Apple: An overview and what to expect in 2019

Apple is an American company that designs and sells electronic devices, such as the iPhone, iPad and iPod, which have disrupted entire industries and created new ones.

The company’s financial results mainly depend on the success, year on year, of the iPhone; the biggest selling and most profitable item in Apple’s product line.

As you can see from the chart below, iPhone revenues amount to 64% of Apple’s total sales. This means that the company’s annual September launch of a new iPhone will give you an idea of how successful the next year is likely to be.

The chart below shows Apple’s revenues by geographic region. The most important region is the Americas (particularly the U.S.), representing 46% of total sales. In second place is Europe with 23%, whereas Greater China is only third with 18%.

apple's revenues by geographic area

Apple’s history

Apple’s history is tied to the life of Steve Jobs, one of its founders and CEO for many years. The company was founded by Jobs, Steve Wozniak and Ronald Wayne in 1976. Apple’s computers enjoyed early success and the company was listed on the Nasdaq stock exchange in 1980. Despite the launch of the Macintosh computer in 1984, Jobs resigned the following year because of a clash with the CEO, John Sculley, and the Board of Directors. Apple experienced many ups and downs during the ‘90s; in 1997 it acquired NeXT, a company founded by Jobs after leaving Apple. Jobs became the new CEO soon after. (1)

From the 2000s onwards, Apple, thanks to Jobs’ ability to innovate, launched several products and services that disrupted entire industries. The most successful are listed below:

The name of the company was changed from “Apple Computer, Inc.” to “Apple, Inc.” in 2007. In fact, by then the company had already started to switch its focus from computers to other products (iPod, iPhone, Apple TV, etc.).

Steve Jobs presents the first iPhone
Steve Jobs presents the first iPhone

Jobs died in 2011, leaving Tim Cook to guide the company. Under Cook’s lead, Apple has produced growth in sales, net income and stock price, but it has lost Jobs’ creative and revolutionary force. The results are only marginal improvements in the products launched every year.

Apple’s financials

The iPhone, with almost 1.5 billion units sold and $1 trillion of revenue generated, is by far the most profitable product in history.

Apple has turned from a growth stock into a cash cow over the years. A cash cow is a company in the maturity stage of its life, with limited sales growth but a lot of cash flow that is used to pay out dividends to shareholders and to buy back shares from the market.

Apple iPhone XS and XR 2018 event
Apple iPhone XS and XR 2018 event

Although Apple has grown relentlessly in the last 20 years and was the first American company to reach the milestone of one trillion dollar market value (followed shortly after by Amazon), it seems unlikely that the stock price can keep up with the growth of past years.

In fact, the most important market served by the company, the smartphone market, seems saturated in all the most profitable geographic regions, except China. In the land of the red dragon, however, Apple is facing aggressive competition, which leaves it with small margins of growth and a limited market share compared to Chinese giants like Huawei.

As you can see from the chart below, iPhone unit sales growth has flattened since 2015. Another market with great future potential is India; however, the largest democracy in the world doesn’t have a middle class comparable to those of western countries. Therefore, there are not so many potential iPhone buyers. In fact, India is such a small market for Apple that it is included, along with Africa and the Middle East, in the geographic segment called “Europe” by the company.

In the first nine months of the 2018 fiscal year, revenues soared by 15% compared to 2017 thanks to increases in iPhone revenue (15%) and services (27%). Despite the release of the iPhone X, presented by Cook as “a product that will set the path for technology for the next decade,” the units of iPhones sold were in line with the previous year. What has changed is the price; it has increased, making the revenue go up. In my opinion, this is still a great result because it allows Apple to keep making a lot of money. But, at the same time, it shows how the worldwide smartphone industry presents small growth margins as of now. This may change if a player in the sector launches a revolutionary product.

Apple - revenues

As the chart below shows, Apple has proven to be an incredible money-making machine. EBIT and net income growth have slowed down from 2015 to date, but are still very high compared to any other American juggernaut company.

Apple - ebit and net income

Apple’s main shareholders

Apple is a public company and therefore doesn’t have a majority shareholder. The main shareholders have ownership stakes of less than 10% each. They are:

  • The Vanguard Group (6.64%)
  • BlackRock, Inc.(6.34%)
  • Berkshire Hathaway (5.20%)

A dispersed ownership allows management to have more decisional power and autonomy compared to a company with a controlling shareholder.

Apple’s stock performance

We can split Apple’s stock performance into two phases:

  • From the launch of the iPod (2001) to that of the iPhone (2007).
  • From the launch of the iPhone to date.

In the first phase, Apple’s stock price grew by around tenfold thanks to the success of the iPod and the iTunes store.

Apple stock price - from the ipod to the iphone release

The second phase has been characterized by a similar growth driven by iPhone and iPad sales. But both revenues and net income have become remarkably high since the release of these two products.

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For example, if we compare the 2005 financial results to those of 2015, we can see how Apple’s numbers have changed. Revenues have increased from $13 billion in 2005 to a striking $233 billion in 2015. You will also notice that what makes the difference is the iPhone; it makes the iPod look like a not-so-remarkable product. This despite the fact that the iPod had great success in the early 2000s.

As illustrated in the chart below, Apple has outperformed the Dow Jones Industrial index, doubling its value from 2015 to date. Apple’s stock price has also benefitted from the billion program of stock buyback launched by the firm in the past years. Since 2016, Warren Buffett has invested several billion dollars in Apple through his company, Berkshire Hathaway, reaching a share of more than 5%. The legendary investor has also said, “I’d love to own 100% of Apple.” (2) Who wouldn’t?

apple vs dow jones - from 2015 to date

Conclusion

Betting against Apple has always backfired in the long term. Apple has been able to overcome physiological difficulties during its journey. Despite the intense competition and the need to continuously innovate, the firm has been able to set new records year after year. The brand, design and exclusivity of its products, and the ecosystem of services built around them, allow Apple to attract new customers, secure their loyalty, and induce them to keep buying its new products.

As I said before, Apple is not a growth stock anymore but rather a cash cow. Therefore, we can expect huge dividends in the years to come, but not a stock performance equal to that of the past years. I’ll change my mind about this last point if:

  • Apple launches new revolutionary products like it has done in the past with the iPod, iPhone and iPad.
  • The company acquires companies with huge potential growth. Maybe Tesla or Netflix; who knows? The future will tell.

What do you think about Apple’s future? Let me know in the comments.

Amazon: The King of Disruptors

Tesla: The Past and the Future

Netflix: When David Beats Goliath

Check out my book: A Beginners’ Guide to Stock Investing.

References

1. https://en.wikipedia.org/wiki/Apple_Inc. [Online]

2. https://buffett.cnbc.com/video/2018/05/07/buffett-id-love-to-own-100-percent-of-apple.html. [Online]

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