Apple: A Strong Buy Valued Over $2 Trillion
Apple’s business primarily runs around its flagship iPhone. However, the Services portfolio that includes revenues from cloud services, App Store, Apple Music, AppleCare, Apple Pay, and licensing and other services now became the cash cow.
Moreover, non-iPhone devices like Apple Watch and AirPod gained significant traction. In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods. Solid uptake of Apple Watch also helped Apple strengthen its presence in the personal health monitoring space.
Headquartered in Cupertino, CA, Apple also designs, manufactures and sells iPad, MacBook and HomePod. These devices are powered by software applications including iOS, macOS, watchOS and tvOS operating systems.
Apple’s other services include subscription-based Apple News+, Apple Card, Apple Arcade, new Apple TV app, Apple TV channels and Apple TV+, a new subscription service.
In fiscal 2019, Apple generated $265.17 billion in total revenues. The company’s flagship device iPhone accounted for 54.7% of total revenues. Services, Mac, iPad and Other products category contributed 17.8%, 9.9%, 8.2% and 9.4%, respectively.
Apple primarily reports revenues on a geographic basis, namely the Americas (North & South America), Europe (European countries, India, Middle East and Africa), Greater China (China, Hong Kong & Taiwan), Japan and Rest of Asia Pacific (Australia & other Asian Countries).
In fiscal 2019, Americas, Europe, Greater China, Japan and Rest of Asia-Pacific accounted for 44.9%, 23.2%, 16.8%, 8.3% and 6.8% of total revenues, respectively.
Apple faces stiff competition from the likes of Samsung, Xiaomi, Oppo, Vivo, Google, Huawei and Motorola in the smartphone market. Lenovo, HP, Dell, Acer and Asus are its primary competitors in the PC market. Other notable competitors are Google & Amazon (smart speakers) and Fitbit & Xiaomi (wearables).
Reasons To Buy Apple
- Apple’s Services and Wearables businesses are expected to drive top-line growth. Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow. Apple’s endeavours to open up its ecosystem, through partnerships with the likes of Samsung and Amazon, are positive for the Services segment. The subscription-based video streaming, news and gaming services are expected to benefit from Apple’s strong installed base. Robust App Store sales coupled with solid adoption of Apple Pay and Apple Music helped Apple double its 2016 Services revenues six months ahead of its targeted 2020-end. Moreover, its wearables and hearables business is expected to be driven by solid demand for Apple Watch and Airpods.
- Growing Subscriber Base within the Services Sector. Apple currently has more than 550 million paid subscribers across its Services portfolio. The App Store continues to draw the attention of prominent developers from around the world, helping the company offer appealing new apps that drive App Store traffic. Further, growing number of AI-infused apps will attract more subscribers on App Store. Notably, more than 30,000 third-party subscription apps are available on App Store and the largest of them accounts for only 0.25% of Apple’s total Services revenues. The company now expects to reach its target of 600 million paid subscriptions before the end of calendar 2020.
- Apple Pay, A design based on the contactless payment (NFC) technology, has been expanded to 49 markets. Apple Pay allowed entry to more than 150 stadiums, ballparks, arenas and entertainment venues around the world with contactless tickets in 2019. Moreover, users could ride public transport in Shanghai, Beijing, Tokyo, Moscow, London and New York. In 2020, Apple will extend ride services to trains and buses in cities like Washington, DC, Shenzhen, Guangzhou and Foshan. Users can also access dorms and services of additional universities across the United States through Apple Watch and iPhone. The growing adoption of contactless payment primarily due to coronavirus pandemic bodes well for Apple Pay.
