What's up next for Apple?

The iPhone is the company's latest product to reshape not just the marketplace but the world. As Apple's product line grows, count on its stock price to soar.

Let's say you have created the most useful, the most beautiful and arguably the most profitable tool in the history of mankind. A device that spans the range of modern human existence from entertainment and communications to business, education and art. A device that has no equal despite ample attempts at imitation and that ceaselessly expands to fulfill needs that you didn't know you had.

"Well, then," the stock market would say. "That was nice. What else ya got?"

That is the dilemma faced today by Apple (AAPL, news, msgs), whose iPhone, at a mere 2 years old, is inarguably the best computer and media device, ounce for ounce, that has ever graced the globe. It so surpasses previous notions of what a telephone, media player, handheld computer, pathfinder and personal gaming device could be that it continues to astonish owners and observers alike.

The electronic love that blossoms among iPhone users is not immaterial, and I would argue that there's a good chance it will help propel Apple shares to $335 (about twice their current price) by mid-2012 -- and with a kick-start this fall as more groundbreaking products emerge as soon as next month. That makes Apple one of the best stocks to pick up on any upcoming weakness. Here's why.

Major-league profits

First, you must recognize that practical products that thoroughly delight consumers are exceedingly rare in our age of instant obsolescence, a time when it has become increasingly hard for companies to raise prices and demand brand loyalty because of the ease with which imitations are created and the speed at which jaded ennui sets in.

Companies that cannot demand excess value through useful products paired with imaginative marketing are condemned to bruising battles for market share through price wars that eat up capital, reputation and profits.

By creating a software platform in its iTunes App Store on which tens of thousands of profit-incented third parties can essentially create new versions of the device every day, Apple has essentially created alchemy out of aluminum and silicon: The iPhone has become a self-perpetuating machine that changes itself to fit new opportunities and spins off profits with little effort from the home office. It's never been done before, though every company on the planet wishes it could duplicate it. Imagine the margins that Kellogg (K, news, msgs) could achieve if it could find a way to grab a 30% royalty every time someone made Rice Krispie treats.

I'll give you an example: I am a huge baseball fan who follows my hometown Seattle Mariners but also likes to keep close track of all other teams, particularly while on the road. The Major League Baseball application on the iPhone, at $9.99, is a brilliantly executed piece of Web and video software, and it serves this purpose to a T.

The MLB iPhone app not only provides instant box scores and game-casts featuring pitch-by-pitch results that automatically update during a game, but for an extra $35 per year gives me access to live high-definition video (or audio) of every contest in progress. The app also provides 10-minute HD video versions of games 90 minutes after they're over. Now check out why this is important: Apple has provided the platform for a media product that is actually better than cable or satellite TV and radio, and obviously more portable than a desktop PC. It has created a new form of mobile entertainment with long-term profit streams for itself, MLB and the phone carrier. And Apple happily takes in $2.99 for every download of the baseball application.

Waiting for the iNetbook

Of course, Apple is much more than the iPhone, and its earnings report last month showed that its desktop and notebook Mac sales continue to enjoy a halo effect as consumers worldwide continue to seek out the ease with which it marries technology with functionality.

Money is absolutely pouring into the company to the extent that it now has a cash hoard of more than $28 billion and annual free cash flow of nearly $10 billion more. This astonishing profitability -- which competitors ranging from Microsoft (MSFT, news, msgs) to Nokia (NOK, news, msgs) and Sony (SNE, news, msgs) have tried but failed to dent -- gives Apple almost unlimited opportunity to invest in developing products. (Microsoft is the publisher of MSN Money.)

The company has often introduced products in September as part of a back-to-school vibe, and, because it plays the media like a violin, it manages to get free publicity for every major announcement. The device rumored to be coming next month is a type of tablet computer that will naturally be connected to the Web wirelessly and feature a large touch screen.

This is potentially a blockbuster product, in my opinion, because the new niche of small notebook computers known as netbooks, the hottest thing going in personal computers these days, has so far delivered a group of boring, slow, unattractive devices. They all feel like cheapie versions of bargain notebook computers rather than the new type of media player that they could be if designed on the Apple workbench. An extra-large version of the iPhone with built-in camera and a fold-out 95%-sized keyboard, priced under $700, could be a big hit for purposes ranging from gaming and movie watching to serious e-mail, note taking and communication. The right device could command the category and blow the ridiculously weak competitors from Dell, Acer, Sony and Toshiba out of the water.

In the meantime, Apple has to keep delivering its current devices at a pace commensurate with the recent pace. Considering that it has not really slowed down in the recession and that the economy is finally heating up again, the company shouldn't have a big problem doing so. I mean, Mac sales in the past quarter were up 4% year over year, versus the negative-3% pace of the industry.

Seven percentage points may not sound like much, but it's huge in this business. Plus, there are market-share gains to be made: At present, Apple is only the seventh-largest PC vendor, with a 3% share, and the fourth-largest U.S. vendor, with a 5.8% share. Both of those numbers have risen in the past two years and provide ample room for growth, particularly overseas.

To project a $335-a-share price in three years, I am just looking for 15% earnings growth and a return to the premium price-earnings multiple that is accorded to industry leaders. General Mills is growing at 8% and gets a 16 P/E. In this tough environment, Apple is being given a 22 P/E, but in a more buoyant climate it should have an opportunity to shift higher toward a P/E that's double its growth rate, or 29. That may seem high now, but technology leaders are frequently given 30 to 50 P/Es as traders determine that they are willing to pay up for growth.

My estimate for Apple earnings next year, based on current and projected growth trends, is $7.90 a share. Grow that 15% for three years and multiply by a 28 P/E and you get roughly the $335 target. It won't be easy, but it is within reach.