Apple Inc. (NASDAQ:AAPL)’s Stock Still has a Bright Future
Apple Inc. (NASDAQ:AAPL) hardly disappoints when it reports earnings and that has been true over the past several quarters with the latest quarterly results continuing the trend. But that is history. The focus is on the future and the important question at this juncture is what lies ahead for the company and its investors. Does it look like Apple is about to hit a dangerous reversal or can the company continue reinventing itself to stay relevant and grow from the current levels?
Apple’s F4Q2015 overview
For its recently released 4Q2015 results, Apple beat both earnings and revenue expectations, although iPhones sales missed the consensus estimates. Revenues of $51.5 billion, a 22% year-over-year increase, came ahead of the consensus estimate of $51.1 billion. Likewise, EPS of $1.96 surpassed the consensus estimate of $1.88.
However, Apple sold 48.04 million iPhones in the quarter, above last year’s 39 million, but below the consensus estimate of $48.72 million iPhones.
Apple is looking for revenues in the range of $75.5 to $77.5 billion in the December quarter.
Can Apple’s bounty harvest continue?
Apple Inc. (NASDAQ:AAPL) already enjoys multiple advantages over its competitors and the company keeps trying to reinvent itself to stay relevant and grow. However, some of its expansion or diversification efforts are predicated on chance, which means that there is no guarantee they will pay off in the long run.
Strong customer bond
Apple’s products tend to establish a strong bond with customers once they try them. Usually, the bond that Apple has established with its customers is difficult for competition to undo. That is true if you consider that iOS has continued to harvest Android defectors with little or no iOS defections to Android.
The strong customer bond is also supporting Apple’s penetration in other product categories, such as wearables, smart-home and cloud. In the wearable market, Apple recently disclosed that it generated $1.7 billion in revenue from Apple Watch sales in the initial five months. The company expects more robust growth in the future as the smartwatch market expands.
The high customer affinity for Apple’s products is another reason the company has been successful in sidestepping the pressures of smartphone commoditization and market saturation.
It is difficult to think about another smartphone vendor out there with stronger pricing power than Apple Inc. (NASDAQ:AAPL). At a time when rivals are cutting prices on their products to get their inventory moving, Apple maintains healthy pricing for its iPhones with the latest iPhones costing above $600. The average smartphone is priced at sub-$200.
Apple doesn’t shy away from asking top dollar for its iPhones, and customers keep flowing in, with some defecting for low-priced Android models. The strong pricing power enables Apple to keep growing its iPhone revenues. The pricing power also enables the company to maintain strong margins. The company posted gross margins of 39.9% in the last quarter and expects gross margins in the current quarter to be in the band of 39% to 40%.
Breaking iPhone reliance
Apple relies on the iPhone for most of its revenue. While the company wants to keep iPhone revenues flowing and improving, it is making efforts to diversify its revenue base. Apple has expanded into wearables with the Apple Watch as part of the efforts to unlock incremental revenues and break iPhone dependency given that the smartphone market is becoming saturated, thus limiting huge growth. If the recent Apple Watch revenue update is anything to go by, Apple’s campaign in the wearable market is moving in the right direction.
The strong bond that Apple already enjoys with its customers is likely to bolster the company’s revenue diversification efforts, especially though bundling or upselling of the existing install base. For example, the company is currently offering a $50 discount on the price of Apple Watch for customers who buy an iPhone and an Apple Watch at the same time. The offer is available in select markets and expires on November 15. Such a bundling strategy enables the company to tap into the iPhone’s strength to diversify its revenue streams.
Apple Inc. (NASDAQ:AAPL)’s Services operation is a $20 billion business. In the services segment, the company offers such solutions as iCloud storage subscriptions, Apple Music and Apple Pay, among others. These service offerings are not only geared towards unlocking incremental revenue for Apple, but they are also succeeding in driving customer lock-in, thus improving customer stickiness to various Apple products, which is a great way to keep revenue growing.
Fostering product socket competition
In iPhone 6S and iPhone 6S Plus, Apple used A9 processor chips from different suppliers, a first in the company’s product design. Using the same chip from different suppliers doesn’t look like a limited edition at Apple – it could be a trend. As a trend, the strategy could enable Apple to reap multiple benefits. For example, the strategy fosters competition among component suppliers, enabling Apple to negotiate for better prices, thus allowing it to improve margins or guard against margin erosion. Additionally, engaging multiple suppliers for the same component enables the company to sidestep problems of component supply shortages that can hurt product sales.
Where does Apple stand in cloud disruption?
For most technology companies, cloud is either a growth driver or distraction. In the case of Apple Inc. (NASDAQ:AAPL), cloud is a growth driver because the company isn’t engaged in offerings that are at risk of being displaced by cloud. In any case, its iCloud storage service could evolve to do much more than what it is already doing, thus unlocking new growth.
Potential pressure points
Global economic shock
From Apple’s F4Q2015, it was clear that the company weathered the economic slowdown in China as sales in the market rose 99% to $12.5 billion in the quarter. However, prolonged economic cold in China could start having an adverse impact on Apple’s sales in the country as consumers hold off spending due to tough economic times.
As such, Apple could escape pressure in China if the economic situation in the country corrects quickly, if not, difficult times could catch up with it in one of its most important global markets.
Fading customer stickiness
Apple has largely escaped the impact of smartphone commoditization and market saturation because of the fact that it enjoys strong customer stickiness. If it happens that the company’s customer retention ability fades, the result could be a dangerous unwinding of an empire.
Slow progress in new markets
Apple is looking to Apple Watch, Apple Music, Apple Pay, HomeKit and a host of other new products and services to drive its revenue growth and diversification. For the most part, these projects are currently consuming more money than they generate. If these efforts fail to catch on or remain restricted to niche markets, the impact could be disruptive to the company’s performance and potentially cloud its future.
Moreover, the failure of Apple’s moonshots could keep the company chained to iPhone sales in a market that is steadily slowing as it reaches peak saturation.
Apple Inc. (NASDAQ:AAPL) is a successful business that continues to mine success, but it is not immune from certain global macroeconomic pressures.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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