Fundamental Analysis Apple Inc. AAPL
Apple Inc. is a multinational provider of consumer electronics, computer software, and online services.
Apple provides premium products with high quality and very good user experience. The company stands out in the market especially because of cutting-edge aesthetics in design combined user-friendliness which needs continuous development through innovations. Therefore, the short-term growth of the company relies heavily on the success of continuous innovation.
Apple also uses the market development which means creating new markets for new products or entering entirely new markets. Even if the company steps in an existing market Apple places a high emphasis on product differentiation and comes up with an entirely new product. Because of this strategy, Apple’s growth doesn’t slow down despite high market capitalization.
Most important growth potential comes from company’s user base. More than one billion active devices which are premium products are used worldwide. And Apple tries to generate new income streams from its user base. To generate more revenue from the user base, Apple continuously brings new products and services in its IOS ecosystem. This is more effective strategy than increasing the numbers of users.
As you can see on the table Net Sales by Product from 10 Q (May 3, 2017), Apple’s services are providing double-digit revenue growth.
The company’s services include software applications, iOS, macOS, watch OS and tvOS operating systems, iCloud, Apple Pay and selling and delivering digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store and Apple Music.
An example App Store:
Last year, App store generated more than $20 billion in revenue for developers, more than 40% year over year, and $8.5 billion in revenue for the company. Customer’s total spending in App Store was $30 billion in 2016, $20 billion in 2015 and $15 billion in 2014. Average iOS download generates four times the revenue for developers compared to Google Play.
IOS ecosystem which includes hard wares, like iPhone, iPad, iMac, iWatch etc., promotes selling apps to the customers who are already in the same ecosystem and cannot easily leave the IOS and switch to Android. This enables App store not only to generate revenue growth but also to use the ecosystem as an economic moat against competition. Every year, people spend more time on apps and the usage of apps promotes selling and upgrades of hard wares. Therefore Appstore not only benefits from ecosystem but also promotes it too.
The example of App store applies to all participants of the ecosystem, i. g. : Apple Pay, iTunes Store, Apple Music etc.
Apple’s main growth potential lies in its ecosystem which includes premium products and customers with high income. And the company, one of the most innovative companies in the world, will succeed to generate stable income with high margins and wide economic moat from its ecosystem.
As mentioned before, one of the strongest economic moat for Apple is the network effect of its products in IOS ecosystem. Each product promotes using the other products and each new product experiences fast adoption and diffusion in the user base, after its integration in the ecosystem.
Once a user begins to use one of Apple’s product, he becomes a part of the ecosystem and the more he uses Apple’s products the more he gets involved in it which makes him more reluctant to switch to another ecosystem, i. g. windows or android.
The other very important economic moat of the company is the brand loyalty. According to Forbes, the estimated value of the brand is $145 billion (2015). Customers strong brand loyalty enables Apple to consistently charge higher prices across its product line.
High-profit margins confirm the Company’s wide economic moat.
Apple’s current products have a short life cycle. The Company’s revenue is strongly dependent on iPhone (62% of the revenue see table above). The overall slowing growth in the smartphone market and declining gross profit margin for the iPhone are the major concerns of the investors.
But we can also notice the sales of the Apple’s products, inkl. iPhone, are becoming stable even there is no significant innovation. And This contradicts the assumption of the short life cycle of the products.
The main reason why people upgrade their iPhone to the new models is that the apps and data usage requires more and more capacity. For example, the storage capacity of iPhone increased from 8GB to 256GB with iPhone X. But not only the storage, the capacity of RAM and also the computing power of chips have to increase too. So, Apple decided to buy Toshiba’s chips unit to secure the supply of NAND chips (here).
The real innovation which would have an economic moat to protect the revenue from decline will be Apple’s Siri. The virtual assistant with AI can improve the user experience of the Apple’s products and extend their life cycle.
To our opinion,
(1) Apple will overcome its dependency on products with short life cycle,
(2) The Company will widen its economic moat by improving the ios ecosystem and
(3) generate more revenue with higher profit margins from its user base, especially through apple car and artificial intelligence.
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No Investment or Financial Advice.
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