Remember growing up and watching the Lay's potato chip commercial? You know, the one where they say "Betcha you can't just eat one?" In Apples case, "Betcha you can't just buy one."
If you've ever purchased an Apple product chances are you have more than one product in your house. Why is that? You may not like my answer but it's the apps or applications. One of the most interesting things about Apple is the app ecosystem it has built. They have a vast array of applications that can be downloaded and installed across their product line. So why is this a big deal? It's not only a big deal, it's pure genius. Think about it for a moment. You buy their product, you bring it home, and the downloads begin. If you have kids like I do, you know what I am talking about. It's all about buying and downloading apps.
The last time I checked, there were over 775,000 apps available for download. Many are free but some you pay for. In the same way that it pays music publishers for songs, Apple pays the developers $.70 for every $1.00 it collects through it's iTunes store for these pay-per-download-apps and the rest is pure revenue to the company. Here is a copy of a portion of the press release:
CUPERTINO, California―January 7, 2013―Apple® today announced that customers have downloaded over 40 billion apps*, with nearly 20 billion in 2012 alone. The App Store℠ has over 500 million active accounts and had a record-breaking December with over two billion downloads during the month. Apple's incredible developer community has created over 775,000 apps for iPhone®, iPad® and iPod touch® users worldwide, and developers have been paid over seven billion dollars by Apple.
Do you realize how much money that is? Apple has paid $7 billion dollars to developers since they began offering app downloads through the iTunes store. So if they pay out at 70% that means they collected at total of $10 billion during that same timeframe and kept $3 billion as revenue to the firm. However, the growth in the volume of downloads has grown exponentially. As stated in the release above, Apple just crossed the $7 billion threshold in payouts. Just last March it announced that it had surpassed $4 billion in payouts. Nine months prior to that announcement, in July of 2011 it said payments had surpassed $2.5 billion for the first time. This means that total Payments to app developers is doubling every nine months. And so too are portions of the revenue collected and retained by Apple.
If you do the math, Apple paid $3 billion to developers during just these last nine months from fees it collected on apps downloaded through iTunes. Apply the 30% metric and you come up with approximately $1.28 billion in revenue on app download fees. If the rate of growth continues they will have collected another $2.5 billion by the end of their 2013 fiscal year, and nine months later, by March of 2014, another $5 billion.
This exponential growth in apps and it's associated revenue acts as a new "phantom product" that could bring in more than $6 or $7 billion in revenue on apps alone in by this time next year. As a basis for comparison the iPad generated about $9.5 billion in revenues during the first fiscal year (fiscal 2011) that it was available
What Should Investors Do Now?
This recent pullback is based on fear. Fear that new product development is slowing down and the cash machine that is Apple will start to run dry. Conveniently the same fear that has everyone running for the exits has created much lower prices for those willing to heed Warren Buffets quote about fear. Remember that quote? That's right…."Be greedy when others are fearful". Now is a perfect time to heed that advice.
I added to my position on Friday and I'm sure I'm going to be buying some more. Of course I won't buy all at once but in tranches. Perhaps a little here, perhaps a little more if the stock retreats another $20 and so on. I'm not much good with technical analysis but I know a couple of guys that are pretty decent at it and they tell me support levels are not apparent until around the $420…and beyond that well.. psssshew. Regardless I'm going to grit my teeth and buy a little bit every $10 or $20. A year or so from now I'm sure I'll be glad I did. That's my plan and I'm sticking to it.