Apple In Perspective

Apple has been taking a real beating on Wall Street and in the press lately. But are we losing our long-term perspective by focusing so intently on quarterly results?

Stock Market

The Stock Market is a predictor of future growth, but it is hardly infallible. Seven months ago the market was predicting spectacular growth for Apple. Today it’s predicting almost no growth at all, worse than Dell and HP. Was the market wrong seven months ago or is it wrong today? Or both?

Growing Markets

Take a broader look at the computing markets. We are transitioning from notebook and desktop computers to mobile phones and tablets. No one is in a better position to benefit from this changeover than Apple. They were first-movers in both phones and tablets and they continue to devour the bulk of those sector’s profits. Apple’s path is not unimpeded, but they still have the inside track.

iPhone & iPad Sales

Last quarter, Apple sold 37.4 million iPhones for 7% growth and 19.5 million iPads for 65% growth.

Remember all that talk about suppliers cutting orders and how it meant that Apple wasn’t selling as many phones and tablets as before? Yeah, not so very much.

China

“iPad experienced very strong year-over-year growth in every operating segment, particularly in Greater China and Japan where sales more than doubled year over year.”

The highlights for the quarter in China were that iPads grew 138% year-on-year, and we set new records for sell-through both for iPhone and iPad during the quarter.” ~ Peter Oppenheimer

Remember all that talk about Apple not doing well in China? Yeah, not so very much.

Business

“…the Good Technology’s data that says that iOS accounted for 77% of all their activations by their corporate customers. Now that would not include BlackBerry, but it would include all the other guys. and so we seem to be doing really well and honestly, I don’t see the recent announcements changing that at all. I’ve seen more and more people developing more and more custom apps for their businesses on iOS to be used on iPad and we’re very, very bullish on it. As a matter of fact, just to quote you some numbers, iPad now is being used in 95% of the Fortune 500 and what’s even more impressive probably is on the global 500 companies, we’re now in 89%.” ~ Peter Oppenheimer

Remember all that talk about Apple’s iPhone and iPad not doing well in business? Yeah, not so very much.

Unique Advantages

Critics dismiss Apple as un-innovative, passé and niche. But Apple retains distinctive differences that give it unique advantages in the the newly emerging mobile markets:

— App Stores in 155 countries

— iTunes in 119 countries

“Today, our iTunes store offer the broadest combination of geographic reach in content depth in the industry, and they surpassed quarterly billings of $4 billion for the first time ever in the March quarter, that’s a $16 billion annual run rate making our digital content stores the largest in the world. The quarter’s iTunes billings translated to record quarterly iTunes revenue of $2.4 billion, up 28% from the year ago March quarter with new quarterly revenue records for music, movies, and apps. ~ Peter Oppenheimer

— 300 million iCloud users

— Highest loyalty and customers satisfaction rates in the business

“A recent study by Kantar measured 95% loyalty rate among iPhone owners, substantially higher than the competition, and iPhone remains top in customer experience. Last month, we were very pleased to receive the number one ranking in smartphone customer satisfaction from J.D. Power and Associates for the ninth consecutive time.” ~ Peter Oppenheimer

“The most recent survey published by ChangeWave indicated a 96% satisfaction rate among iPad customers.” ~ Peter Oppenheimer

— Developers

…(W)ith App Stores in 155 countries that encompass almost 90% of the world’s population, our developers have created more than 850,000 iOS apps, including 350,000 apps made for iPad.”

“Cumulative app downloads have surpassed 45 billion and app developers have made over $9 billion for their sales through the App Store, including $4.5 billion in the most recent four quarters alone. Canalys estimate the sales from our App Store accounted for 74% of all app sales worldwide in the March quarter.”

“…(W)e are now paying very happily our developers more than $1 billion every quarter.” ~ Peter Oppenheimer

Revenues, Profits And Margins

Apple had $43.6 billion in revenue. What other company had comparable revenues?

Apple had $9.5 billion in profits. What other company had comparable profits?

Apple had 37.5% margins which is astonishing for a hardware company and compares quite favorably to the margins of both Google and Microsoft, which are primarily software shops.

