Apple Inc's (AAPL) Quarter 1 growth in sales last quarter failed to meet analyst expectation and as a result many have reduced their growth estimates for the company. Therefore, we decided to take a look at the big question on everyone's lips regarding AAPL - Can AAPL continue to grow?
We will not focus on AAPL's margins and debt etc, as these are all extremely healthy, just the all important top line revenue growth of AAPL.
Firstly, to get a handle on the AAPL machine, let's look at AAPL's historical growth. We won't go too far back into the past as this would be irrelevant for the future in our opinion.
All source data is provided from AAPL's SEC filings.
As we can see below, AAPL has attained an average growth of 44.25% since 2008. Quite incredible when coupled with the high margins they are able to earn on their products.
Regionally the U.S. and Europe make up a clear majority of sales for AAPL, representing 60% of their sales in 2012.
The next table shows each regions contribution to AAPL's growth each year. As we can see, AAPL's sales growth has been dominated by the U.S. and then Asia and Europe account for a significant proportion of this growth.
Product wise, the majority of AAPL's sales come from the iPhone then iPad and Macs, together accounting for 87% of AAPL's product sales in 2012.
Below we look at growth over the last 2 years of the particular product lines. What is clear to see and not surprising is the iPod is a dying line, quite clearly due to cannibalism caused by iPads and iPhones replacing the need for the iPod. The strongest of growths have come through the iPhone and the iPad, AAPL's biggest sellers.
The next table shows each product categories contribution to AAPL's growth each year. We see AAPL's top line growth has come mostly come from the iPhone and iPad market.
Now we need to get a grip of AAPL's market share so we can after this assess where they stand and where they can move forward from here.
All source data is as published by IDC corporate
AAPL has had around 4% to 8% of global market share of all phone sales from 2011, increasing from 3.9% in Q1-2011 to a peak of 7.9% in Q1-2012. We do not have figures for Q4-2012, but can assume it is likely higher due to release of the iPhone 5 during this period.
In the smartphone market, AAPL has from Q1-2011 to Q4-2012 had a market share ranging from 13.8% to 21.8%.
Smartphones these days account for around 40% to 50% of all mobile phone sales and this number will no doubt continue to increase.
AAPL is estimated to have around 5% of the global computer market share.
According to information obtained from IDC, AAPL maintains around 50% to 60% of the total global PC tablet market share.
Below we have conducted a Strengths, Weaknesses, and Opportunities (SWOT) Analysis on AAPL in a summarized table format. After this we analyze each SWOT in relation to market share, historical growth and other information as it applies to AAPL.
No Debt, huge cash
AAPL has around $173 billion in cash and investments on their balance sheet and no debt at their latest reporting date. This is significant in that it gives AAPL plenty of room to develop new ideas, products and features. Of course the money does not provide the inspiration needed, but it helps in bringing these ideas to fruition and holding and buying talent to create such ideas. It can also help with the marketing of their products into new markets.
This cash can certainly assist with growth.
The Apple brand is very well known by consumers and its products are definitely regarded as being the most innovative with exceptional quality and reliability.
Such a brand name will not necessarily bring growth, but attaching it to new products will certainly see these products being brought forward into the light of consumers. So a good product with the Apple name stands a very good chance of success.
Product Innovation (R&D)
Innovative products are what a company like AAPL has built its brand and growth on. In the past AAPL has been at the forefront of this. As such this is the million dollar question, can they keep this going? The large piles of cash as mentioned previously certainly links into this to assist them in development. They spend considerably less than their competitors on R&D (around 2% of sales in 2012), so if this is increased to similar levels who knows what they might bring out in the future considering what they have achieved with the lower budgets to date.
AAPL's main weakness against competitors is the price of their products. They tend to cost more in all product lines than competitors, and this certainly affects their sales to lower income earners and less developed countries.
As such AAPL are combating this by developing lower priced products such as iPad mini's and lower cost iPhones perhaps. Whether this eats into their current higher margin products is unknown, but there is bound to be some cannibalism coming from this. We would however suggest this would open a much larger market to them and be more beneficial for growth on the whole as AAPL currently has a very low market share globally in most areas. There are far more people on this planet who are lower income earners than high earners, so it opens up for far larger volumes of sales.
Coupled with this is the increasing wealth of developing nations which will push up more people into the middle class with disposable incomes able to purchase Apple products.
New Product Opportunities
Apple is in relatively few product lines. They are now looking to branch into more, which should see them attain new growth. At the same time whether this will afford them the same levels of growth seen in the past remains to be seen. We know they have Apple TV which could become a great success and there is clearly a massive market available here for them. Further they have the opportunity to enter into many more.
