In recent months, legions of bears have delivered arguments that Apple (AAPL) has already saturated its share of the marketplace. Bears presume that Apple has nowhere to go but down, because wily competitors can steal share through an intelligent mix of quality and value conscious pricing. Apple shorts may highlight the logical progression of the business cycle from start-up, growth, maturity, and ultimately, decline, in support of their critical thesis. Wall Street, of course, has remained especially keen upon analyzing market share data as it relates to the smartphone and tablet dual engines powering the mobile market.
On paper, it may appear that Apple iOS stands in direct competition against Google (GOOG) Android and Microsoft (MSFT) Windows operating systems. In reality, however, Apple has always operated within a slightly separate sphere of influence away from mass consumption. Return on equity and profit margin statistics may indeed support the idea that Apple is a luxury brand. Market share data is therefore largely irrelevant to the Apple bottom line. If anything, luxury brands thrive upon preserving the aura of exclusivity, which does drive long-term profit expansion. For now, Apple's formidable cash hoard represents another built-in layer of security for its shareholders. Legendary investor Warren Buffett may opine that Apple operates from behind a moat.
The Apple Product Mix
As a Percentage of Total Net Sales:
In 2008, Apple took down $6.1 billion in net income off $37.5 billion in total net sales. Five years later, in 2013, Apple closed out the fiscal year having banked $37.0 in net income upon $170.9 billion in revenue. Apple iTunes revenue has remained relatively stable, between 2008 and 2013, in terms of operating segment percentages of total net sales. The concept of Apple iTunes as somewhat of a reliable bulwark stands in stark contrast to a product and revenue mix that has swung dramatically towards mobile over the course of the past six years. The Mac and the iPod were the most prominent components of the Apple product line, as recently as 2008. Today, the iPhone accounts for more than half of all sales at Apple.
If anything, Apple has cannibalized its own sales. Apple iTunes segment revenue has averaged 8.7% of annual net sales over the course of the past six years - with minimal standard deviation away from the mean. Again, the comparative normalcy of iTunes segment sales may serve as evidence that consumers have refused to exit the Apple ecosystem. The Apple iPhone that doubles as both a telecommunications and entertainment device has largely replaced the Apple iPod. Meanwhile, the Apple iPad tablet, which itself facilitates Internet browsing, has also eaten into Mac sales. Taken together, the iPhone and iPad platforms rapidly emerged to account for more than 70% of total Apple net revenue over the past two years.
Apple remains the 800-pound silverback alpha gorilla within the technology space. In recent years, Samsung (OTC:SSNLF), Qualcomm (QCOM), Google, Microsoft, Nokia (NOK), BlackBerry (BBRY), and Intel (INTC) have all attempted to build out their own wings of ecosystems that compete directly against Apple. Ironically, it was Apple, and not Wintel (Microsoft Windows + Intel), that led the Moore's Law secular shift in consumption away from desktop computing and towards mobile technology. Despite the intense competition, Apple still gobbles up the Lion's Share of profits within this space. Mobile divisions at Microsoft, Nokia, Intel, and BlackBerry have all failed to turn profits over the past year.
Apple Mobile Margins and Market Share
iPhone Unit Sales
iPhone Revenue Per Unit Sold
iPhone Percentage of Apple Revenue
iPad Unit Sales
iPad Revenue Per Unit Sold
iPad Percentage of Apple Revenue
The iPhone is now the primary gateway into an Apple ecosystem of telecommunications, computing, music, and gaming. The Apple iPhone has remained above $600.00 in terms of revenue per unit sold over the course of the past five years. Year-over-year Apple iPhone revenue per unit sold did decline by 3.6% between 2012 and 2013. Apple has blamed this slight drop off upon consumers opting to purchase older Apple iPhone 4 models, instead of buying the premium iPhone 5S. Be advised that Apple generally rolls out its new hardware at similar price points to the prior year. Upon new product launch, Apple will then offer older models at heavy discounts. One unlocked 16GB iPhone 5S now retails for $649 (32GB for $749 and 64GB for $849), while the older unlocked 8GB Apple iPhone 4S begins at $450.00.
