Apple surpassed the trillion dollars of value in stock last August 2, 2018, a landmark in its history.
A trillion is a million million: 1,000,000,000,000 (twelve zeros). Inditex, the first textile company in the world by revenues and the first Spanish market value company, is not at 100 billion dollars, i.e., Apple is worth more than ten times more.
In Notes941, we’ve prepared a list of the 10 keys or strengths that have led investors to invest so much money into Apple in recent years, with some weaknesses as well, since no one is perfect. Let's get to strengths.
1. Innovation
Apple introduces innovation in its genes and if there is a key word that defines its vision and its achievements that is "innovation". This is not what Apple says, nor do I say it. The facts attest to this. The company has surprised experts, analysts, media and customers with their releases for decades. Both in its first golden age (from its foundation in 1976 until the mid-eighties) and after the return of Steve Jobs in the late 1990s.
"Steve Jobs predicted that there would be a computer in each house when founded Apple with Steve Wozniak in 1976."
First came personal computers with Steve Jobs vision that there would be one in each house at a time when no one was thinking about it, then came the iMac (1998), the iPod (2001), the iPhone (2007), the MacBook Air (2008), the iPad (2010), the Watch (2015), the AirPods (2016), among other things. All those releases are great milestones of the technology because they were creating a new "category" of the product or they were "reinventing" it, as they like to say.
In addition, Apple has always opted to innovate with its own software and services. The operating system for iPhone and iPad (iOS) and the App Store are two examples.
2. iPhone
The clearest product case that has transformed Apple, and with a big difference, is the iPhone. It is a product that has generated more revenues and value to Apple in its history. Without the iPhone, Apple would have continued to be a niche company probably, with an infinitely lower value today. In smartphones, Apple has a global market share of about 15% after having sold more than 1.4 billion iPhones since its launch.
"Without the iPhone, Apple would have continued to be a niche company probably."
iPhone has generated 60-70% of its direct revenues in recent years. That figure is dropping with the rise in service revenues (sales or apps subscriptions, Apple Music, etcetera), up to 56% in the last quarter. This figure was not seen since 2014, when iPhone revenues were rising. The weight of the iPhone will probably continue to decline in the coming years at the same time as service revenues rises, which will improve its diversification.
Apple’s shares were around 5-10 dollars within the two years before Steve Jobs announced the launching of the iPhone in January 2007. It was put on sale in June of that same year. From there, mountainside, Apple started the upward slope, as seen in the graph below. Precisely coincided in time with the outbreak of the great recent crisis in August of that year.
The trillion was reached when $207.05 was paid on August 2, 2018, given that Apple has 4,829,926,000 outstanding shares, according to its latest financial report, registered in the SEC two days before. It happened a few minutes before 18.00 in Madrid, 12.00 in New York, 9.00 in Cupertino.
Before launching the iPhone, Apple was actually working on a tablet. But when Steve Jobs saw the possibilities of the multi-touch screen (the use of two fingers to enlarge a picture, for example), he changed his mind. He parked the "iPad" and probably thought: We are launching a phone since it’s going to be a hit, as it happened.
"The iPhone and App Store are milestones of recent history that marked a before and after for numerous industries and societies."
iPhone was the first mobile with a full front screen, that is, without a physical keyboard. Today all mobile phones are alike. A year later, in 2008, Apple launched the App Store. Today all phones have an app store. The iPhone and App Store are milestones of recent history that marked a before and after for numerous industries and societies, as we explained in the first article of this blog.
3. Loyalty and ecosystem
Apple customers, including myself, are loyal customers. Why? Apple offers products that work perfectly well. The different products of the Apple ecosystem (mobile, tablet, clock, computer, AirPods, etcetera) are perfectly understood among each other.
For example, you can copy text on a Mac and then paste it on the iPhone. Or you can be reading an article on the iPhone and open it with a simple click on the iPad. Magic? Almost... When I taught friends of "copy-paste", the faces have always been fascinated, normally accompanied by a "wow".
Is Apple better than Windows or Samsung? To a certain level, yes, but there is also an important factor of tastes and preferences. The difference in mobile phones is getting smaller. There exist very good mobiles in different brands.
Apple has tried to retain its customers with the products ecosystem and the supply of services. Other brands depend on Android, a very fragmented operating system. Few Android phones are updated to their latest versions. Apple manages to update hundreds of millions of iPhones in a few weeks, allowing app developers to offer significant software improvements to all users.
"The fusion of hardware and software has been and is a huge competitive advantage for Apple. It allows a perfect harmony in the device."
