Wedgewood Partners David Rolfe Comments on Apple
Given that Apple's average iPhone prices have not changed in proportion, it is certainly not accruing to Apple's customers. Perhaps some of that value accrued to customers of Apple's competitors? But if that were true, Apple's competitive cohort probably would have exercised some pricing power by now, but they have not done so, considering prices by smartphone segment have been relatively flat.
Now, as we have noted in the past, Apple's capital expenditure budget has risen rapidly over the years, meaning Apple is aggressively reinvesting into its business. Apple's "cost of sales" as a percent of revenues has risen nearly ten percentage points compared to the first calendar quarter of 2012. As a result of this dramatic rise in costs over a relatively short period of time, we suspect that much of the profitability per unit has gone to Apple suppliers. While it is unsettling to see per unit iPhone profitability decline, we believe that Apple will eventually realize returns on these expenditures, particularly by increasingly exercising more scale over its asset and supplier base.
So we realize that Apple's rival peer group is making competitive inroads, but we do not think they are as dramatic, nor as sustainable, as the market seems to be implying and that the majority of Apple's lower profitability represents current investments in future returns. Indeed, considering that the stock ended the quarter at close to just a 4 X Enterprise Value to EBITDA multiple, and although the past few quarters have been difficult for Apple shareholders, we believe patience and a focus on Apple's long term growth of their best in class ecosystem will be rewarded in due course.
From Wedgewood Partners' second quarter 2013 letter.