Research firm iSuppli has performed several teardowns of the Apple iPhone, in order to estimate component costs. Recent iSuppli data has priced out bill of material costs of between $187.51 and $198.70 for respective 16GB iPhone 4S and 5S models near their initial launch dates. If anything, Apple is now minting cash off the recent and significant decline in NAND Flash memory costs. Upon launch, NAND Flash costs for the 64GB iPhone 4S and 5S handsets came in at $76.80 and $29.00, respectively. Apple can now collect an estimated $171 in gross profits off storage upgrades to the iPhone 5S, alone ($849 64GB - $649GB = $200 - $29 NAND Flash Costs = $171). At the high end, Apple is therefore raking in 85.5% gross margins, as a literal storage company. In all, Apple closed out 2013 having booked 37.6% gross margins and 30.0% return on equity through its latest fiscal year.
Again, fat profit margins at Apple are more so comparable to those of a luxury brand where market share data is largely irrelevant. Cupertino is not necessarily concerned with hawking product to the masses on the cheap. Still, Apple bears, such as Julianne Pepitone, are somewhat infamous for their dogged determination to harp upon market share data. In her September 3, 2013 CNN Money piece, Pepitone ripped Apple for its "innovation problem" that she felt triggered deteriorating market share statistics. Julianne Pepitone also went on to lecture Apple for its blatant refusal to aggressively deliver product to emerging overseas markets.
Recent reports out of International Data Corporation (IDC) have indicated that Google Android and Samsung tablet shipments were sharply expanding. According to IDC data, Android systems operated 62.6% of the Q2 2013 market, in terms of tablet shipments. Apple bears may have erroneously rung the alarm to sell stock, after citing the fact that Apple iOS controlled 60.3% of the tablet market at the very same point last year. Serious analysts, however, should recognize the idea that Apple refuses to compete against the likes of Android, in any price war for the Pyrrhic victory that is building out market share. Both Google and Amazon have often given away product for free, or at cost, in order to drive traffic towards higher margin online sales. Apple is not in the bait-and-switch business.
The Bottom Line
On September 28, 2013, Apple closed out its fiscal 2013 with $14.3 billion in cash, $26.3 billion in short-term marketable securities, and $106.2 billion in long-term marketable securities on the books. Taken together, Apple's $146.8 billion in cash and investments were more than enough to cover the $83.5 billion in liabilities on the ledger. The Apple liabilities did include $10.1 billion in deferred revenue, which will ultimately be accounted for as sales, and removed from the balance sheet. Apple may then be left with roughly $70 billion in cash and investments after paying off the remaining $73.4 billion in liabilities. This liquidity position would then calculate out to approximately $80 per share in cash and investments ($70 billion / 899.2 million shares issued).
Apple stock traded for $549.02 per share at the December 20, 2013 closing bell. Wall Street then valued the Apple business at a mere $470.00 per share, after backing out the aforementioned $80 in net liquidity. Last year, Apple took down $41.20 in earnings per share, after dividing the stated 899.2 million shares issued on the balance sheet into the $37.0 billion in earnings upon the income statement. The Apple business therefore trades for a relatively cheap 11.5 times current estimated earnings. Apple cash flow from operations actually increased from $50.9 billion to $53.7 billion between 2012 and 2013. The 11.3% decline in year-over-year net income through this time frame may be largely attributable to depreciation expenses that more than doubled to $6.8 billion through 2013 over the prior year.
Going forward, the apparently inevitable stock buyback and China Mobile deals should power long-term Apple stock returns above the S&P 500 Index. Earlier this year, on April 30, 2013, Apple sold $17 billion in bonds to help finance its ongoing and ambitious plan to return $100 billion back to shareholders over the next twenty-four months. Meanwhile, China Mobile and its 754 million customers await Apple at the negotiating table. For these reasons, activist investor Carl Icahn has described his recent move to purchase $2.5 billion in Apple stock as a "no brainer."