What Next for Apple Investors?


  • Everyone wants Apple to deliver the 'next iPhone' - can they do it?
  • Can Apple continue innovating or is their innovation in decline?
  • Is the proliferation of cheaper, alternative devices having an effect?
  • Is there any good news for Apple competitors?
  • Are we missing the real point with Apple?

I've watched recent articles both for and against Apple Inc. (NASDAQ:AAPL) with some interest over recent months and decided to do a little more in depth analysis myself. Following their FY 2015 report in October, I spent some time poring over the Annual Report, looking for clues as to where this business might go next. On the surface of that single, latest report, you can only imagine that this is a business that is going to continue to grow at a phenomenal rate - but you look a little deeper, at iPad sales as an example, and you'd be forgiven for feeling there might be a few worrying signs lurking below the glossy veneer of this technology behemoth.

The bears are out in force, citing upstream supplier orders as a portent of doom. Likewise, the analysts are saying the strategy is wrong and Apple needs to join it's low margin, volume based competitors to thrive in the future. This made me dig a little more and look back a little further.

If you go down to the woods today... you're in for a big surprise.

The bears have been sounding the warning bells on Apple for the past 7 to 10 years - practically since their success started. Margin pressure, increased competition and failure to innovate are constantly dragged out and given a ritualistic, rhythmic beating calling all Apple investors to heed their warning. Looking back, it's interesting to see the discussions and arguments around each of the warnings - but ultimately, with the benefit of hindsight - they have all been proven wrong.


(source: STRIDE)

Apple has kept gross margins at 40% and grown their Net Income margins to over 20% consistently over the past 5 years - all while delivering revenue growth of over 30% CAGR in the same time - with 28% growth in the last FY. It really doesn't seem to be picnic time just yet... but is that about to change? The analysts think so.

Analysis Paralysis

Checking the analyst predictions and responses over the past 7 years was an even more amusing trip down memory lane. They couldn't have got it more wrong. From the initial iPhone launch they have pretty much called every launch of this record breaking product wrong - none more so than the iPhone 5C and 5S launch - which had Apple tagged as 'clueless' across the analyst community but ended up breaking all previous records for launch week and total unit sales. 

The initial iPad launch was deemed a failure by most analysts citing previous failed tablet launches as proof that there was no need for a tablet computer. Apple sold over 300,000 units on launch day and went on to sell over 8m units of this first version. Following that, there have been 10 iterations of the various iPads that have sold almost 300 million units in total - not exactly my idea of a flop. Now, they announce, the iPad is practically dead - at 55m units in the past 12 months (a 19% decline) and only $23 billion in revenues, it's hard for me to share their pessimism.

Several analysts have claimed that Apple has to move to the volume-centric, low margin model of it's competitors to stay effective. All the numbers seem to indicate the exact opposite to this. Apple has grown and led (read as top 3 player) in every space it's entered / participated, all the while maintaining and growing revenue, gross margin and net income margin.

Another great call was in praising Apple for moving into the cheap PC market with the Mac Mini. While these have sold reasonably well, they lag the iMac and MacBook variant significantly - hardly the game changer that the analysts thought they would be. Ultimately, the point I'm making is this - analysts just don't understand Apple.

Major PC & Tablet Player

Apple has bucked the shrinking PC market trend in general, but they've also become a major player at the same time. If you look at combined iPad and Mac sales, Apple sold 75m units in the last year and generated $50 billion of revenues. Apple is now the 4th largest manufacturer in the world when looking at PCs alone.


(source: Gartner)

This statistic is misleading though as 'hybrid PC / tablets' running Windows 10 are included in almost all other manufacturers counts and iPads are excluded from Apple. Apple and Dell were the only two that managed growth in the last quarter and Apple saw it's market share jump from 6.9% worldwide to 7.6%. 

As per this report on tablet sales over at IDC, Apple are still leading the way in tablet sales although the market is still contracting.


Major Media Distribution Player

Apple generated $20 billion from it's AppleCare, Apple Pay and Internet Services collective in FY 2015. This covers the iTunes Store, App Store(s), iBook’s Store and Apple Music. So nearly the same total revenue of $24 billion the company generated in FY 2007. This is quite remarkable - especially when you compare it to Google Play that has far greater reach and far lower revenue according to all industry pundits (source: Variety, TechCrunch). The App Annie Q3 index shows that Google is winning the download battle but all the predictions that Google would surpass Apple's revenue in this area by 2015 were vastly overestimated. In fact, if you read the report, the gap is widening and not closing. Another really interesting point around this is that it also brings Apple's media delivery revenue to within 10% of Amazon's media delivery revenue, which is quite remarkable given the true global reach and ubiquity of Amazon.