Apple was the only big company in the world that opted to do hardware and software together. Windows and Google did only software until very recently, now they are also making hardware successfully (Surface, Pixel) because they have seen the value. That fusion of hardware and software has been and is a huge competitive advantage for Apple. They allow to create a piece of equipment in a team with the people who make the software, which allows a perfect harmony in the device.
Being part of Apple's ecosystem will not tie you to it at all. I, for one, use iCloud (200 GB) on my iPhone X for some tasks; if it is photos, Google Photos (free unlimited storage, as we explained in Notes94 recently); for the files on my computer, Dropbox (a tera); to take notes, Evernote; for mail and contacts, Gmail (100 GB); for my passwords, 1Password.
That is, I have my data completely diversified and if I wanted I could change my mobile with an Android in a couple of hours without any problem. It is not true that iOS is closed or more closed than Android. Also, today and more and more the apps you pay for subscriptions and use them wherever you want, on iOS, Android, via the web. And you can use iCloud without having an Apple device.
4. Services nad App Store
The revenues that Apple refers to as "services" are for the sale or apps subscriptions (Apple takes 15-30% of those revenues), Apple Music ($10 a month or $100 a year), storage in iCloud, Apple Pay (charges fees to banks), etcetera. There are probably around 700-800 million active iPhones. Over the last few years, more than 200 million are sold annually.
Whoever uses iPhone will know that after a a while you need iCloud storage to have a backup and save your photos, and start paying between a dollar (50 GB) and three dollars (200 GB), or equivalent in different currencies, every month.
Apple aims to earn about 50 billion dollars from services by 2021, but will probably be a little earlier. In the last quarter, it surpassed 9 billion (it grew one third in a year), which meant 18% of all the company's revenues. That is to say, it is already on its way to 40 billion in a year.
To put these figures in perspective, Inditex, owner of Zara, had slightly more than 25 billion euros (29 billion dollars) revenues in its last fiscal year, closed last January. Banco Santander, the largest bank in the euro zone by market value, got slightly more than 48 billion euros (56 billion dollars) in 2017.
5. Privacy and trust
For a couple of years, Apple has been saying that privacy should be a human right. The company generates money with the sale of hardware and services, does not earn money from advertising, like Google and Facebook, which dominate the sector globally. In other words, this assertion is good for the Apple business and bad for the Google and Facebook business models, which to offer targeted advertising need to handle the data of people.
At this stage, we all agree that privacy is becoming relevant and the concern of people is growing. All the efforts that Apple mounted to reinforce security and privacy, with concrete facts in each iOS update annually, especially since the iOS 8 in 2014, certainly are to be appreciated.
In some cases, they encounter major conflicts, such as their support for web-based advertising blockers and even the tracking (cookies). Happy users, of course, because they no longer have to meet Cancun advertising or the Amazon’s mixer on any website after having searched for a day flights to Cancun or mixers.
6. Marketing and secrecy
Apple is known for the success of its marketing management and its absolute secrecy before its launches, although many things are known due to tips from employees, iOS beta software or factory workers in China. The announcement for 1984 television announcing the release of the Macintosh is part of the marketing history. Also the "think different" slogan.
But more than the ads, Apple's marketing genius is how the company manages and the impact that its product launches and software upgrades achieve.
"Apple creates a halo of expectation around its presentations that generate a lot of interest to readers, who demands that coverage and consumes it."
Every year, after the presentation of the new iPhones in September, they get massive coverage in media. It occupies cover pages of the leading printed newspapers in the world, as well as in dozens of thousands of websites around the world, and TV. In fact, many sites are dedicated only to the Apple world with legions of followers.
From my own point of view, this impact is due to these reasons:
iPhone means a lot to Apple, it’s news from a business point of view, because it represents much of the revenue of the largest company in the world. In other words, there is an objective journalistic justification to be published in a media because of the relevance to the company's future.
The iPhone is probably the most successful consumer product in history and has changed the global economy.
Apple manages to create a halo of expectation around its presentations that generate a lot of interest to readers, who demands that coverage and consumes it.
The general interest of people for technology. It's “cool” to know and have the latest technology, even if you take advantage of it or not...
The New York Times, Financial Times, The Wall Street Journal or Bloomberg make live coverage of these Apple releases. Does anyone doubt the seriousness and professionalism of these outlets? Although everything is said: Apple achieves free publicity of incalculable value.
7. Watch, virtual reality, self-contained car
The Apple Watch was the first big product that Tim Cook launched after the death of Steve Jobs.
Although Apple does not give sales figures, it is the most sold smartwatch in the world and in the first quarter of this year Canalys analysts estimated sales of 3.8 million units. It offers management and control of multiple physical exercises and health, but much remains to be done on the health domain.
