached to Apple’s mobile devices.
Despite the premium, customers continue to buy NetApp solutions, as there is less cost overage post-deployment.

NetApp has had its fair share of growing pains recently. In the past 12 months, execution has been choppy, due in part to the
company’s increased exposure to more demanding enterprise customers. Historically, NetApp shipped standard storage
configurations into the channel, requiring less post-sale customization. In contrast, more demanding enterprise customers require
both initial deployment and post-deployment customization support, which we think has been causing some fulfillment issues at
NetApp. Meanwhile, the company has struggled with keeping its product cycle refreshes on schedule and also monetizing prior
acquisitions. Its 2003 acquisition of Spinnaker still has not ushered in a complete scale-out NAS clustering solution.

Despite these challenges, we believe that NetApp possesses the technology and market position to continue achieving above-peer
revenue and earnings growth over the next five years. Below, we present an overview of how NetApp scores on certain attributes
(relative to its peers) that have been attached to leading companies, such as Apple.

(Best = 1, Worst = 5)
 (i) Customer loyalty (Score = 1): NetApp’s easy-to-use software architecture has built a loyal following of customers over
the past five years. The company’s software-driven systems are easier to scale and manage relative to the competition, based
on our conversations with partners and customers in the field.
 (ii) Reputational excellence (Score = 1): Despite some recent hiccups in product fulfillment, NetApp’s solutions continue to
be regarded as the leading solution to support server virtualization environments. This attribute is important, as our recent CIO
survey results indicate that server virtualization cycle has plenty of legs left.
 (iii) Lifestyle products (Score = NA): NetApp sells only to the enterprise, not the consumer.
 (iv) Culture of success (Score = 2): Employees and the channel love to work at NetApp. First, the company culture prides
itself on being a Silicon Valley start-up that can compete with anyone. The company’s practice of rewarding stock options to
executives and rank-and-file also helps. NetApp also consistently ranks highly in lists of “best places to work” surveys. Lastly,
the channel partners enjoy working with NetApp, as the company is more willing share the margin-rich post sale of services
and support.
 (v) Potential to accelerate cash return to shareholders (Score = 3): On this topic, NetApp does not score as well. In our
view, NetApp may have to use cash for acquisitions to fend off deeper pocketed EMC and Oracle over time in the data center.
NetApp does possess a strong cash flow profile.

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Amazon — AMZN —Doug Anmuth
Figure 21: Coverage List (Best = 1, Worst = 5)
Ticker Rating Ticker Rating  (i) Customer loyalty (Score = 1): Over the last 10+ years Amazon has done something we once thought was impossible
AMZN OW P OW online—win customer loyalty. The company’s focus on price, selection, and convenience has enabled it to cut through a very
AWAY OW PCLN OW crowded physical retail and ecommerce space to earn repeat customers. Amazon is driven by strong fulfillment capabilities
EBAY N QNST N
and an easy to navigate front-end site, and the Amazon Prime membership program encourages repeat purchasing. Amazon
EXPE UW RATE N
has also virtually created the eReader and eBook market with the Kindle.
GOOG OW RLOC OW  (ii) Reputational excellence (Score = 2): Amazon has a strong reputation around shipping and fulfillment. Free Super Saver
GRPN N TRIP N Shipping and Prime have helped Amazon differentiate versus other retailers. The company’s 3rd-party business featuring
LNKD OW YHOO N vetted and reliable sellers also accounts for ~35% of units. Amazon is also increasingly shifting this business into its own
NFLX N ZNGA N warehouses through Fulfillment by Amazon.
Source: J.P. Morgan

Figure 22: Price Performance — AMZN Figure 23: Qualitative and Quantitative Summary — AMZN


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 (iii) Lifestyle products (Score = 3): Amazon management runs the business on a very long –term timeframe and is not afraid
to make near-term investments to drive long-term share gains. Amazon has challenged the status quo by pioneering online
commerce, shifting from books/media to other general merchandise, launching the Kindle eReader and eBooks, and launching
AWS, Amazon’s cloud services.
 (iv) Culture of success (Score = 4): Amazon employees think and operate the business for the long-term. The business is run
in a very lean way. Management’s focus is on long-term share gains and FCF generation.
 (v) Potential to accelerate cash return to shareholders (Score = 5): Potential is there with an estimated $8B of cash on the
BS at the end of 1Q12, but we would not expect major capital returns. Amazon strategically buys shares, but I would not
expect a dividend or bigger return given the competitive nature of the space and Amazon’s desire to continuously innovate to
gain share.