Major Smartphone Player

We'll have to start with the obvious point - Apple dominates the smartphone market. With 231 million units sold this last year generating over $155 billion in revenues and 94% of global smartphone profits, it's foolish to try and play down the grip Apple has on this market at the moment. While Samsung clearly sells more units, it can't come close to Apple in terms of revenues or profit. As per the above point, it also attracts users that are more price conscious. This means they are less likely to contribute to the ecosystem and ultimately are lower value users in revenue terms.

You hear endless iOS versus Android debates, but it appears the race is far closer than everyone thinks. While Android sells a lot more devices, several of these devices appear to end up inactive. They currently boast 1.4 billion active users - which is very impressive, but if you take a closer look, you can calculate that they had roughly 2.3 billion user activations by their Google I/O 2014, when they announced their surpassing the 1 billion active users mark.

According to this Gartner report, Android shipped more than a billion devices in 2014 and were expected to ship 1.26 billion in 2015. They had already reporting over 1.3 billion activations as of Google I/O 2014, so today, there have been roughly 3.56 billion device activations. This means that less than 40% of these devices are active today according to Google themselves. That renders all sales statistics meaningless in my eyes.

Using the handy OS stats over at StatCounter, we can extrapolate that there are roughly 45% as many active iOS users as Android users - which means there are over 630 million active iOS users. This also makes sense because Apple confirmed 500 million active users at their 2014 keynote and they surpassed 1 billion devices activated at the end of this year. If this extrapolation is correct, 63% of iOS devices are still active compared to less than 40% of Android devices.

We already know that iOS users are more active than Android users from many studies that have been done (source: iDownloadBlog, Forbes) - but we can now see this from a new perspective. The iOS ecosystem generated ~$20 billion this year from it's ~630 million active users ($31.74 each) while the Android ecosystem generated ~$11 billion from it's 1.4 billion active users ($7.85 each). Given the higher usage statistics, higher revenues, and the 4x value of individual iOS users, one can only deduce that the iOS ecosystem is working extremely well for both Apple and it's customers. 

The Secret Sauce

With this much success in all these markets, we must assume that this hasn't been luck. We must also dismiss the 'fanboy' element as the Apple reach has grown to 10% of the population of the globe. 

The simple recipe to success here has been to focus on premium, profitable products. Apple played a 'quality not quantity' game that has inadvertently led to 'quality AND quantity'. Their focus on profitability means they have not had to worry about loss leaders or volume plays, instead they have focused on innovation. Innovation is what has led to their success, and it's another place that people like to try and knock Apple - but I'll deal with that in a minute.

To round off this point, the 'secret' is absolutely obvious to anyone running a premium business - but executing on this all-too-simple plan is not quite as obvious.

Instead of knocking them out cheap, knock them out the park.

For those Apple naysayers that claim the company hasn't innovated, they'll need to try a new approach to the argument. It would be fine if we were back in 2005, but for the past ten years we've seen the iPod, the first PowerBooks, the iMac, the Mac Displays, iOS, iPhone, iPad, Macbooks, Retina Displays, Apple TV, the App Store, Apple Watch and Apple Music.

While a purist might try and argue who came up with some of these ideas, innovation isn't just about having the idea - it's about the execution. Apple has grown its business from a simple PC manufacturer with a portable music device in 2007 to be a global leader in personal computing, smart phones, tablets, smart watches, set top boxes, mobile payments and media delivery. All of this has culminated in 1,100% revenue growth in this period and 1,500% net income growth.

What's next for Apple?

When you look at all these hits, you can't say the company has been lucky. When you look at how the detractors and analysts have gotten their predictions wrong for so many years - you can't say they've been unlucky. The simple truth is that Apple has developed and released products that have disrupted industries and created completely new ones - and we expect them to continue to do so.


(source: STRIDE)

The obvious disclaimer of past performance not being an indicator of future returns aside, we think this 10+ year purple patch is set to continue for some time yet.

As a result, we're forecasting growth of 10% per annum over the next 3 years and think that Apple is massively undervalued at present. 


3D Value Investing: Triangulating The Best Investment Targets

3D Value Investing uncovers the best businesses for investment, the fair value of those businesses and the best times to buy in and sell out. This approach to long-term investing results in higher returns with lower risk.

Download your eBook now

Subscribe to Email Updates