“The iPhone’s sales rate reveals the strength of Apple’s competitive advantages”

Apple’s track record in recent years is proving many things from an economic, strategic and stock market point of view. With the popularization of its products, it is logical that many users want to know more about its business and understand a little more about the company of the bitten apple.

That is why today we have Angel Martin Gold, Apple user, shareholder of the company and financial analyst . Angel has been following Cupertino’s company for several years. If you are interested in this type of approach, he has also written several articles about Apple in inBestia where he collaborates regularly.

The great weight of the iPhone in Apple’s income

“The iPhone’s sales rate reveals the strength of Apple’s competitive advantages”
“The iPhone’s sales rate reveals the strength of Apple’s competitive advantages”

Question: In view of the great weight of the iPhone in Apple’s revenue, many are concerned about their iPhone-dependency. Do you think it is a risk or an opportunity for the company?

Indeed, just over 60% of Apple’s revenue comes from the iPhone. And this is something that has been worrying the market for some time. Fears were more pronounced a couple of years ago, as we saw growth rates slow down. In this period, which was from September 2012 to April-June 2013, the company lost more than 40% of its stock market value. An outrage.

At that time, the most pessimistic -and there were many of them- warned that Apple could become the new Nokia. There was talk of hardware commoditization, and the danger of being so dependent on a hardware product like the iPhone.

Since then, the excellent performance of the product has made the fears go away, as you can see in the quote, but they are still there. There is some skepticism.

In my opinion, it is a potential risk , but for the moment I am not concerned. A relevant indicator that points in this direction is the average sales price of the iPhone. This product is simply spectacular. While the rest of the industry is forced to reduce prices to maintain demand, the same is not true of the iPhone. Almost the opposite, in fact.

They have been able to afford to increase prices (with the launch of the iPhone 6 especially) without damaging the sales rate at all, clearly illustrating Apple’s pricing power with this product. It reveals the strength of the brand and competitive advantages by differentiation that distinguish it from the competition.

The question that some investors have been asking for some time is whether these competitive advantages are sustainable in the long term. A really difficult question to answer. With the data in hand, there is no evidence that these competitive advantages are deteriorating, nor will they do so in the immediate future.

But the risk potential is still latent in the minds of investors, in an environment of high dynamism and uncertainty such as the technology sector.

How does your core business compare to other competitors?

Q: How does it compare to the “core” business of other companies like Google or Microsoft? Google for example has almost 90% of its revenue coming from advertising, the vast majority from desktop search ads and nobody cares.

It is true that sometimes there seems to be a double standard. Perhaps it is because Apple is considered a company that sells devices, while Google and Microsoft focus on services such as advertising, software or the cloud. There is no doubt that they are very different business models, and therefore comparisons are very complicated.

“If you want to understand the future of Apple, don’t put the focus on any particular device. Put it on the platform that brings them all together.

But perhaps the problem comes from perceiving Apple as a purely hardware company. If you change the perspective and see it as a company that integrates hardware, software and services through a platform that generates stickiness in the users by joining the different (and growing) devices, this has, instead, positive implications.

As I read some time ago: “If you want to understand the future of Apple, don’t put the focus on any particular device. Put it on the platform that brings them all together.

China’s long-term approach

Q: China is still showing a lot of potential for Apple. Cook commented that his strategy in this country is not focused on the next quarter, nor the one after that, but on the next decade. What is the translation into action of these words?

Apple’s interest in establishing a significant presence in China is growing and is reporting great rewards. The growth there is being spectacular, doubling the income in one year. Greater China (which includes Hong Kong and Taiwan) has surpassed Europe in revenue since the second fiscal quarter of 2015 (January-March). In addition to the iPhone’s good performance, Tim Cook has highlighted growth in apps, services and the developer community.

It should be noted that the growth of the smartphone market in China has slowed down dramatically. Cook said at the Conference Call that if the iPhone were excluded, the market would have recorded negative rates in annual terms.

Let’s remember how many analysts asked Apple to launch a cheap iPhone in order to compete in emerging markets such as China, and the market was disappointed when it didn’t. Well, it seems that Apple was right, and the market was wrong.

The iPhone plays in another league, at least for the time being. As much as the per capita income in China (or other emerging markets) is much lower than in developed markets, there is a remarkable (in absolute terms given the high population) and growing segment of the population that can afford it perfectly; and another segment that even with difficulties, will make great efforts to achieve it because of its aspirational brand component.

“The opening of a good number of new stores is the best proof that Apple bets with facts for this market”

The opening of a good number of new stores is perhaps the best proof that Apple is committed to this market with facts, and it does not remain only in grandiloquent words – like those of Cook in the Conference Call: “China will become the number one market for Apple”.

The Chinese economy is currently in a delicate moment of transition, where the slowdown in its growth is one of its most visible, but perhaps not the most important, manifestations. But one should not automatically extrapolate macro-aggregate figures (“China is growing less and less”) to specific markets (“the smartphone market is slowing down or even decreasing”), much less to specific companies or products (Apple is growing dramatically).