Screen-Shot-2013-04-25-at-4-25-10.06.04-AM

Courtesy of Asymco

It seems that Apple compares favorably to every other company in the world other than the Apple of 12 months ago.

iPhone 4

“Now, that said, we see an enormous number of first time smartphone buyers coming to market, particularly, in certain countries around the world. And so what we’ve done with that is and we started last quarter is we’ve made the iPhone 4 even more affordable and which has made it more attractive to first time buyers and we caught up on the – our supply – demand towards the late in the quarter last quarter and we are continuing to do that in other markets. And we believe that the phone or the price point that we are offering is an incredible value for people, that allows them to get into the ecosystem with a really, really, phenomenal product.”

One thing that hasn’t been getting enough attention, or rather hasn’t been getting the right kind of attention, is the continued sales of the iPhone 4. The iPhone 4 is now over two and a half years old but it continues to sell well in developed markets like the United States and Europe and in developing markets like China, India and Brazil. How can this be? Is there any other phone manufacturer who could successfully sell a phone that is two generations and two years out of vogue?

The iPhone 4 is proof that buyers are buying Apple’s ecosystem, not just their hardware. So long as Apple maintains a lead in integrating hardware, software and services, they will maintain an edge in mobile computing.

And as an added bonus, while the iPhone 4 may be bring the iPhone’s average sale price down, the sale of this older technology should be bringing the iPhone’s margins up.

Apple’s Long-Term Outlook

“We are managing the business for the long-term and are willing to trade off short-term profit where we see long-term potential. The iPod is a great example of this. When we launched it in 2001, its margins were significantly below the margins of Apple at that time.

Four years later, the iPod and the iTunes Music Store comprised half of Apple’s revenues and inspired us to build the iPhone. The iPad mini is another great example. We have priced it aggressively and its margins are significantly below the corporate average. However, we believe deeply in the long-term potential of the tablet market and think that we’ve made a great strategic decision. We’ll only make great products and this precludes us from making cheap products that don’t deliver a great experience.”

If you look at Apple’s numbers for this quarter and the next, you might think you see a company in decline. But if you look at Apple’s numbers over the fiscal or annual year, you see anything but decline. Let’s put this in perspective: Would you rather have Apple’s profits or those of Google, Amazon, Microsoft or Samsung? Once you put it that way, the answer as to how Apple is doing becomes clear.

Apple dominates the most dominant tech sectors of our times. And unless I’m gravely mistaken, that’s a good thing. A very good thing.

Published by

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?

623 thoughts on “Apple In Perspective”

    1. Macabella & Polimon, well said. I don’t remember a time when Apple’s P/E ratio was high, not like the crazy highs of the likes of Amazon. I don’t know if this is bias, confused views or befuddlement by economic forecasters and analysts. I see the holes in the arguments of the Naysayers, but haven’t found one in any of JK’s analyses; but I’m open to any possibilities, and waiting. 🙂 What I’d like to hear about is an analysis (an detailed one) on the problems with iTunes and possibly solutions. I do find each update seems to be a little more confusing but since I have grown up with iTunes, the learning curve has never been too steep a climb.

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  2. We live in times when the obvious needs to be underlined and overstated to compete with the barrage of anti Apple FUD, including paid (by Samsung) FUD. Thanks to Mr. Kirk for this article. Yes, obviously Apple rules the tech sphere, and no amount of hot air is going to change this fact.

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  3. John Kirk had written, as usual, a terrific piece of journalism: clear, objective and well documented. I have no problem to say I’m an Apple lover, but I am not an Apple fan boy; I’m not blind, there are things I don’t like from Apple like the way it manages the product updates. I’d like this process was shorter, with more added value, but it seems to be working well for Apple.