Of course part of AAPL's great success has likely been their focus on a few products and doing them well, but as they have grown so has and will the development team, which gives them the ability to focus on more. Of course, just as with any large company there is likely to be a few flops along the way, but unlikely enough to sink them.
Notable as mentioned is the lower cost iPhone which opens up considerable more access to market share. And as we note, AAPL only has around 8% of the global market share of mobile phones, so there is plenty room to grow here. Furthermore, is their share of around 20 or so percent of the smartphone market. The smartphone market will grow as developing nations wealth grows and they can switch over as entrants into the smartphone market, boding well for AAPL.
Also there is little doubt AAPL is working on new products with CEO Tim Cooke commenting recently that Apple's product pipeline is "chock full" of "incredible stuff".
Overall, these opportunities are vast and can see AAPL grow considerably if well executed.
In 2012, 37% of AAPL's sales came from North America, with Europe another 23%. This means there is a considerable amount of population where AAPL has low market share internationally of which they can capture. Asia is a huge market, and there is plenty of room for growth there. And as mentioned with wealth growing in these nations, there is opportunity here to market further sales of computers, tablets and phones.
Proportionally as well, in 2012 the Americas contributed to 40% of AAPL's revenue growth, therefore there is much opportunity in the other nations, as they are larger markets. Again, the lower cost alternative phones will give them an opportunity to gain traction in these markets and increase sales growth where they once could not sell.
There is certainly a strong opportunity for growth here. AAPL has managed to execute very well in western nations, therefore they could certainly grab the same opportunity waiting in developing nations.
Global Economic Slow Down
Unfortunately there is not that much that AAPL can do to change global economic slow down. It is a major threat always looming. AAPL has high quality products that last, and owners will hold onto them if times are tough rather than upgrade and at the same time new consumers will likely go for lower cost alternatives. Although, perhaps the lower cost alternatives AAPL is producing will combat this somewhat and the effects of a possible global economic slow down.
Products "too good"
One problem that could be seen with AAPL is that their products are a little "too good", in that they last very long and give little problems, not requiring consumers to update very often. This has certainly been the case we have heard from many Mac owners who still find themselves holding onto their Mac's for 3 or 4 years with no intention to replace, due to them still working so well.
This we see in AAPL's sales, with Macs previously accounting for 27% of sales in 2010 and moving down to 15% in 2012, barely having an impact on overall sales growth of AAPL.
This although a threat to growth, is overall a positive, as it sets a high reputation for AAPL, which flows onto all consumers and should persuade others to purchase.
At the same time, AAPL is working on add on services for these products, which will bring continuing revenues from them.
Many contend that the market is becoming saturated with AAPL products, therefore there is nowhere for AAPL to grow in their current markets.
Our challenge to this is that AAPL only has around an 8% share of the global phone market so there is plenty of room to move here. Furthermore, that market is going to grow over time as developing nations wealth grow and they can get in on the smartphone market, with the smartphone market only representing about 50% of all phone sales.
Also AAPL only retains around a 5% market share of the PC market and again, there is plenty of room for growth here. A jump from 5% to 10% would see AAPL grow revenues by $23 billion.
The only market currently looking heavily Apple sided is the tablet PC market, with AAPL retaining some 50% of this market. These products did account for some 51% of AAPL's sales in 2012 so it would be a worry to see it decrease. But at the same time this market is almost joined with the PC market, and gives them the opportunity to turn users away from traditional PC's into tablets.
Many of AAPL's products cross over each other in some way. So it means they substitute sales of one product for another. For example, a purchaser may substitute buying a Mac for a tablet instead.
This is a worry for growth in AAPL. By entering new product markets this will add completely new revenue streams that will make up for this. But still, it should be noted that it's a real worry that Macs are substitute more and more for lower price tablets and that consumers may purchase the lower priced phone substitute rather than the regular version.
There is no doubt that competition in all of AAPL's markets is becoming fierce. We have Samsung, HTC, Huawei, Sony, and even Google just to name a few.
This is going to potentially eat into AAPL's market share. This will all ultimately come down to product innovation and if AAPL can retain their top spot for delivering high performing, high quality products.
The table below summarizes our SWOT analysis of AAPL. All in all it shows that there are quite a few threats and weaknesses to AAPL going forward, however at the same time AAPL looks like they have the strengths to overcome many of them, as well as excellent opportunities available to them to ensure continued strong growth for years to come.
Investors should be wary about jumping out of AAPL to soon for fear of an inability to keep on growing, as it appears unwarranted at this stage.
Although for those of you that dont agree with the counter of these threats and the strengths to combat them, or the available opportunities, you should of course review any holdings should you have any.
We would also like to hear from others, other SWOT's you see for AAPL that we may have missed in our analysis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.