- A Rising Competitor to Spotify’s Music Monopoly. Further, Apple Music has more than 60 million paid subscribers. The service offers more than 60 million songs, with world-class music experts and tastemakers curating thousands of playlists and daily selections in 115 countries. Apple Music’s availability on Amazon Echo devices is expected to expand the iPhone maker’s footprint against Spotify, which is currently the dominant player in the paid, premium music streaming market. The partnership with Verizon is also noteworthy in this regard. Moreover, the company’s partnership with the National Basketball Association for an Apple Music playlist that features independent artists from an emerging label, UnitedMasters, is expected to draw new subscribers who are fans of NBA games.
Apple Q3 Earnings Call
- Increased Use AI for App Development. Apple is encouraging developers to use artificial intelligence (AI) and machine learning in their apps. The company’s Core ML 2 API helps developers recognize faces or animals in photos, and parse the meaning of the text. Further, the company is offering Create ML for simple and efficient machine learning training on the Mac, which is built on top of the Swift programming language. Notably, Apple has hired former Google head of search and AI, John Giannandrea, to lead its restructured AI division that includes the machine learning division, Siri team and the Core ML API team. In addition to all these, acquisition of start-ups like Silk Labs enhances the company’s expertise in the domain.
- Apple’s focus on autonomous vehicles and augmented reality/virtual reality (AR/VR) technologies presents growth opportunity in the long haul. These are fast emerging as lucrative business opportunities. To ramp up its efforts, Apple has acquired several smaller firms with expertise in AR hardware, 3D gaming and VR software. These include SensoMotoric, Flyby Media, Emotient, TupleJump, Turi, Metaio, PrimeSense and Lattice Data Inc. Also, Apple’s ARKit is helping third-party developers to work on creating AR experiences for its iOS platform. Furthermore, Apple, with its new offerings, would also be able to leverage the Internet of Things (IoT) market, which is expected to grow exponentially, given the rising demand for connected/automated devices, appliances and automobiles.
WWDC 2020 Special Event Keynote — Apple
Reasons To Sell Apple
- Apple’s fortunes are tied to its most important offering, the iPhone. The device plays an important role in expanding the iOS ecosystem. However, Apple’s excessive dependence on the iPhone is a risk to overall growth. Although iPhone sales have been benefiting from a higher average selling price (ASP), premium pricing has been blamed for Apple’s declining market share in countries like China and India. Moreover, the smartphone segment is filled with attractive devices from Samsung, Huawei, Xiaomi, Oppo, and Vivo that are intensifying competition for the company.
- China is an important market for Apple, given the growing number of middle-class customers. However, the waning macroeconomic environment in China and the intensifying competition have dented shipment growth. Moreover, the supply-chain disruption caused by the coronavirus outbreak in China is expected to hurt iPhone’s demand and supply globally, at least in the near term.
- iPad’s growth has slowed over the past few years, with Amazon, HTC, Microsoft, Hewlett-Packard and others flooding the tablet market. iPad demand has severely declined due to the increasing availability of large-screen smartphones, in addition to stiff competition from Google Chromebooks and Microsoft Surface. Moreover, Apple faces significant competition in the desktop and portable computer segment from the market leader Lenovo and the likes of Hewlett-Packard, Dell, Acer and Asus. MacBook has failed to become a key product, due to Apple’s shortage of innovation in this product line as compared to the iPhone and iPad.
- Apple is facing stiff competition from Xiaomi, Fitbit, Huawei and Samsung in the wearables market. Although Apple’s newer products like Apple Watch and HomePod hold significant promise, they are yet to deliver results good enough to negate decline in iPhone shipment. The company is also experiencing low sales of its smart speaker HomePod, owing to its late entry into the market that is currently dominated by the likes of Amazon and Google.
- Apple is facing increasing regulatory hassles in Europe. The European Commission is opening two antitrust investigations into Apple’s App Store and Apple Pay practices over concerns that the company’s way of doing business hurts consumers by limiting choice and innovation and keeping prices high. Notably, music-streaming service Spotify has filed a formal complaint against Apple, alleging unfair practice by the iPhone maker to lower competition. The complaint relates to the 30% revenue cut that the company takes from some app providers. Moreover, the Supreme Court has allowed the consumers’ antitrust lawsuit against Apple to continue in a lower court. The lawsuit alleges iPhone apps to be expensive. The company is also facing lawsuits concerning health-monitoring features of Apple Watch.