    I think Apple is already posed to be the Number One company in the tech world, it has, as John Kirk had pointed, unique and strategics advantages over its competency. Google is making all the possible mistakes related with Android, Google has no idea about what to do with Android and the online ad may have more than one real player, remember that Yahoo! is in the very capable hands of Marissa Mayer, who is reviving the company. In the other hand, Microsoft is doing its best to sink the company, every move they make is in that sense. Steve Ballmer will achieve what Steve Jobs never imagined: ending Microsoft. And related to Samsung, mmh… well, Samsung is a simple copycat (a very good one, by the way) with a lot of money, but with a very few ideas. In the very moment Samsung tries something, it will try the bitter taste of defeat, because it will never be the same thing steal to invent.

    Congrats John, well done.

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    1. While i agree with most of your assessment i would argue that with the latest samsung s4 they have put some innovation to there device which include the air view and air gesture…Samsung will continue to be apple’s main competition in the coming years…Apple however will need to be more innovative in their ecosystem than in the hardware as the hardware is almost at its limit i think!….how much thinner/faster are we really going to get? What’s the next step?

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      1. Yeah, you’re right. I have read a little about the S4, especially about those technologies you mention, I read it here in an article by Tim Bajarin a couple of days ago. My point with Samsung is that 90% –or more– of what they sell, are mere copies of products or technologies developed by other companies, whether Apple, Sony, RIM, etc. Samsung needs to take a lot more risk in R&D if really wants to be considered as an innovator. Meanwhile, it will be no more than a mere copycat. Thank you so much for your comment.

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      2. Throwing new technologies into a device is not in and of itself innovative, at least not in the consumer market, as much as the companies that do so try to make it sound like it is. Making the new technologies important and usable, that’s innovative, assuming the new technologies are even consistent and reliable, which so far is not the case from what I’ve read.

        That is what made and makes Apple innovative over all the other handset makers and most of the rest of the consumer tech companies. Not just new technologies, but things people will find important and usable. Oh and actually _find_. If you have to throw in an “Easy mode” on your device (and I include Apple’s Mac OS in this), that is automatic “lose”, IMHO.

        Oddly enough, Google knows this, too, as they keep working on new technologies to improve their search results. Now if they could translate this to Android, they and their OEMs might have something other than an Apple/iOS chaser.

        Joe

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  4. It’s amazing to me that Apple (making it’s money primarily from hardware sales) has margins essentially as good as software and internet services companies, who have no “cost of sale” to speak of. It’s mind-blowing.

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    1. Agreed. Instead of bemoaning the fact that Apple’s margins have fallen, we should be astonished at how high they yet remain.

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  5. In one way, a company’s stock is another commodity from the company. If people really want the stock the price goes up, if they don’t then it goes down — regardless of the financials. Amazon has many investors who would rather hold their stock even though the financials say it is way over priced. Apple apparently has many stockholders who want to sell even though the business and financials say it is a great investment. If I had the money I would buy in based on what you have written.

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  6. Overall a well written piece, but I have just a mild disagreement with the initial setup’s premise. The stock market is not a predictor of anything. While you can monitor stock market data to identify trends that may be useful for some things, financial analysts always disclaim that past (and I’d add current performance) is no guarantee of future performance.

    The only things predicting anything in the financial industry are financial analysts, whose motivations are not always in the interests of investors, and whose opinions can often be purchased, for both well-intended and unscrupulous purposes. Those analyses provided by these financial analysts are often no better than a witch doctor tossing bones when it comes to predicting future events. And there are so many institutions who desire a certain amount of market volatility to make money, and creating analytically sound fictions can serve to create or manage that kind of volatility. This also does not take into account the many algorithmically managed transactions handled by software trading systems that can affect the market positively or negatively, as the recent nano-crash that occurred as a result of the fake AP wire story regarding the white house bombing.

    For some reason Apple seems to be a magnet for much of the industry’s negative financial analytical fiction, even when the facts, as you so eloquently pointed out, do not support their suppositions. I would cynically state that the financial industry appears to not let facts get in the way of making money.

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  7. Thanks for the article. Great logical piece of journalism.

    Now if you could just explain the Amazon situation to all of us, that would be great. i.e.

    Apple Profit $9,500,000,000 – Market Cap $383 Billion
    Amazon Profit $85,000,000 – Market Cap $124 Billion???

