Mar 17, 2023 10 min read

Investment Thesis: Apple

This issue's recommendation is an exceptional business is known for creating innovative products and making a big impact on people's life. We believe that it is an excellent choice for a long-term investment that can yield satisfactory returns.

This recommendation is just a start, the next step is to do your due diligence process which will then help you to make the investment decision. We strongly advise investors to do a thorough analysis of the recommendation and understand the soundness of the business before investing in this company. Also, please consult your investment advisor before making a decision

Business Profile (NASDAQ: AAPL)

Apple, Inc engages in the design, manufacture, and sale of smartphones, personal computers, tablets, wearables and accessories, and other variety of related services. It operates through the following geographical segments: Americas, Europe, Greater China, Japan, and the Rest of Asia Pacific. The Americas segment includes North and South America. The Europe segment consists of European countries, as well as India, the Middle East, and Africa. The Greater China segment comprises of China, Hong Kong, and Taiwan. The Rest of the Asia Pacific segment includes Australia and Asian countries. Its products and services include iPhone, Mac, iPad, AirPods, Apple TV, Apple Watch, Beats products, Apple Care, iCloud, digital content stores, streaming, and licensing services. The company was founded by Steven Paul Jobs, Ronald Gerald Wayne, and Stephen G. Wozniak in 1977 and is headquartered in Cupertino, CA.

Story

Apple Inc. is one of the largest technology companies in the world, known for its innovative products, and strong brand image. Apple has consistently delivered impressive financial results which makes it an attractive investment option. Despite its size, Apple has been a top-performing company in the technology industry, with a market capitalization of over $2 trillion.

Growth

Despite being one of the largest companies in the world, Apple still has significant growth opportunities ahead of it. There are very few brands on the planet that are as strong as Apple. This is true not only in the US but also globally, across cultures, demographics, and price points. People want Apple products. And that is a very, very hard thing to replicate. The company's iPhone sales have been a major driver of its success, but Apple has also been investing heavily in other areas such as wearables, services, and autonomous driving technology.

In the fiscal year 2022, Apple's revenue grew by 8% year-over-year to reach $394.33 billion. The company's net income also increased by 5.41% to $95.17 billion, driven by strong sales across all product categories. Despite being big tech, these figures indicate that Apple is still a growth company, with significant potential to continue expanding its business in the years ahead.

Apple has several key advantages that make it a strong player in the tech industry, including its brand strength, ecosystem of products and services, and high customer loyalty. Apple has a strong balance sheet and a massive cash reserve, which gives the company the ability to invest in future growth opportunities or return value to shareholders through dividends and share buybacks. Additionally, Apple's large user base gives the company a strong platform for future innovations and product launches.

Apple's wearables business has been growing rapidly and is on track to become the size of a Fortune 50 company in the near future. The company's services business, which includes the App Store, Apple Music, and Apple Pay, has also been a strong growth driver in recent years.

Wearable, Home and Accessories

Apple generated $41.24 billion revenue from Wearable, Home and Accessories segment in 2022. This segment grew 7.3% in 2022. It sold 82 million AirPods and 53 million Apple Watches in 2022

Apple has added more active iPhone users every year. Apple has switched its focus to services and other long-term revenue sources, as customers keep their phones for longer. In the latest quarterly results Q12023, Apple mentioned that they have an installed base of over 2 billion active devices represents a great foundation for future expansion of its ecosystem, and it continues to grow even during difficult macroeconomic conditions, which speaks to the exceptionally high levels of customer loyalty and satisfaction and it's the ability to attract new customers to Apple platform.

The US iPhone market share has been steady over the years at above 50%. In 2022 it reached 57% of the market share.

**US Smartphone Market Share - Apple vs Samsung vs others**

Apple Services

With a strong installed base of iPhones and iPad with over 2 billion active devices, Apple sees services as a way to continue growing. An increasingly important part of Apple, as it continues to add more subscriptions and services to its iOS platform. Compared to iPhone, iPad, and Mac, Apple’s services revenue has increased year-on-year. Apple services represent the most important segment of the company and the second-largest division, accounting for 19% of revenue in 2022. Apple grew services revenue by double digits on top of growing 24% during the December quarter a year ago. This includes offerings like Apple Music, iCloud, and the App Store, which all have high margins and low churn rates.

Apple now has more than 935 million paid subscriptions across the services on the platform, up more than 150 million during the last 12 months alone
Apple Pay has now been activated by 75% of iPhone users in the USA. Apple Pay is already accepted by more than 90 percent of US retailers. Apple Pay is now available to millions of merchants in nearly 70 countries and regions and works with over 10,000 bank and network partners worldwide.
Apple Music is the second largest music streaming service with 88 million subscribers. Apple Music contributed 6.4% to the total revenue. Apple Music is available in 167 countries. Apple Music holds 16% of the global music streaming market share. Apple Music has over 90 million songs and 30,000 playlists in its catalog.
Apple invested $6 billion into TV+ in 2019. Apple TV+ has 75m subscribers. Apple’s streaming platform grew 29% from January 2021 through August 2022. Apple TV+ now has 6.2% of the global streaming platform market share. When it comes to Apple TV+, the platform has been gaining traction as Apple’s original movies and shows have already won multiple awards. Apple TV+ shows received 52 Emmy Award nominations in 2022 for series such as “Ted Lasso” and “The Morning Show.”
The App Store generated gross revenue of $85.1 billion through in-app purchases, subscriptions, and premium apps in 2021. There are more than 4.7 million active apps available. Gaming is the most popular app category on the App Store with more than 1 million active apps. Business apps were the second most popular category in the App Store, accounting for 10.7% of active apps. There were 8.3 billion App Store downloads in Q4 2021. More than 180 billion apps have been downloaded from the App Store since its release
Siri and Google Assistant are the clear market leaders in the voice assistant technology industry. Each holds around 36% of the market share. In 2020, Siri has 660m annual active users, Apple has not updated figures since 2020. Siri is able to answer 98% of questions asked by users. 60% of users between 18 and 24 years old chose Siri as their preferred voice assistant
Apple’s news aggregation service added more readers every year since its launch. The most recently available data on Apple News showed that the app had 125 million active users in the second quarter of 2020. This marked an increase of 40 million from the first quarter of 2019.