The Chinese economy continues to have great potential, regardless of whether it may experience difficult quarters or even some years. Cook mentioned the high potential growth of the middle class in the country. We are talking about the long term, and it is for this horizon that Apple wants to bet, building from now on a strong position in the region.

The eternal question of the Apple Watch

Q: Apple is still not showing us the sales of the Apple Watch, for competitive reasons according to Cook. Why is Wall Street so interested in knowing them? Do you think it has to do with the fact that they are “misunderstood” because of their short-sighted vision and that they hope to show them when there is no doubt about their success?

Apple already made it clear before launching the product that it is “competitive information” that they were not going to show. This is a new product within a category that is in its initial stages of growth, where it is still being defined. It is not strange to me that they do not want to show the figures.

The absolute sales figures may not be spectacular, but with the information I have, they are doing quite well considering the limitations of the first version of a product and its supporting operating system. It’s a long-distance race. Both the product and the software will be improved, expanding features and functionality.

Ben Bajarin has published the results of a recent satisfaction survey of Watch users, and they are really promising. Data from the current quarter, which includes Christmas vacation sales, will give us further clues as to how he is doing. But I say, it’s a gamble for the future: not only to diversify income, but to improve and expand the Apple ecosystem.

AAPL’s performance on results

Q: Speaking of the stock market’s short-termism, why does AAPL’s share price fall or remain flat even when they present record results?

Many factors come into play. Short-term financial markets can and do behave for reasons that are unrelated to business fundamentals. Psychology plays a key role. Also, if we talk about a specific company, it is influenced by factors of the market as a whole.

For example, as much as Apple is doing great, it could fall simply because the market is falling. Markets are quoted expectations, and these are subjective and subject to sudden changes by agents. Not to mention other factors, such as the growing influence of machines and HFTs on the market.

“The markets quote expectations, and these are subjective and subject to sudden changes by the agents”.

Whether the results are “record breaking” to the market may matter little or not at all to you. What matters to it is whether they have been better or worse than the expectations they had. But here again, it’s not as simple as looking at the headline in the financial media about whether earnings per share or revenues are higher than expected.

It is also necessary to see the perspectives that the company makes public regarding the future (next quarter in the case of Apple), which is called guidance . Go into more detail on the numbers: the impact of currencies, the composition by business areas and geographical areas, etc. It also matters whether announcements are made regarding other issues, such as share repurchases or dividends.

In addition, it may be the case that after the results, the price (in what is called the After-market) is very high. I understand this as a moment in which the different figures and statements of the main executives at the conference are being digested, interpreting and reinterpreting, adjusting and readjusting expectations… it is not easy at all.

“The market can change its mind at times when there is a lot of information to process and interpret.

I wrote about this for Amazon several quarters ago: the first reaction from the market was positive, but then it ended up with a very sharp drop. The market can change its mind at times when there is a lot of information to process and interpret.

The latest results have far exceeded expectations in the main aggregate figures, but on the iPhone, and the guidance for the next quarter may have disappointed slightly. The next quarter they report will be compared with last year’s, where growth was spectacular due to the success of iPhone 6 and 6Plus. The bar is therefore very high.

Thus, combining the positive and “negative”, it gives us a positive image, of course, but not spectacular enough to make the action shoot.

( Note : At the time of the interview, just before the opening on October 28, Apple is up about 2%. The night before, just after presenting results, it oscillated between +3% and slight drops).

Dividends and Stock Repurchase Program

Q: Now that Apple has more than 200 billion in cash in different countries around the world, Luca Maestri announced again a dividend for November. What is the importance of the dividend and the stock buyback in the future of the company?

The dividend was reintroduced at Apple in mid-2012, and has increased year by year, with the prospect of continuing to do so in future years. However, the most important element of Apple’s shareholder remuneration programme, which has been implemented in previous years, is share buybacks. They are an attraction for investors.

A company like Apple has to ask itself what to do with the considerable cash flows it receives: does it invest them in the business (R&D, for example), does it use them to reward its shareholders, or does it “park” them (it is understood that, for the most part, they are invested in financial securities)?

Tim Cook declara que un 30 por ciento de los compradores de iPhone en este último trimestre provienen de Android.

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Given its enviable cash position, Apple can perfectly afford to maintain and grow its shareholder return, without neglecting the investment in the business. However, the tax issue – the need to pay taxes for “bringing” cash and financial securities out of the country into the US – has made them incur debt to finance these operations. In fact, in the last quarter, despite the fact that the liquidity position has increased with respect to the previous quarter, if you subtract the debt, it has been reduced.

In my opinion, it is interesting to maintain a high liquidity position in a technology company, which can act as a valuable strategic asset.

Ángel Martín Oro is a professor of Economic Environment at the OMMA Studies Center, a collaborator on the Title of Expert in Stock Exchange and Markets at the University of Alicante and director of the Observatory of Economic Situation at the Juan de Mariana Institute. You can follow him on his Twitter account.

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