Apple (AAPL, Financial) has done quite well over the last 10 years, and the future looks bright. The company has established its brand around the globe, and the iPhone is seen as a status symbol in many parts of the world.
Net sales by product
Looking at the last eight years, we see that iPhone sales as a percentage of net sales have increased dramatically.
[2015, 2012, and 2009 10-Ks pages 68, 30, and 41]
iPhone
In the U.S. the first iPhones were only available through AT&T (T, Financial). Verizon (VZ, Financial) began selling the iPhone in the U.S. in early 2011, and that was one of the keys to increased U.S. sales.
Another step for increased sales was the bigger screen size. Steve Jobs was good at saying no to many things, and this was key to him saving the company years ago. For example, he got the company out of low-margin products like printers. Saying no with respect to bigger screen sizes was one of the few areas in which he was wrong. Sales skyrocketed once the company came out with bigger phones.
The Wall Street Journal talks about the fact that Apple has 92% of the smartphone profits despite the fact that they have only 20% of the sales. This shows that market share is only part of the picture.
iPad
The iPad is starting to look like the iPod in terms of declining revenue. Some of this decline is probably because of cannibalization with the larger iPhones replacing the purchases of Mini iPads.
Mac
Tim Cook noted in the 2015 earnings call that Mac sales keep defying the negative trend in the global PC market. IDC says the market contracted 11%, but Mac sales remain strong. Later in the call Luca Maestri said that the 5.7 million Macs sold in fourth quarter of 2015 were an all time record and a year-over-year growth of 3%.
I’ve been using both a MacBook Air and a Windows PC for years. The MacBook Air seems to start up and shut down a lot faster than the Windows PC. The MacBook Air is the laptop that goes on the road with me, and it is the laptop I use most of the time.
It was funny when Jimmy Fallon closed his MacBook during a 2014 interview with Bill Gates (Trades, Portfolio)!
Other revenue
Launched in April, the Apple Watch hasn’t yet reached its potential. Among other things, it could help make driving safer. In a September Wall Street Journal article Warren Buffett (Trades, Portfolio) noted that cars are now safer, but accidents are on the rise. The conclusion is that drivers have gotten worse. When a driver looks down at a phone, then it is a distraction. It would be nice if a device like the watch could solve this problem. It would need to work much like the watch in Knight Rider. Hopefully there will be a 911 app on smart watches in the future that works much like the Uber app.
The iTunes revenue stream is substantial. Apple Pay and Apple TV have potential. Entering the automobile business with the Apple Car would be difficult and not an ideal use of capital in my opinion.
Net sales by operating segment
Apple has become more of a global company over the last 10 years. We see that China is now a huge part of the company’s sales. In the 2015 earnings call Tim Cook cited a McKinsey study that said China's middle class will rise to 500 million people if we look ahead five years. He said the No. 1- and No. 3-selling smartphones in mainland China last quarter were the iPhone 6 and iPhone 6 Plus respectively and that Apple is very bullish on that market.
[2015, 2012, 2009 and 2006 10-Ks pages 24, 30, 41, and 54]
Valuation
The company seemed to be cheaper back when I wrote my May 4, 2013 "Apple Is An Outstanding Company at a Reasonable Price" article. The stock price nearly doubled from May 1, 2013 to Nov. 1. I don't expect the stock price to do that again over the next 2½ years, but I won't be surprised if it does very well. In early 2013 analysts were worried about declining margins, but the company has margins that are fantastic and they have room to go down slightly. The gross margin percentage was 40.1%, 38.6% and 37.6% for 2015, 2014 and 2013. Analysts were also concerned about market share a few years ago, but profits are what matter.
Here is the five-year return from the latest 10-K filing:
The above return chart shows that the company’s stock price was well above the Standard & Poor's 500 benchmark four out of the last five years. The exception was September 2013.
Here is the P/E ratio from bigcharts.com over the last five years:
We see that the P/E ratio was lowest in early 2013. The P/E ratio doesn’t tell the full valuation story if we fail to consider the extra cash and securities in the price part of the equation.
Greenlight Capital (GLRE, Financial) talked about cash representing nearly one-third of Apple's market cap back when the 10-Q ending Dec. 29, 2012 showed about $137 billion in cash.
Apple has even more cash now, but it is a smaller percentage of market cap so the P/E ratio is now overstated by a smaller amount.
$21,120 million cash and cash equivalents
$20,481 million short-term marketable securities
$164,065 million long-term marketable securities
($53,463) million long-term debt
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$152,203 million cash and securities net of long-term debt
The market cap on Sept. 26 was $654,160 million.
Cash and securities net of long-term debt were about 23% of market cap at the end of September.
Apple's free cash flow has been higher than net earnings the last three years. Looking at 2015, 2014 and 2013, we have free cash flow of $69.8 billion, $49.9 billion and $44.6 billion. Net earnings were $53.4 billion, $39.5 billion and $37 billion.
Smart capital allocation decisions are necessary to make sure free cash flow isn’t wasted. Part of the company’s capital allocation strategy is buying back stock, and the company has done a good job in this area in my opinion. Unlike other tech companies, Apple doesn’t have extreme levels of stock-based compensation so the company buybacks do more than just counter dilution. Per the 2015 cash flow statement, the company has spent $103 billion on buybacks over the last three years, and the weighted-average diluted shares has dropped from 6.5 billion to 5.8 billion. In the 2015 second quarter earnings call Tim Cook announced the company was expanding the size of its capital return program to $200 billion through March 2017. Note that my Facebook article has more information on stock-based compensation at Apple, Facebook (FB, Financial) and Google (GOOG, Financial)(GOOGL, Financial).
Forbes says the Apple brand value is now $145.3 billion. This doesn’t appear on the balance sheet, and it is one of the many reasons why the company trades well above book value.
Closing thoughts
Steve Jobs stepped down as CEO in August 2011, and he passed away in October 2011. There will never be another Steve Jobs, but Tim Cook is holding his own. The company’s sales have almost doubled since 2011, and it seems Tim Cook is a good successor. "The Shape of Things to Come" New Yorker article talks about the fact that Jony Ive and the folks at the Apple design lab work for more than just money. It goes on to say that Ive and Cook seem like respectful cousins. Apple has a solid team that should continue to thrive.
Things change quickly in the technology space, but Apple has a cultlike following that gives it an advantage over other companies. Once customers enter the Apple ecosystem they are reluctant to leave. It’s hard to imagine people driving around with Apple stickers on their cars switching to other products unless Apple makes a series of serious mistakes.
Apple is a great company, but it is more dependent than ever on iPhone sales. The company is truly global as demonstrated by the growth in China. The future looks bright, but the valuation is not as appealing to buyers as a few years ago.
Sources:
Disclosure:
I'm long AAPL, GOOG and GOOGL. Any material in this article should not be relied on as a formal investment recommendation. I am still long AAPL, but I’ve been reducing my position such that I don’t have as many shares as a few years ago.