- Moreover, Apple is slapped with a record fine of €1.1 billion by French anti-trust regulators for engaging in anti-competitive practices. The regulators alleged that Apple favoured Tech Data and Ingram Micro to align prices as well as limit wholesale competition for Apple products in France. The company is also ordered to pay a $500-million settlement for intentionally inhibiting/restricting the performance of older iPhone models to preserve batteries. Further, the U.S. Supreme Court repealed an appeal by Apple in a decade-long dispute wherein Nevada-based VirnetX is fighting to collect royalties from the company for secure communications technology used in the iPhone, iPad and Mac computers.
Apple Earnings and Revenue
Apple’s Q3 Earnings Beat, iPad & Mac Aid Sales Growth
Apple reported third-quarter fiscal 2020 earnings of $2.58 per share which increased 18.3% year over year.
Net sales increased 10.9% year over year to $59.69 billion.
Product sales (78% of sales) increased 9.9% year over year to $46.53 billion. iPad sales of $6.58 billion jumped 31% year over year and accounted for 11% of total sales. Mac sales of $7.08 billion increased 21.6% from the year-ago quarter and accounted for 11.9% of total sales.
Services (22% of sales) revenues grew 14.8% from the year-ago quarter to $13.16 billion.
Apple’s Geographical Performance
Americas sales increased 7.8% year over year to $27.02 billion and accounted for 45.3% of total sales.
Europe generated $14.17 billion in sales, up 18.5% on a year-over-year basis. The region accounted for 23.7% of total sales.
Greater China sales climbed 1.9% from the year-ago quarter to $9.33 billion, accounting for 15.6% of total sales.
Japan sales increased 21.7% year over year to $4.97 billion, accounting for 8.3% of total sales.
Rest of the Asia Pacific generated sales of $4.20 billion, up 17% year over year. The region accounted for 7% of total sales.
Apple’s Q2 Details
iPhone sales inched up 1.7% from the year-ago quarter to $26.42 billion and accounted for 44.3% of total sales. The slight year-over-year growth was driven by strong demand in May and June, primarily for iPhone SE. Moreover, continued economic stimulus and phased reopening of some economies globally, helped sales.
Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 98% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined in the reported quarter.
Services maintained momentum in the reported quarter. As anticipated, advertising and AppleCare were negatively impacted by coronavirus-led store closures and lower economic activity. This was fully offset by double-digit growth in App Store, Apple Music, video and cloud services. Apple also witnessed strong engagement with iMessage, Siri and FaceTime.
Markedly, Apple achieved its goal of doubling fiscal 2016 services revenues six months ahead of schedule.
Apple now has more than 550 million paid subscribers across its Services portfolio, up 35 million sequentially and 130 million year over year. The company expects to reach its target of 600 million paid subscriptions before the end of calendar 2020.
Moreover, the number of paid accounts increased double-digits across all geographic segments.
In June, the company launched Apple Card Monthly Installments for more products in its U.S. stores. The program offers 0% interest to customers buying Apple devices.
Mac sales grew double digits in each of the geographic segments. Fiscal third-quarter Mac sales hit a record high in Japan and the rest of Asia-Pacific. It also achieved third-quarter sales records in the Americas and Europe.
Additionally, more than half of the customers who purchased iPads and Macs during the quarter were new to the device.
Apple quoted a recent survey report from 451 Research which stated that overall consumer satisfaction was 97% for iPad and 96% for Mac in the quarter under review.
Wearables, Home and Accessories sales increased 16.7% year over year to $6.45 billion and accounted for 10.8% of total sales.
