Apple recently unveiled its latest iPhone, and you may have noticed how similar it looks to the iPhone 12 version released last year. I’m now starting to wonder if Apple has run out of ideas since there wasn’t a major upgrade in the phone. Are they now constrained by technological capabilities?
In this article, let’s take a look at what Apple could have up their sleeves, and whether its business is still worth investing in.
Apple (APPL)’s Business Fundamentals
You are undoubtedly familiar with Apple, and it is evident that it has strong business fundamentals.
Apple was the first company to reach a market capitalization of $1 trillion in 2018, and its business continues to expand as seen in the revenue chart below. In fact, in 2020, it set a new record by being the first firm to reach a market capitalization of $2 trillion.
The company reported record sales of $81.4 billion in the most recent quarter, which concluded on June 26 this year, up by 36% year on year. Apple also set new revenue records in each of its geographic regions, had double-digit growth in each product category, and set a new all-time high for its installed base of active devices.
In terms of cash flow, the company is generating more money each year, with $21 billion in operating cash flow in the most latest quarter. This money can then be re-invested to the company for research & development and marketing, which will potentially increase its future revenue.
Apple (APPL)’s Business Overview
Here’s a quick rundown of what Apple does if you’ve been living under a rock. In a nutshell, the company designs, manufactures and sells smartphones, computers, tablets, wearables, accessories, and various other products. It also provides a wide range of services. Broadly speaking, we can categorize what Apple offers into products and services.
In terms of products, Apple’s main bread and butter is the iPhone, accounting for about half of the company’s revenue in 2020. This category also includes Mac, iPad, Wearables, Home, and Accessories. Furthermore, Wearables, Home, and Accessories include AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and various Apple-branded and third-party accessories.
The first example of its services is AppleCare, which is Apple’s technical support service that provides Apple users worldwide with repair and replacement services. The next one is Cloud Services, which allows customers to store their data in the cloud and access it across numerous devices.
The company also provides a wide range of digital content through its app store, such as the Apple arcade, Apple music, Apple TV, Apple News, and Apple Fitness. Lastly, Apple offers payment services via Apple Card and Apple Pay.
Apple (APPL)’s Revenue breakdown
As seen above, the iPhone accounted for the majority of Apple’s sales in the last three years. However, the data could also indicate that the rise of its iPhone revenue has already reached a plateau.
The expansion of the Wearables, Home, and Accessories category and the Services category is another notable trend. These categories have grown considerably quicker in the last three years, indicating Apple’s priority in the coming years.
In terms of gross margin, we can observe that the services segment has a substantially greater gross margin than the products segment. In fact, it is more than double at 66%, compared to 31.5% for products. It’s clear that this is a lucrative segment, and it’s no surprise that Apple is now shifting its focus to becoming a service provider.
The company has accelerated its efforts in recent years by investing more money and resources in Apple-branded services. Bundled services, such as Apple One, offer all-in-one subscriptions to entice Apple consumers to stay in the Apple ecosystem. The iPhone is no longer just a phone – it’s also a sales platform for Apple’s services. Going beyond offering devices will certainly result in more recurring income, and this is ideal for businesses like Apple that want regular cash flow.
Apple (APPL)’s Health segment
Apple is also entering the healthcare market. You may have heard of LumiHealth, an Apple-Singapore initiative that aims to help Singaporeans live healthier lives. According to CEO Tim Cook, this is just one of Apple’s numerous health initiatives as it strives to position itself as the company’s greatest contribution to humanity.
The standardization of patients’ health records is another major goal. Not all countries have a seamless integration of patient health records that can be used across many care settings, like Singapore. Hence, Apple has decided to take on the challenge of integrating patient records.
Apple also unveiled Apple Fitness+, the first fitness service built around the Apple Watch, which will include numerous activities such as guided meditation, Pilates, and strength, balance, and endurance programs. Fitness+ will also introduce group workouts, allowing users to exercise together. I know I sound like an Apple promoter, but these efforts just show how Apple is positioning itself in this market. Electronic gadgets will inevitably become an essential tool for monitoring and improving our health, and we will become increasingly more reliant on them. Apple is fully taking advantage of this fact, which is why its Apple Watch can be used to track sleep, monitor blood oxygen levels, and more.