Apple's services business is highly profitable, with a gross margin of over 70%. This suggests that the company's investment in new services and content is paying off in terms of revenue and profitability.

Apple's Valuation is Reasonable

Despite its strong growth prospects, Apple's valuation is still reasonable compared to other large-cap technology companies. As of January 2023, Apple's price-to-earnings ratio (P/E) was around 25, which is lower than the P/E ratios of companies like Amazon and Microsoft. Additionally, Apple has a strong balance sheet, with over $50 billion in cash as of the end of the fiscal year 2022. This gives the company significant financial flexibility to invest in growth opportunities or return value to shareholders through buybacks and dividends.

Apple reported strong financial results for FQ1 2023, with revenue of $124.5 billion, up 12% year-over-year. This figure exceeded analysts' expectations, driven by strong demand for the iPhone. Additionally, Apple's services segment continued to grow, with revenue of $19.9 billion, up 21% year-over-year, driven by the App Store, Apple Music, and Apple Pay. Furthermore, Apple's gross margin for the quarter was 43.4%, up from 41.4% in the same quarter last year. This suggests that the company's pricing strategy and product mix are effective in driving profitability.

Shareholder-Friendly Policies

Apple has returned significant value to shareholders in recent years through its dividend and buyback program. In 2022, AAPL generated $109 billion of free cash flow and from that paid out $14.8 billion in dividends and $89.4 billion in share repurchases. This highlights the company's commitment to returning value to its shareholders. Apple's dividend yield is currently around 0.6%, which is modest but still provides a source of income for investors. The company's buyback program also helps to support its stock price, as it reduces the number of shares outstanding and can boost earnings per share. Over the past decade, Apple's stock has delivered impressive returns to investors, with an average annual return of ~27% from 2013 to 2023.

Apple's ecosystem

Apple's ecosystem lock-in is a significant advantage for the company. Once customers buy into the Apple ecosystem, they are more likely to purchase additional Apple products and services. This lock-in effect has resulted in a loyal customer base, which drives revenue growth and profitability for the company.

Apple is known for its innovation, with a history of groundbreaking products, including the iPod, iPhone, and iPad. The company continues to invest heavily in research and development, with a budget of over $26 billion in 2022. This investment has resulted in new product categories, such as the Apple Watch and AirPods, which have been successful for the company and will continue to do so.

Strong Leadership

Apple is led by CEO Tim Cook, who took over in August 2011 from the company’s legendary co-founder Steve Jobs. Prior to becoming CEO, Cook was Apple’s chief operating officer (COO), a post he was given in October 2005. His leadership is a significant advantage for the company. Cook has been with the company for over a decade and has successfully led the company through a period of significant growth and innovation. Additionally, the company has a deep bench of talented executives. Cook’s compensation shows their integrity and commitment towards Apple. In September 2020, Cook was given an equity award of nearly 668,000 Apple shares that are worth US$77.5 million at Apple’s share price of US$116 as of 27 November 2020. This is the first equity award granted to Cook since his 2011 award that we discussed above. Half of the ~668,000 shares would vest over a multi-year period (one-third on April 2023, another third on April 2024, and the last third on April 2025), and the other half would vest according to Apple’s total shareholder return over a three year period from the first day of FY2021 to the last day of FY2023. This is again, a very well-designed compensation scheme. According to an SEC filing, Cook will receive a pay cut in 2023 to 49 million. In addition to reducing the total target, 75% of Cook’s vesting shares will be tied to Apple’s stock performance in 2023, instead of 50%. Cook owns around 3.3 million shares. Essentially, his interest is aligned with shareholders.

Risk

The focus is on the iPhone for near-term risks. A slowdown in the growth and penetration of the smartphone market could be exponentially more painful for Apple, as over half its current revenues come from its iPhone products. A slowdown in overall smartphone market growth, iPhone market share growth, or penetration into China could materially reduce Apple's multiple and stock price. Considering that analysts’ predictions for iPhone sales are bullish for this year, next year could show negative comps or a year-over-year decline, which would effectively knock down the stock's multiple.

Future growth is dependent on new product categories or on a product that would redefine a current category. Some analysts wonder why the company is so keen on returning its cash via share repurchases and dividends instead of reinvesting in research and development or making acquisitions. There is the risk that the company will be unable to sustain its “innovative” strategy in the future because it is not putting that cash to work today to discover the technology of tomorrow.

Apple is under scrutiny in the US, facing antitrust issues and an ongoing lawsuit from Epic Games over App Store pricing policies. Apple faces regulatory scrutiny in the US and the EU, where it's being investigated for antitrust concerns and anti-competitive practices. These investigations could lead to fines, penalties, or operational changes that could hurt the company's profitability.

Apple's reliance on the Chinese market exposes it to potential backlash from the Chinese government amid US-China tensions and possible US government decisions that could impact Apple's business in China. Additionally, supply chain disruptions due to the ongoing global semiconductor shortage could impact Apple's production capabilities.

The following data snapshots are as of 03/11/2023 from tradingview website

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