A New Metric With Which to Measure Apple

 |  Includes: AAPL, BBRY
by: Stephen Rosenman

Apple (NASDAQ:AAPL) has grown its revenue and operating income by an astonishing 238% and 636% respectively since FY 2006. Not many companies can match those numbers. How does Apple do it? Apple certainly sells a ton of products, increasing the number of devices it's sold 150% since 2006. However, other companies have been successful marketing their products. Yet, very few accomplish that while managing to increase the amount of money they make selling each device year after year. That's an extremely difficult feat.

It's therefore time for a new metric to measure Apple: operating income per device (OPD). That ratio captures something very special about Apple: growing sales at the same time that their OPD has been expanding. Usually, it's the other way; a company's OPD goes down as their sales ramp up. Apple has moved their OPD skyward (and, I mean skyward) for several reasons.

They've innovated, entering new markets with revolutionary devices; they can set prices no one else can. Their product line is shifting to more expensive products which deliver greater earnings. In addition, they've executed well, bringing out strong OPD numbers.

Let's compare Apple to RIMM (RIMM), a great company which has not been able to grow its OPD. First, look at the number of devices Apple and RIMM have sold.

(Fiscal Year 2011 for RIMM is not included in graph as only 6 mths in)

Both companies have been on a tear. Both have sold more of their products each year despite the worst economic climate in 50 years. However, Apple outshines RIMM when you compare revenues per device (RPD) sold.

Apple's RPD reflects the move into iPhones and iPads, products that command far greater average selling prices (ASP) than say iPods. RIMM, on the other hand, has stayed with one product, the smart phone. Despite improving the Blackberry, RIMM hasn't been able to even hold its RPD. The take away messages are clear: Apple's drive for revenue per device is relentless while RIMM's declining RPD is cause for concern. You may argue, "It's unfair to compare RIMM and Apple; you're comparing apples and oranges." Yet, Apple has purposely moved its product lines to devices that can produce more money. RIMM hasn't. RPD here compares apples and lessor quality fruit.

The comparisons become more stark when one looks at operating income per device. Apple's operating income and net income per device (OPD and NPD) show remarkable growth. Apple increased its 2006 OPD of $56 to $164 in 2010. In contrast, RIMM's OPD and NPD declined $31 and $25 respectively over the same period.

(Note FY 2011 is YTD figures)

Over the years, Apple has developed new and more expensive products: iPhones sell at higher prices and bring in more earnings than shuffles. Apple continually moves into products that can sell at higher ASPs and, thus, brings in extraordinary earnings per sale. Apple's healthy OPD reflects the company's remarkable ability to move into new markets, command the highest ASP, and deliver bottom line profits.

To sum up: Apple has innovated into products that can sell at higher ASPs and bring greater earnings per device. That trend shows no sign of slowing down. In contrast, RIMM has seen its RPD, OPD, and NPD fall. RIMM has been unable to differentiate its products in order to get the type of favorable pricing Apple has achieved.

My prediction: Apple makes $190 and $150 OPD and NPD respectively in FY 2011 while increasing the number of products it sells. Hence, "The Golden Rule of Apple" is born: OPD will rise each year even as the number of devices sold climbs.

Disclosure: Author long AAPL