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  8. John, thinking more about what you wrote and the discussion I do think one element needs to be added to your analysis. Who owns large blocks of stock and how their investment strategy impacts the price. I think it was Philip Elmer-Dewitt who noted how much AAPL the major brokerage houses were selling in the recent downturn.

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    1. The top ten holders of AAPL: Vanguard, FMR. State Street, Jupiter, Barclays, T Rowe Price, Susquehanna, JP Morgan Chase, Northern Trust, Invesco. Lots more detail, including who is buying and who is selling, here.

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  9. Great article. Makes a lot of sense. With all the money they spend on R&D, Apple will again amaze us wth some new product or gizmo that we didn’t even think could exist a few years ago! Then the “herd” mentality in Wall St. will flock back and the stock will go up again. No company stays on top forever (smasung, amazon and google be warned!), but a solid company like Apple doesn’t stay down for long either!

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  10. It is not that there is something fatally wrong with Apple. It has, however, become dull. The excitement premium is what made customers pay such a premium and queue up overnight to be the “first on their block” to have the latest and greatest product.

    Compare a visit to an Apple Store now vs. a year ago. Far fewer events, less energy and no special experience.

    60 billion for share repurchase and dividend increase: how about putting more of that into R&D?

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    1. “Compare a visit to an Apple Store now vs. a year ago. Far fewer events, less energy and no special experience.” – 4ourth

      The facts respectfully disagree with your assessment:

      “With an average of 401 stores open in the March quarter, average revenue per store was $13.1 million, compared to $12.2 million in the year ago quarter. Retail segment income was $1.1 billion.” … “We hosted 91 million visitors to our stores during the quarter compared to 85 million in the year-ago quarter. That translates the 17,500 visitors per store per week.” – Peter Oppenheimer

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    2. Considering you can now pre-order an iPhone online versus waiting in the cold dark mornings for a _chance_ to get one, I was surprised that there were _any_ lines for the iPhone 5 and iPad mini last year, never mind how long the lines endured. One would think that after two weeks it would have become clear, just place the order online.

      Anyway. “Excitement” is a subjective qualifier. “Experience” and “energy” are a bit more quantifiable if you simply look at the stores themselves and how regularly they are PACKED and how well Apple has refined the physical shopping experience (for which they do not get enough coverage or credit. Maybe the fine folks here at Techpinions could help that deficit).

      But I intuitively agree with “fewer events”. I don’t have numbers, but it does seem like that is one area where Jobs and Cook are differing. Michael Kaiser’s advice for arts organizations in his book _The Art of the Turnaround_ is to find some way to engage the public at least once a month to once a quarter (depending on the organization size) and I think that is a valid point.

      Joe

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  11. “The iPhone 4 is proof that buyers are buying Apple’s ecosystem, not just their hardware.”

    Right. At Verizon, 2 million customers preferred an older iPhone to new Android. Tell me again who has a problem?

    Joe

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  13. It would help if people understood the context in which Apple’s stock price ballooned to 700. It was a time when every other stock seemed to be struggling, and AAPL was the only stock defying the gravity of the economic crisis. Every cent that could go into Apple’s stock did go, until no one was left with room in their budget for more. Meanwhile the economy regained its footing, and smart investors took their (massive) profits and diversified into recovering sectors. The decline is an unwinding of a very unusual situation, and not a verdict on Apple in a vacuum.

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    1. One part, but an important part, of the context, to be sure, IMHO. A lot of people who were always more bear (and that is being generous) than bull on Apple got real giddy. If anything, after that, most analysis has returned to the Apple view from pre-iPod era, even a major portion of that era. I remember many profitable quarters and ERs and the stock dropping like a lead brick right after. No one had faith Apple could continue things going forward, never mind Apple did so quarter after quarter.

      Is Apple worth over $700 a share, even if the run was based on emotion than fundamentals? Absolutely, because the fundamentals are real. But a share holder has to be patient and wait it out because most investors don’t get Apple and frankly, as a shareholder, I’m glad many of them are gone.

      Joe

      Reply

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