Moreover, Apple Watch’s adoption rate grew rapidly. Notably, more than 75% of customers who purchased Apple Watch during the reported quarter were first-time customers.
Apple devices continued to gain traction among enterprises amid coronavirus disruption. The company witnessed rapid adoption in healthcare, particularly in telehealth. Markedly, UVA Health, Rush University Medical Center and UC San Diego Health are using apps on iPads and iPhones to take care of, remote patients.
Apple Business Chat adoption increased in the fiscal third quarter. Notably, HSBC deployed Apple Business Chat in its contact centres in the United States and the United Kingdom.
Gross margin expanded 0.4% on a year-over-year basis to 38%. However, gross margin contracted 0.4% sequentially due to unfavourable forex of 0.9%.
Products’ gross margin contracted 0.6% sequentially to 29.7% due to unfavourable mix and forex. Services’ gross margin was 67.2%, up 1.8% sequentially, driven by a favourable mix.
Operating expenses rose 10.4% year over year to $9.59 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses which increased 11.8% and 9.2% respectively.
Operating margin expanded 0.5% on a year-over-year basis to 21.9%.
As of Jun 27, 2020, cash & marketable securities were $193.62 billion compared with $192.84 billion as of Mar 28, 2020.
Term debt, as of Jun 27, 2020, was $101.56 billion, up from $99.48 billion as of Mar 28, 2020.
Operating cash flow was $16.3 billion, an improvement of $4.6 billion year over year.
Apple returned $21 billion in the reported quarter through dividend payouts ($3.7 billion) and share repurchases ($10 billion).
Apple’s board also approved a four-for-one stock split. Each shareholder of record at the close of business on Aug 24 will receive three additional shares for every share held on the record date, and trading will begin on a split-adjusted basis from Aug 31, 2020.
Apple didn’t provide any guidance given the uncertainty around the impact of the coronavirus pandemic.
However, the company expects fiscal fourth-quarter iPhone sales to benefit from strong demand for iPhone SE. Apple stated that the sale of new iPhones will begin a few weeks later against the usual late September.
Apple expects iPad and Mac to post strong year-over-year growth. Services are expected to benefit from strong usage of App Store, video, Music and cloud services. However, AppleCare is expected to face tough year-over-year comparisons.
Further, operating expenses are expected between $9.8 billion and $9.9 billion.
Long Term Outlook
Apple Emergence Into Fintech
Apple is making inroads into fintech space with its recently launched credit card, co-branded with Goldman Sachs. Apple Pay is gaining traction as more consumers use their phones to pay for purchases in stores, avoiding handling cash in the pandemic. Now, with the new App Clips, This future looks brighter than ever. With App Clips, users can download a small part of an app that’s discoverable at the moment it’s needed. Now we can use App Clips for things such as ordering take-out from a restaurant, renting a scooter, or setting up a new connected appliance.
Supporting 5G Connectivity
Apple is equipping the iPhone 12 with its own mobile processors, as well as supporting 5G connectivity.
Becoming Carbon Neutral
Apple’s plan to become carbon neutral across its entire business, manufacturing supply chain and product life cycle by 2030.
Apple’s third-quarter fiscal 2020 results reflect continued momentum in the Services segment, driven by a robust performance of App Store, Apple Music, video and cloud services. iPad and Mac also contributed strongly to the quarterly results. Moreover, iPhone sales recovered, driven by strong demand in May and June, primarily for iPhone SE. Apple devices also continued to gain traction among enterprises, particularly healthcare providers. Apple didn’t provide any guidance due to uncertainties triggered by the pandemic. However, it expects fiscal fourth-quarter iPhone sales to benefit from strong demand for iPhone SE. Apple stated that the sale of new iPhones will begin a few weeks later against the usual late September. It also expects iPad and Mac to post strong year-over-year growth.
Apple Q3 2020 Results, Apple 2019 10-K, and predictions made by the Author’s understanding of the company.
This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.