Management: Apple is the one of the largest tech giants of the world. They were the first US company ever to reach $1 trillion in market capitalization. Tim Cook is the CEO of Apple and his managerial style has been known to be democratic. When Cook was appointed to CEO in 2011, many investors and consumers of Apple were concerned that Cook lacked the visionary of Steve Jobs. However, his liberal style of management encourages consensus-building with high-level employees before making decisions. Time and time again, Apple’s management proves unique principles and values led their company to have a type of innovative culture that is distinct from all other companies – which is a prime reason for their success.
Secular Themes:
The technology market is constantly growing and developing. Every single year, technology improves exponentially. Even when you believe there cannot possibly be any more technological development left, it gets better. For example, computer processing speeds doubles every 18 months. This is known as Moore’s Law. The future growth of Apple will be driven by development in the following factors:
1) iPhone revenues – iPhone sales make up 60% of Apple’s overall revenue. This concerns investors because they believe that if iPhone sales do not do well, this could destabilize share prices. However, Apple customers tend to have the greatest brand loyalty. Switching to Android smartphones are very costly once you get tied into the ecosystem of Apple. Henceforth, it makes more sense to stay within the Apple brand rather than explore around.
2) Further research and development –This year, Apple anticipates investing approximately $14 billion on research and development costs. The central focus of their R&D budget is to innovate and improve hardware of their products. They are dedicated to developing MicroLED displays, which is more energy efficient and brighter than industry renowned OLED displays. These smart displays put Apple devices such as the Mac, iPad, iPhone, and Apple watches ahead of their competition.
3) User experience – Apple prioritizes its business model on maintaining the highest possible customer satisfaction. They are the best in the business at creating devices that bring joyful experiences that appeals to their consumers, instead of simply another product. Apple products’ hardware and software integration is very simplistic and tailored for consumer interests which is why they are able to generate high demand.
Fundamentals:
Apple stands out compared to other tech giants because of their cutting-edge technologies mixed with user-friendliness. The short-term growth of Apple depends greatly on constant development innovation of products. The greatest growth potential of Apple comes from their consumer ecosystem. Globally, there are a billion active Apple devices. They try to create additional income streams from Apple services, such as iCloud, iTunes and the App Store, instead of from just the product sales alone. These services are creating double digit growths in revenues. For example, the App Store brought in $20 billion in revenue for developers and $8.5 billion for the company. Apple users spent $30 billion on the App Store, which is double from what they spent in 2014. On top of that, they have created a tightly-knit technological ecosystem of Apple devices that work seamlessly together. This has enabled a die-hard type of brand loyalty which allows Apple to charge higher prices on their products compared to competitors such as Google and Microsoft, while maintaining high demand for the products. Apple places a great deal of importance on differentiating their products from their competitors and this is why they are so successful when enter new markets with new products. This strategy prevents growth slowdown regardless of high market capitalization.
Model / Consensus Assumptions:
This financial analysis paints a very optimistic picture of Apple’s future. The numbers by themselves prove that Apple is among the group of elite companies on the market. As of September of 2018, their ROE is 36.04%. This is significantly greater than the industry average ROE of 6.76%. High return on equity ratios can be inflated if a company has a lot of debt. Apple’s debt to equity ratio is 87.30%, which is fairly impressive. This further proves that Apple has the capabilities to generate plenty of profit without taking on too much debt. The central product that brings in Apple’s massive profits is the iPhone. The Chinese market gave the iPhone an enormous sales boost. Additionally, Apple’s high equity ratio and their quarter of a trillion dollars of cash reserves ensures the company is financially stabilized. A high quantity of cash reserves means that the corporation can give out its total net profit to equity holders. Another benefit of a high number of cash reserves is having the ability to enter new industries, such as the automobile industry. For example, there are rumors that Apple might have a possible collaboration with BMW and Tesla. Entering new industries diversifies risk by reducing dependency on one product.
Valuation:
Apple Inc. has the best business model for generating cash. It was the first company in history to reach $1 trillion in market capitalization. On the cash flow statement, Apple is blowing tech giants such as Google, Facebook, and Amazon out of the water. Apple’s operating cash flow is $64 billion, while Alphabet, Facebook, and Amazon’s combined free cash flow is $72 billion. Apple’s free cash flow grew 23.85% since 2017. These ludicrous numbers have never been seen before by any company. They are generating 70% more free cash flow than Microsoft, who is renowned for their extremely high profitable business model. The increase in profitability is correlated with an increase of demand for iPhones while maintaining lower costs of production.
Risks:
Lack of innovation: Technology products on a global scale are constantly enhancing becoming refined. Apple understands that it needs to make large sums of investments into research and development in order to consistently innovate products and stay competitive every year. There is risk that other tech giants such as Google or Samsung could surpass Apple’s iPhone sales if their smartphones do not compete with the innovativeness of the Android phones.
Sole sourcing: Currently, Apple receives tech components from a very limited number of suppliers. This means that there is risk for supply shortages and price fluctuations. In order to diminish these risks, Apple has contractually agreed to a supply of various components. However, this method does not completely mitigate these risks. In addition, Apple’s suppliers “may suffer from poor financial condition,” which means that the suppliers could go out of business, which would lead to greater difficulties satisfying customer demands.
Actions:
Without any doubt, Apple is a supreme company that outshines all others in the technology sector. Ever since the development of the original Apple Computer, the revenues of Apple Inc. have risen exponentially. Apple diversifying their products and services by diving and excelling in a variety of technological industries as proved highly successful. Unlocking the growing technology market in China has great potential for Apple, which would multiply their capital investments. Due to their current valuation of equities, I highly recommend BUYING shares at the current level.