Just a few years ago, analysts had a biased opinion that desktop computers and laptops would be phased out completely. Apparently, they were staring at an inevitable case of obsolescence as the emergence of smartphones and tablets threatened to replace them.
And to demonstrate how the disruptive force was earmarked to affect the computing world, I have used the example of Apple (AAPL, Financial), which happens to be a major player in the desktop and laptop computing market as well as the smartphones and tablets market.
Back in the early 2010s, there was a genuine debate going around that Apple’s iPads and iPhones were cannibalizing the company’s computer sales. However, the numbers have never really supported this discussion. While iPhones and iPads did lead to a decrease in Mac sales, it is correct to say that there was never any threat of Macs potentially becoming obsolete products.
As demonstrated in the graphic below courtesy of Statista, iPads revenue share, in particular, was massive in the early 2010s through 2014. On the other hand, Macs revenue share fluctuated from one period to the next. However, the story has changed over the last couple of years with iPads revenue share dwindling while Macs revenue share has continued to recover.
Analysts see Apple maintaining growth in the Mac revenue stream especially given the performances during the most recent quarter.
In the fourth quarter of 2017, the company’s Mac unit sales were up 10% year-over-year while revenue from the segment increased 25%. This came following the sale of 5.386 million Macs versus 4.886 sold in the fourth quarter of 2016. Revenue-wise, the figure stood at $7.17 billion up from $5.739 billion a year ago. This growth eclipses the overall revenue growth for the company after revenue from the iPhone unit, which is the biggest contributor to the revenue mix grew only by a paltry 2%.
Apple price, revenue and net income 2008 to 2017, via GuruFocus Charts.
The difference in growth rates between the unit sales and revenues is a clear indication of rising Mac prices as Apple continues to upgrade its products to compete with rivals in the market. While increasing rivalry from Microsoft Corporation’s (MSFT, Financial) Surface Laptops, Lenovo, and Alphabet Inc.’s (GOOG, Financial) (GOOGL, Financial) Chromebooks is seen as a potential headwind against long-term growth, Apple’s own used products could still affect growth.
The company produces some of the best hardware products in the form of iPhones, iPads, and Macs, but its pricing is often higher than that of comparable products in the market. This, however, does not mean that it is the end of the road for those looking for a low-budget MacBook, iPhone, or an iPad. According to a recent report by Deloitte, the used products market is becoming a major attraction to consumers, with the smartphones segment of this market already valued at about $17 billion.
This is partly due to the increase in the number of platforms that device owners can exchange used products ranging from smartphones to laptop trade-ins and more. Auction sites for such products have been the preferred option for consumers over the last couple of years. However, it has now become more feasible to sell used MacBook, iPhone, or other Apple products directly at competitive prices on startup platforms like uSell.com and Gazelle.com, which are looking to rival the likes of eBay Inc. (EBAY, Financial) by targeting specific niches. Some owners are also utilizing social media platforms like Facebook Inc. (FB, Financial) and Pinterest for the same purpose. So, the competition is heating up.
Such platforms will continue to become popular especially if new Apple products continue to be launched at super premium prices compared to rivals in the market. There are customers who prefer Apple products, and these are the type that will most likely end up on those platforms that offer an alternative route by selling used Macs, iPhones and iPads.
Nonetheless, Apple Macs are still a major player in the company’s revenue mix. In fact, in terms of revenue growth, this unit is only second to the services unit based on the most recent quarter results. Apple has been trying to mold the services unit into one of its top two revenue generating streams as it continues to switch towards becoming a major player in the services market. So, it’s understandable why it has dwarfed the Macs unit in terms of revenue growth.
Illustratively, revenue from the iPhone unit increased by just 2% in Q4 of the calendar year 2017 whereas the iPads unit registered a growth rate of 14%. On the other hand, the services unit was up 34% for the quarter compared to revenue posted in the previous year while as discussed earlier, Macs registered 25% growth.
Conclusion
It appears obsolescence is a foregone story now as far as laptop computers are concerned, and Apple’s Macs unit looks set to continue playing a key role in the revenue mix. However, there are genuine threats to this growth and it remains to be seen whether the company’s premium pricing of its products will become a major obstacle in the foreseeable future. The used goods market is growing rapidly and given that some people choose to sell their products while they are still practically new, this could become more interesting for consumers in the coming years.
Disclosure: I have no position in any stock mentioned in this article.
