THIS REPORT IS GENERATED FOR
GESHER GROUP INVESTMENT UNIT
EMERGING MARKET
Company name:Apple Inc.Net Income:$18,024 MTicker:AAPLTotal Cash:$32.66 BStock Price:$128.79Total Cash/Share:$5.61Historical High:$133.60Total Debt:$36,403 MHistorical Low:$73.047Operating Cash Flow:$33,722 MRevenue Quarterly:$74,599 MTotal Assets:$261,894 MRevenue Annually:$199,800 MRevenue/Share:$12.68Total Liabilities & SE:$261,894 MCost of Goods Sold:$44,858P/E Ratio:17.82Gross Profit:$29,741 MEarnings/Share:$3.06Annually:$7.42
AAPL:NASDAQ As of close Tuesday, 02/24/2015
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AAPL[/caption]
Market Valuation:
In my opinion, Apple has a narrow economic competitive advantage based on modest consumer switching costs. Switching costs are crucial factors in attracting new users especially in emerging markets, but that will offset with a loyal iOS user base that may be less likely to switch to other operating systems for future device purchases in the long term. As the smartphone market matures and a greater proportion of purchases come from previous smartphone owners, the current situation extremely favors Apple. However, due to the short life cycle for these gadgets, I think its competitors have a lot of opportunities to lure away its customers if Apple does not keep up its innovation and product design which leads to my conclusion of its narrow competitive advantage.
Throughout Apple’s Product Development, I think its switching costs are much higher than its competitors like BlackBerry and Motorola which fail to lock in customers when they were on the top.
Because of Apple’s decision to increase its iPhone’s screen size for the iPhone 6 and 6 Plus, its sales is paying off in Asian Markets. Sales in Japan, South Korea, and China are all at record highs. Following is a graph from Counterpoint Research:
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Apple’s iPhone sales in South Korea[/caption]
In South Korea, Samsung’s home territory, Apple claimed 33 percent of the market last November, more than doubling the 15 percent share it held prior to the launch of the iPhone 6 and 6 Plus. This puts it well ahead of South Korean brand LG (14 percent) and not far behind Samsung itself, whose market share slipped from 60 percent to 46 percent.
Apple is continuing its gains in China, the sales grew by 45% year on year to take third place in the country with 12% of total smartphone sales. Local firms like Xiaomi and Lenovo took first and second place with 18% and 13% respectively. The iPhone 6 sales in China accounted for more than two-thirds of Apple’s iPhone sales, but that did not capture the Apple’s sales growth in China during the 2015 yet.
Company Valuation:
I think Apple’s strength lies in its experience and expertise in integrating hardware, software, services, and third-party applications into differentiated devices that allow to capture a premium on hardware sales.
Although the broad market competition is intense, the recent earnings report suggests that the Apple’s installed base of at least 400 million at the end of 2014. Due to the high product retention and quick replacement time, it is reasonable to assume the sales volume could grow from 193 million in 2014 to about 234 million in 2015 which in turn could drive EPS of about $11.50 (23% higher than street’s estimate). The 400 million installed base is based on CEO Tim Cook’s statement that only 14% of its users were iPhone 6/6 plus users at the end of 2014 with 73.2 million devices sold in 2014.
Apple’s most recent earnings report was very impressive. The sales were $75 billion, $18 billion of net income, more than any other quarterly profit, and $31 billion of FCF to name a few.
Ultimately, I think future smartphone and tablet competition will stem from software and services, as we are seeing less and less meaningful hardware differentiation (such as screen size and quality, etc.) I think Apple is well positioned to develop and expand adequate services to enhance the user experience, in order to build switching costs that will hep the firm retain customers and generate significant repeat purchases will be critical for future iPhone sales.
After December’s report, I am now much more optimistic about iPhone’s growth in the near-term, especially as China becomes an increasingly important part of the story. Also, I am fully anticipating the stronger switching costs because of Apple’s recent iCloud offerings and its upcoming devices like Apple Watch, Home kit, and Health-kit.
With a strong, large, and loyal user based, I expect Apple’s sales and revenue to continue its upward momentum. Also due to the increasing synchronizing of media and user content by iCloud, I expect the price elasticity for its original users to continue decreasing. However, Apple Watch’s roll-out could be a hit or miss, but its decision to follow the E-watch market is a right move in my opinion. The earnings will tentatively be announced 04/23/2015, expect unusual volatility around that time.
Other Notes:
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AAPL & SPY (SPDR S&P 500 ETF Trust[/caption]
For a technical standpoint, Apple’s stock price fluctuation correlates a lot with the broad market performance. As illustrated in the chart above, the dip that happened in Mid Dec to Mid Jan 15 were due to a lot of the volatility associated with the macroeconomic market performance. Considering the consolidation after the new time high in Dow Jones and S&P 500 and the Euro Zone influence.
This report is written by analyst: Alex He
February 25th, 2015
Santa Cruz, California, USA
AlexRT.COM Copyright