Future Products
We’ve gone over some of Apple’s current products and services, but these are not its only efforts. The company is now working on new products to add to its ecosystem. These initiatives can be hit or miss; nevertheless, let’s talk about them to see where Apple is heading.
Apple is reported to have a team of employees working on virtual and augmented reality projects right now, which includes two products: the Apple VR headset and Apple Glasses. Recruiting has indeed increased in recent years, accompanied by a slew of acquisitions of AR and VR firms geared towards improving the field.
Apple VR headset
Have you ever heard of Oculus Quest, Facebook’s virtual reality headgear? Apple’s VR gear could be similar as it will allow users to immerse themselves in entirely different virtual environments. This type of application can be used for almost everything – from watching ‘live’ sports, music, and other forms of entertainment to gaming and educational applications. The possibilities are countless.
Apple analyst Ming-Chi Kuo predicts its release date will be in 2022, while the exact date is yet to be confirmed.
Apple Glasses
Next is the Apple Glass which, unlike the VR headset, provides users with augmented reality experiences. This is comparable to the Google Glass which was released years ago but was discontinued due to widespread criticism on its pricing and privacy capabilities.
AR is different from a virtual reality headset, which provides an immersive experience in a virtual world that is completely different from our surroundings. On the other hand, AR augments our real world as its name suggests. Users will be able to interact with objects that aren’t physically there, enabling a completely new type of application.
A smart glass’s potential is limitless. Instead of using a phone, users can chat, read, and browse the internet while augmented by the real world. In fact, Pokemon Go, which allows players to ‘interact’ with these pokemon in the real world, is one of the most popular AR apps in recent years.
Nonetheless, the technology is still in its early stages. Given the past failure of Google Glass, can Apple, as a company that values data privacy, be able to pull this off and handle users’ privacy concerns? Would they also be able to drop the price to enable many users to purchase one? These are some of the factors that will determine Apple’s success in this field.
Similarly, no official announcement has been made, but there is conjecture that the Apple glasses may be released in 2025, which is still a long time from now.
Apple (AAPL)’s satellite features
Apple is working on a satellite function that will allow iPhone users to send texts in case of an emergency, even if there is no available signal in the area. This is especially beneficial in locations that lack cellular connectivity. If Apple can pull this off, it will be a significant step forward for the company.
Apple Car
Apple’s self-driving car is another future product and they have been reportedly working on this project, code-named Project Titan, since 2014. Unfortunately, internal friction, leadership concerns, and other issues plagued the project, causing it to be delayed to the point that it was rumored that Apple had abandoned its plans.
Moving forward, Apple addressed some of these issues and is proceeding with its ambition to produce an autonomous car. This was verified in December 2020, albeit the release date is still many years away. According to Reuters, it will be released in 2024 while Apple analyst Ming-Chi Kuo believes it will not be released until 2025 to 2027.
We also don’t know if Apple is proceeding with this project alone or with other automakers as no official announcement has been made, despite initial reports pointing to a partnership with Hyundai.
If Apple is successful in developing a self-driving car, it may be the next step in the company’s already well-developed ecosystem of products. This technology can be used in food delivery services or in developing a fleet of robotaxis that will power the future. However, it’s worth noting that Apple isn’t alone in this already saturated EV (electric vehicle) market. Can it compete with Tesla, Nio, and a number of other startups? Will they still be able to make a profit in such a crowded market?
Conclusion
Apple positions itself as a service provider and has its share of successes and failures. Its Apple TV+ service, which debuted in 2019, has received many award nominations for its original content. But it is falling behind its competitors such as Netflix and Disney as its current content is not as wide and not updated as frequently. Nevertheless, Apple is still in the race and should not be overlooked because they are known to place a premium on quality over quantity.
Take note that most of its future initiatives are based on rumours, and unofficial plans can easily be scrapped if there isn’t enough demand. That said, this is the company that has reshaped our way of life, and I am convinced that they will continue to do so in the future.
I’m sure Apple is working on other products or services that we don’t know about yet.
So should we invest in Apple?
“Price is what you pay, and value is what you get”, as Warren Buffet once said. We know Apple is a fantastic company, but we must first determine whether it is wise to invest in their business. What do you think?
P.S. Cheng uses Buffett’s value investing principles to find hypergrowth stocks with strong business fundamentals. He’ll be sharing how he does it next week, you can register for it here.