Apple continues to innovate

On Wednesday I joined millions of people in downloading Apple's new and greatly improved operating system for mobile devices, iOS 7. After playing with it for awhile, I can say I'm delighted. It's like having a brand new phone. And it's not just me; in just two days, a significant portion of Apple's installed base has upgraded to iOS 7. A much greater percentage of Apple phones are now running the newest software than is the case with Android-based phones. It is reasonable to expect that, as Apple claims, iOS 7 will be the most popular mobile software in the world before too long, because the vast majority of iPhones and iPads being used today are eligible for the upgrade, and it is relatively easy to do. The same is not true of Android phones, only a fraction of which can use the latest version of Android.

The new software represents a complete overhaul, adding hundreds of new features and capabilities, all with a fresh new look. One new feature, Activation Lock, means a stolen iPhone becomes useless; the phone cannot be reactivated without a user's Apple ID and password, and Apple requires all passwords to be relatively complex. The camera software is now easier to use, with added editing features. Font sizes can be increased or decreased. Developers now have 1,500 new APIs to play with, opening the door to even more innovation.

Meanwhile, Apple's new iPhone 5S comes with a 64-bit processor (a first for the smartphone market), and a fingerprint scanner, both of which will be hard for competitors to copy in a short time frame. Plus, a new camera sports a bigger aperture, larger pixels, a new dual flash, and software capabilities not found in any camera. Reviewers almost universally consider the 5S to be the best smartphone on the market. Initial reports suggest the iPhone 5S is selling like hotcakes. The cheaper 5C is likely to do very well in overseas markets.

Within the next month or so, Apple is likely to introduce a new generation of iPads, and Apple already dominates the tablet market. Tablets are replacing laptops and desktops all over the world.

Apple has over $100 billion in cash, equivalent to more than $110 per share, and it pays a 2.6% annual dividend—which represents only 10% of its current cash holdings. Backing out the cash, AAPL trades with a trailing PE of 9 and a forward PE of 9.2, which means that the market is pretty confident that Apple's best days are behind it, and there is little chance that earnings will continue to grow. That's a pretty pessimistic assessment of a company that has revolutionized and created entire industries (e.g., smartphones and tablets), and that continues to deliver high quality and innovative products to a global market with significant growth potential.

You don't have to be a wild-eyed optimist to like this stock.

Full disclosure: I am long AAPL at the time of this writing.