Apple Continues To Branch Out
Seeking Alpha Analyst Since 2018
- Continues to innovate and release new phones customers want.
- Apple uses its rich cash flow to seek out new products to spread its brand influence even farther.
- Diversification will help solidify its balance sheet even further for decades to come.
Investment Outlook: Apple Inc
The stock performance over the past twelve months has been phenomenal. According to Bloomberg (2021), Apple's stock price was comparably higher than peers that included Amazon, Facebook, Microsoft, and Alphabet. It grew by 67.94% from February 19, 2020, to February 12, 2021, while the best performing peer, Amazon.com Inc was higher by 52.05% during the same period. It marginally trails Amazon.com Inc in performance over the past five years.
Figure 1: Comparable Stock Price Growth: 19 Feb. 2020 - 12 Feb. 2021
Source: Bloomberg (2021)
The firm has had a slow start to fiscal 2021 with a Year-to-Date (YTD) return of 2.02% due to market pullback. However, the performance in fiscal 2019 indicates a robust financial and demand base with total net sales and net income higher by 5.51% and 3.90% respectively. The firm’s revenue of $274.52 billion and net income of $57.41 billion were the highest ever (Apple, 2020). Positive trends are supporting increased stock demand and higher pricing.
- It launched the first iteration of the iPhone 5G during the September 2020 launch. The phone was well received based on the performance of Q1 2021 with product sales up by 20.95% while services sales were higher by 23.96% over a comparable period in 2019 (Apple, 2021). It normally launches its latest iPhone in Q1 of each fiscal year and the 17.22% increase in sales despite marginal changes in pricing indicated sustained higher demand. The robust uptake of new merchandise extended across all product categories including Mac, iPad, and Wearables, Home, & Accessories with strong double-digit growths. The meaningful improvement in sales of its core product(S) will boost overall financial performance for the fiscal year. Additionally, the firm continues to maintain stable gross margins for its products at around 31.47%.
- The revenue diversification strategy has been successful with stronger contribution from services in fiscal 2020 and Q1 2021. In fiscal 2020, the services component that includes digital content, AppleCare, and Apple TV contributed $53.77 billion in revenue and grew at an annual rate of 16.15% (Apple, 2020). It posted revenues of $15.76 billion in Q1 2021 compared to a level of $12.72 billion in Q1 2020, indicating an increase of 23.96% (Apple, 2021). The growth has strong ramifications for overall profitability considering that the total gross margin for the services segment topped 66.01% in fiscal 2020, up from 60.77% in fiscal 2018. In essence, the fixed and marginal costs decline with higher sales. The profit boost from services will expand at a quicker rate than products. It cushions Apple from tapering product sales owing to lengthened renewal periods and it can leverage the existing base to expand services. The current penetration of the installed based stands at between 15% and 18% (Rosenbaum, 2021), indicating a strong upside. The firm continues to expand the services on its platform including the introduction of Apple Fitness and Podcasts+ addresses the required services diversification to boost growth.
- At the end of fiscal 2020, Apple held $191.83 billion in cash, cash equivalents, and marketable securities against total term debt and commercial paper totaling $112.44 billion (Apple, 2020). It is leveraging the cash to an expansion of products and services to include hardware subscriptions and the Apple Car. The firm is exploring partnerships with auto firms like Hyundai to enter the EV market and could provide autonomous driving systems and other connectivity services. It promises additional revenue diversification for the firm in the medium-term. The hype around the project provides the short-term boost for further stock growth supported by the ever-expanding services segment contribution to profits.References
Apple. (2021). Form 10-Q for the quarterly period ended December 26, 2020. Apple Inc.
Bloomberg. (2021). AAPL: US. Bloomberg. https://www.bloomberg.com/quote/AAPL:US
Rosenbaum, E. (2021). Why Apple became a $2 trillion company in 2020, and what could come next. CNBC. Why Apple became a $2 trillion company in 2020, and what could come nextApple. (2020). Form 10-K for the fiscal year ended September 26, 2020. Apple Inc.
Analyst's Disclosure: I am/we are long AAPL.
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