Summary

• Apple’s integrated ecosystem and customer loyalty makes it likely that the company will develop new sources of revenue from their user base with new innovations.
• Explore Apple’s strengths, weaknesses, opportunities, and threats.
• My expectations for the next 3 to 5 years.

Apple (AAPL) designs and manufactures the iPhone, iPad, iPod touch, HomePod, Mac desktops & laptops, Apple Watch, and Apple TV. The company also designs operating systems for each of their hardware devices. Apple offers various services which includes: iTunes Store (music/movies/games), App store, Apple Music streaming, iCloud storage, Apple Pay, and AppleCare customer support. The products are distributed through Apple’s own retail stores, online stores, and through other retailers.

Apple has evolved into a dividend paying growth company. Although the company’s largest best selling product, the iPhone, has been on the market since 2007, Apple still has the potential for new groundbreaking innovations. One of these innovations is the Apple Car, which is operating under the name, Project Titan. Not much is known about the car, but estimates for launch are 2021 through 2025.

There has been some concern among investors that Apple’s iPhone sales have been slowing down. Apple’s decision to stop reporting sales of iPhone units added to that concern. Despite that concern, Apple will probably bounce back due to their customer loyalty, which is likely to lead to future iPhone upgrades. The longer-term catalysts are the development of new products such as TV streaming and the Apple Car.

Strengths

• Apple has the competitive advantage of having a fully integrated ecosystem. The hardware, software, and services work together across devices in a user-friendly manner. Apple’s dominate position for smartphone market share in North America is a reflection of this.
• Reliable, easy-to-use performance of hardware and software.
• Strong brand image – status symbol/fashion brand.
• High margins due to premium price strategy [gross margin 38%, operating margin 26.7%, EBITDA margin 30.4%].
• High returns:  ROE of 46% and ROIC of 17%.  
• Strong balance sheet – high quantity of cash, high stockholders equity.
• Strong operating and free cash flow to be used for growing the company, paying dividends and for share repurchases.
• Continuous innovation – Apple updates current products on a regular basis to keep up with advancing technology. The company is also working on building an electric car for future growth potential.
• Strong customer loyalty – Apple was declared the most pleasing company in most of the markets that they operate in. Apple came out on top for smartphones, tablets, and laptops. A survey by Morgan Stanley shows that 92% of iPhone owners are somewhat or extremely likely to purchase another iPhone.

Source: gs.statcounter.com

Weaknesses

• Apple’s products are priced too high for certain markets such as China. The newest iPhones had prices cut 12% to 17% in China recently. Improper pricing could have a negative effect on product sales and allow competitors to gain market share. Lowering prices could lead to lower margins.
• Apple attracts customers from mid to high income levels. The high price of iPhones could deter many in the lower income levels from purchasing Apple products.
• Apple has compatibility issues – One recent example of this is the latest version of Windows 10 was not compatible with the latest version of iCloud. However, this has been resolved with an iOS update. Issues like this pop up occasionally, but they typically get resolved with updates.

Opportunities

• Apple should create strategic price points for different markets. For example, less affluent countries such as China and India may need lower prices as compared to the U.S. to gain market share. This would make Apple’s products more competitive with the other manufacturers that are selling well in those countries.
• Develop new products/innovations – Apple is expected to launch a TV streaming service with original programming. The company is striving to produce Emmy and Academy Award worthy content. Project Titan (electric car) has the potential to be a strong seller. Apple should also look at other new product opportunities for future growth. Innovating existing products to remain a step ahead of the competition is another strategy that Apple should continue to employ.
• Expand into new markets: Apple can look at emerging economies as new areas to market to. As growing economies become more developed, more of the population will be able to afford Apple’s products.
• Strategic M&A opportunities: Apple can seek out other hardware manufacturers for potential acquisitions. Products with high margins would be in-line with Apple’s products.
• Continue to expand their distribution network to reach more customers on a global basis: This could include more retail Apple Stores, additional online stores, and more third party sellers.

Threats

• Apple faces a lot of competition on the hardware side. iPhone competitors include: Samsung (OTC:SSNLF), LG Electronics, Huawei, Xiaomi, HTC, Microsoft (MSFT), etc. Alphabet (GOOG) (GOOGL) remains the main competitor for the iOS with their Android operating system.
  • Apple also faces a lot of competition for their other product categories. Apple’s competitors can make it challenging for the company to grow market share. Therefore, Apple will have to continue to innovate so that their products stand out from the competition.
• The threat of tariffs could make Apple’s products more expensive. That could make their products less competitive.
• Rising labor costs could reduce margins: Wages have been rising in China where iPhones are produced. These wages are likely to continue increasing as China’s economy continues to grow.

Conclusion

Overall, I expect Apple to perform well over the long-term. The stock does fall out of favor occasionally when concerns about iPhone sales are on the minds of investors. However, I expect Apple to perform well over the next 3 to 5 years.

Even if iPhone sales are flat or slightly decline, Apple still retains most of their customers. Many of the loyal customers will use Apple services, which will contribute to the company’s revenue growth. Many of these customers will eventually upgrade to new iPhones over time.

The higher growth rate can come from innovative products down the line. Apple’s TV streaming service and electric car has the potential to produce a higher growth rate within the next five years. Therefore, Apple appears to be a solid dividend paying growth stock for the long-term.

Disclosure: I am/we are long AAPL.

Business relationship disclosure: The article was written by David Zanoni with feedback from Kirk Spano.

Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.