Right now, the Apple Watch takes the heart rate on the wrist with high precision and has given warnings for anomalous situations that have saved lives, as explained by the users themselves. When the Apple Watch is able to measure blood sugar to diabetics (they study it in a non-invasive way, according to The New York Times) or take the blood pressure (Apple already has patents for this), I think we’ll hear "boom" as Steve Jobs liked to say.
In two or three years, Apple is expected to launch virtual reality glasses, according to rumours. Apple is already preparing all its devices to offer functions linked to virtual reality. In 2017, it launched specific virtual reality tools for developers.
Three years ago, Apple recruited about 1,000 people to see the possibility of launching a car, the "Apple Car". Shortly after that, the conclusion was that it was not worth it, so they activated a plan B: A software to manage autonomous cars. That is to say, Audi, BMW, Ford or Toyota (little friends of Apple) could use that software in their vehicles. There are also at least two or three years to know something about this.
8. Financial data and Warren Buffet
The idea of this article was to talk about Apple’s strength and qualitatively analyze the reasons that have led Apple to the trillion dollars, but it is impossible not to enter into the financial analysis of the company. What investors look at, above all, are figures and spreadsheets.
Very briefly. Apple quotes "cheap" if you look at what is known as P/E ratio (price-to-earnings ratio), i.e. how many times you need to multiply the earnings per share to get the stock price. For example, if a company has a profit per share of 10 dollars and its stock is at 20 dollars, it would have a P/E ratio of 2 times, because if you multiply by two the
Well, Apple has today a P/E ratio of fewer than 20 times, compared to 30 levels of Google and 150 for Amazon. The higher the P/E ratio, the more "expensive" is the stock, although we must also look at other data to have a complete picture. So is Apple cheap? Analysts believe Apple will be able to move above the trillion comfortably.
Warren Buffet has a lot to do with the trillion because two years ago it entered Apple with many billions of investment and Berkshire Hathaway already owns 5% of the company. He came in "late" but with full force. The 5% is valued at 50 billion dollars.
You know, if the Omaha Oracle bets on a company and puts all those eggs in that basket, the confidence in the company multiplies. In fact, news of their investments has always driven the stock. For Buffet, the incredible loyalty of Apple's customers is one of its main assets.
9. Dividend and buyback
Apple announced in 2012 its first plan to pay dividends since 1995. Almost two decades without paying anything to its shareholders. Obviously, this announcement has allowed the stock to scale, because the shareholder is not only going to make money with the sale if the share goes up, but also get annual profitability, which gives greater stability to the investments. Besides, the dividend has been rising.
On the other hand, Apple has announced stock buybacks worth almost 300 billion dollars since 2012, that is naerly a third of what is worth today in stock. Do you have a lot of liquidity and little to buy? Precisely what happened to Apple. Repurchase your own shares.
By doing so, you reduce the number of outstanding shares, what technically reduces capitalization, but theoretically you also increase the stock value. The value of the company is shared among fewer shares. Besides, the earnings per share figure goes up automatically, and therefore the price per share could tend to rise.
Apple has repurchased 25% of its shares since the plan began six years ago, according to data from S&P Global Market Intelligence mentioned by The Wall Street Journal, but the price of its shares has more than doubled.
10. Management and Tim Cook
For a company to work, it needs good managers. Tim Cook has proven to be a great manager on the basis of Apple's results in the last seven years, when he took the course of Apple definitely.
Steve Jobs died in October 2011. Obviously, many doubted that no one could replace him, especially for his creativity and inventiveness. Cook from the beginning said that Jobs was irreplaceable and that he would not think what Steve Jobs would have done when he made a decision, something that Jobs himself asked for. Cook has limited himself to managing a company full of talented people. And if he lacks talent in something, he is already in charge of looking for it in the market and hiring it.
Cook has focused on shining the company and its employees, leaving space even for the presentation of products. Before, Jobs was always the protagonist on stage, although he was obsessed with having the best talent and he always said it. Cook has set a steady course, with a clear roadmap, without excessive haste and clear determination, knowing that you don’t need to be the first, but to do better, or much better.
Weaknesses
The article is a little longer than expected, so I'll quickly mention some of the weaknesses or improvement spaces that I think Apple has.
Maps. Apple Maps has improved a lot since they launched in 2012, a year after Jobs' death. It was such a fiasco, which it finished with Scott Forstall’s career at Apple. He was a friend of Jobs, and some people said he could have been named CEO. Forstall and Cook made a major mistake: they tossed the maps before they were ready.