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LinkedIn — LNKD — Doug Anmuth
 (i) Customer loyalty (Score = 2): Strong user base among corporate enterprises and consumer users. More than 9200
enterprises and 100M+ users. LinkedIn has strong network effects driven by social dynamics and Internet trends. LNKD has
established itself as the leading career network.
 (ii) Reputational excellence (Score = 1): Strong reputation with corporate customers who place high value on LinkedIn's
broad network and deep information. High ROI for enterprises.
 (iii) Lifestyle products (Score = 4): Not lifestyle products, but challenging the status quo by disrupting the traditional job
placement and recruitment market. Conservatively run and investing for the long-term.
 (iv) Culture of success (Score = 3): Strong management team with leadership and vision in the Internet space.
 (v) Potential to accelerate cash return to shareholders (Score 5): Unlikely given early stage nature of company and
significant growth opportunity ahead.
Figure 24: Price Performance — LNKD Figure 25: Qualitative and Quantitative Summary — LNKD


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Disney — DIS — Alexia Quadrani
Figure 26: Coverage List These grades are relative to Disney’s peers (TWX, VIAB, CBS, etc): (Best = 1, Worst = 5)
Ticker Rating Ticker Rating  (i) Customer loyalty (Score = 1): Theme parks (Walt Disney World and others around the world, Disneyland Shanghai in
DIS OW OMC OW development), movies/characters (animated classics, Pixar), ESPN.
DISCA N SNI N  (ii) Reputational excellence (Score = 1): All three areas mentioned above are unrivaled
GCI N SSP OW
HHS N TWX OW
 (iii) Lifestyle products (Score = 2): Not so much challenging the status quo, but clear leadership that has been maintained.
IPG OW VCI OW  (iv) Culture of success (Score = 2): High level of creativity instilled in the business (Parks developers are known as
MNI N VIAb OW Imagineers), Pixar is leader in animation, ESPN holds an ongoing dominance and is the highest valued cable network by far.
NYT N WPP.L N
 (v) Potential to accelerate cash return to shareholders (Score = 2): Company is working through a peak capex year in
Source: J.P. Morgan F2012 (Sep YE) due to several major Parks attractions opening, after which capex should come down meaningfully to allow
accelerated return of cash to shareholder, mostly through buybacks.
Figure 27: Price Performance — DIS Figure 28: Qualitative and Quantitative Summary — DIS


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Figure 29: Coverage List Comcast — CMCSA— Phil Cusick
Ticker Rating Ticker Rating
AMT OW NTLS OW (Best = 1, Worst = 5)
CCI N PCS OW  (i) Customer loyalty (Score = 2): Comcast has 22m video subscribers of which almost 11m take advanced services (such as
CHTR OW S N HD or DVR service) and the company has 18m high speed internet subscribers, which is quickly becoming a necessity in the
CLWR N SBAC modern home. Comcast also owns 51% of NBCUniversal which has premium cable network, broadcast, film and theme park
CMCSA OW T N properties with a loyal following.
CTL OW TDS N
CVC UW TWC N  (ii) Reputational excellence (Score = 3): The company has an excellent service record and is continuously trying to improve
DISH N USM UW its product and service offerings to its customers.
DTV OW VZ N  (iii) Lifestyle products (Score =3): Comcast has been innovative it trying to extend delivering entertainment services through
FTR N WIN N various platforms and integrating its offerings into the everyday life of the consumer. The company’s Streampix offering
LEAP OW could have a substantial impact on how subscribers consume media.
Source: J.P. Morgan

Figure 31: Qualitative and Quantitative Summary — CMCSA
Figure 30: Price Performance — CMCSA Full moon indicates more like AAPL; Empty moon indicates less like AAPL
Trailing 1yr


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 (iv) Culture of success (Score = 2): Comcast continues to lead the cable and media space with its aggressive culture and
leadership.
 (v) Potential to accelerate cash return to shareholders (Score = 1): We expect the company to repurchase $3.0b in stock in
2012 and issue dividends of $1.7b for a combined cash return to shareholders of $3.7bn in 2012, up 42% y/y. We could see
upside if the cable business performs better than expected.

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Figure 32: Coverage List (part 1)
Trimble — TRMB— Paul Coster
Ticker Rating Ticker Rating Searching for the Next Apple….
ACTG OW ELON N In Applied & Emerging Technologies, we highlight Trimble as a company developing some Apple-like characteristics, not least
AVID OW ELT OW the potential for this electronic equipment company to post growth for many years to come.
COMV ENOC N
CSTR N ESE N Trimble designs, manufactures and sells equipment that is used in engineering and construction, field agriculture, asset
CUB N FLIR UW management and tracking, mining and exploration. The company is often equated with the GPS industry, however in recent
DBD N FN OW years, a slew of hardware, software and service acquisitions re-positions the company as a full life-cycle IT-based solutions
DGI OW GEOY N provider for the industry verticals that the company services. Trimble’s vision is to achieve the connected construction site, the
DLB OW GRMN UW connected farm, the connected mobile enterprise.. As an analogy, Trimble is beginning to do for engineering, mining,
DTSI N IRBT UW construction, and agriculture, what SAP and Oracle did for the manufacturing industry with increasingly broad-scope ERP
systems in the 1990s. We think this is a powerful value proposition.
Source: J.P. Morgan
Figure 34: Qualitative and Quantitative Summary — TRMB
Figure 33: Price Performance — TRMB Full moon indicates more like AAPL; Empty moon indicates less like AAPL
Trailing 1yr