Cook had to apologize with an open letter in which he recommended the use of Waze, Google Maps, among others. Forstall objected to the apology, a more own attitude of Jobs, who surely had not apologized. Cook instilled a change of culture in the company, made it kinder. Also, Forstall, who was in charge of iOS, had clashes with his companions, which ended up with Cook's patience and kicked him out.
Well, the maps have improved, but they are still far away from Waze and even Google to dodge traffic, which is the most relevant thing when using the maps in the car. For that, the best is Waze, as explained in Notes941 several weeks ago. Besides, Apple has a lot of businesses to include on the maps. The reference is Google.
On the other hand, Apple lacks critical mass if compared to Google or Waze, available both in 100% of the mobile phones. Critical mass is relevant because traffic jams or other road problems are detected with the data management from other users. Apple has a 15% global market share in smartphones, but its maps are likely to be less used. The quota is good in the US and Japan, with around 40%, but it is low for this function in the rest of the world.
Given the relevance of the autonomous car in the future, Apple has to squeeze a lot with the maps and solve in a certain way the possible problems of the critical mass.
Taxes. Apple pays little corporate tax in Europe and in November 2017 explained why with this letter. It considers that since most of the value of its products is created in the United States, it thinks the majority of its taxes are owed to the US.
Apple earns more money outside the United States than in its home country. As the United States collects taxes for the repatriation of earnings, something that Apple needs to do to pay dividends, buybacks or invests in the US, it would be receiving a double tax on its earnings. So Apple tries to pay its corporate taxes in Ireland, where the rate is much lower than in the other countries. Apple operates in Europe from Ireland and diverts European earnings to that country.
Anyway, Apple has not been repatriating cash to the United States. Until now that Trump reduced the tax from 35% to 15.5%. It had been getting into debt in the United States with the issuance of bonds in order to have more cash at home.
The European Commission has investigated the tax it pays in Ireland and ordered to pay back 13,000 million euros, as you can read here. Apple has requested international coordination to simplify the payment of taxes and “remove the current tug of war between countries over tax payments and ensure certainty of law for taxpayers”.
Apple Music. When Apple Music was launched in 2015, it seemed a checkmate to Spotify. However, Spotify has done nothing but grows with more strength if possible, and Apple Music, although it has obtained decent figures, is not what was expected, neither in the number of subscribers nor probably in the capacity to offer news to the users.
Spotify excels in data management, something that frightens when you find out that you know the mark of your headphones. Spotify has about 70 million payable users in the world, for about 45 million Apple Music. In the United States, both are around 20 million, and Apple has just surpassed Spotify.
Apple TV. Apple had many hopes put on Apple TV, but its development is taking much longer than expected, VA very slow. Outside the United States the offer is almost non-existent and only applies to mirror effect (put your mobile, iPad or MAC on TV) or to watch Netflix, HBO, Prime Video...
Tim Cook made a compelling intent statement in 2015, when they launched the App Store on the Apple TV: "The Future of television is apps". That vision I think is taking time and in fact it is not clear that it is going to be like that, despite how well it sounds. The future of television will decide, for the moment, the owners of the contents (movies, series, live sports, etcetera.) and, if you remove Netflix, HBO and Amazon, these in general are quite suspicious with Apple. Cook may be right, but it's going to take a lot longer than they thought.
It will be interesting to see what Apple does with the video content, its own "Netflix", because it has hired a lot of people, including Oprah Winfrey, and is investing at the moment 1 billion in content. I would bet because they will present it in June 2019.
Apple Pay has a slower adoption than expected, both from the banks first as well as from the customers once it is available. In addition, in many countries around the world there are not enough payment terminals that allow contactless payments, what is required for mobile payments.
However, there is a clear growing trend to use the mobile or watch for payments. A week ago, Apple announced that it managed 1 billion transactions with Apple Pay in the last quarter.
Right now, Apple does not allow competition from banks, since iPhone’s NFC, the technology for payments, is only available for Apple Pay. Mobile phones with Android usually have the NFC open.
Other weaknesses have to do with the growing concern against the dominance of mega-enterprises, which may affect competition and could influence regulation against it. Also, traditionally it has been seen as a weakness the enormous weight of the iPhone in the company's revenue, something they are trying to correct now with the services. The iPhone came to represent 70% of the revenue, right now is at 56%. For now, Apple has not found another device that generates revenue similar to the iPhone, but who knows if it will arrive in the near future in the form of glasses...
What do you think? Leave your comment below, on Twitter (@OvidioCordero) or Facebook (Notes941 - Tech & innovation).
Ethical note: I have no shares of Apple nor do I plan to buy them.
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