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Figure 35: Coverage List (part 2) Consider the Tekla acquisition, one of dozens of acquisitions that Trimble has made in the last few years. Tekla develops
Ticker Rating Ticker Rating software products for use by architecture, engineering, construction, government and utilities customers, to design and construct
ITRI OW SYNA N large concrete and steel infrastructure projects and buildings, to manage workflow, assets, contractors and staff during the project
LOGI UW TASR N and to commission the building or infrastructure for use. Combining this Tekla software with Trimble’s traditional GPS-based
NCR OW TNAV N
equipment used for precision control of machinery, or to manage the supply of concrete and other supplies to the project, in real-
time, provides a holistic efficiency-oriented solution for industries that have typically been slow to adopt information technology.
NICE OW TRMB OW
The company claims that its technology can improve efficiency by 30%, reduce fuel use and emissions by 30%.
OVTI N TSYS N
PLT N TTMI N
At the 2011 JPMorgan TMT conference, Trimble’s CEO, Steve Berglund, suggested that Trimble’s growth could endure for
RLD OW VRNT OW
decades to come. Though we expect nothing less than supreme self-confidence from the typical CEO, we feel he makes a good
RMBS N ZBRA OW
case for Trimble to follow an Apple-like trajectory owing to the magnitude of the problems that the firm is trying to solve;
RPXC OW ZIP OW
megatrends relating to infrastructure, affluence and technology. In short, we live in an increasingly urbanized, over-populated,
Source: J.P. Morgan resource-constrained world, characterized by housing shortages, escalating energy consumption, transportation congestion, and
episodic food crises. Trimble’s solutions address many of these challenges by improving the speed with which infrastructure
projects are executed, improving the yield from farmland, and optimizing asset utilization. We expect the company to
continuously expand the scope of its solutions (e.g. new sensor technologies, 3D modeling, SaaS), principally through acquisition.

 (i) Customer Loyalty (Score = 2). Trimble’s technology is an industry-standard in engineering and construction, surveying,
and in agricultural field solutions. Trimble Dimensions, the firm’s international user conference, is now in its 6th year; last
year it attracted nearly 3000 participants from more than 60 countries. The firm was founded over 30 years ago and has
offices in 21 countries.
 (ii) Reputational excellence (Score = 2). One measure of the firm’s reputation is the fact that it has entered into two JVs with
Caterpillar, one of which utilizes the Caterpillar dealer network to distribute Trimble product. In 2011 Trimble was awarded a
Blanket Purchase Agreement (BPA) by the Federal GSA, meaning fleet management services can be provided to 75 US
federal agencies. Two Chinese government agencies have formed JVs with Trimble: CASIC-IT and CREEC. Hilti Group
entered into a JV with Trimble in 2010.
 (iii) Lifestyle products (Score = 4). We will abuse this category by using it as an excuse to reflect upon the role that
Trimble’s products play in the building of roads, railways, airports, buildings, in the extraction and transport of energy, in
improving crop yields, and in optimizing the allocation and movement of mobile workers and equipment.
 (iv) Culture of success (Score = 2). Trimble has grown at a 15% CAGR since 2000, and experienced only one significant
down year (-15% in 2009). The company is very focused on operating margins, with the CEO expressing the intention of
achieving 15% operating margins, even during down-cycles. Trimble’s corporate culture embraces frugality; there are many
paths to success. Looking forward the company aspires to 15-17% CAGR revenue growth, and over 20% operating margins
in the next 5 years.

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 (v) Potential to accelerate cash return to shareholders (Score = 5). But not now. Trimble exited 2011 with record
EBITDA margins of over 25%, and the firm generated $240 million of cash flow from operations (normalized free cash flow
of just over $200 million). Trimble is however firmly committee to growth at this point in the firm’s history, and investors
should expect at least 5% of y/y growth to originate in acquisitions. In this context, Trimble exited 2011 with net debt of $410
million. The company does execute share buy-backs but these have typically done little for the stock. We don’t expect
significant cash to be returned to investors in the next 5 years.

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Qualcomm — QCOM— Rod Hall
Figure 36: Coverage List I would say that there is a huge amount of growth still go in smartphones and QCOM is very well tied to that.
Ticker Rating Ticker Rating (Best = 1, Worst = 5)
APKT N MITL N  (i) Customer Loyalty (Score = 5). Loyalty doesn't matter much for the royalty business where they make 2/3 of their
CIEN N MMI N earnings.
CSCO OW QCOM OW  (ii) Reputational excellence (Score = 1). Very solid product reputation on chips, again doesn't matter for royalties
FFIV N RIMM N
 (iii) Lifestyle products (Score = 4).
GLW UW RVBD OW
INFN N TLAB UW  (iv) Culture of success (Score = 2).
JNPR N
 (v) Potential to accelerate cash return to shareholders (Score = 2). It spins off plenty of cash but thy still think of
Source: J.P. Morgan themselves as a growth company. Returns probably depend on intl cash repatriation.
Figure 37: Price Performance — QCOM Figure 38: Qualitative and Quantitative Summary — QCOM


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Finding the Next AAPL: 15 Stock Ideas with Similar Qualities

Finding the Next AAPL: 15 Stock Ideas with Similar Qualities

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