Apple
Our ownership in Apple (AAPL, Financial) first began a couple of years before the launch of the iPhone. It has been quite a journey as the Company has reinvented itself quite successfully over these lucrative fifteen years. When we first invested in the shares, Apple was dominating the portable media player market (PMPs). The iPod’s market share would soar once Apple opened up its iTunes platform to non-Apple PMPs. In addition, Apple Stores were first opened (and universally mocked at the time) in 2001. By year-end 2005 the Store count had reached 116. Even the Company’s Mac line of computers was growing nicely in a very competitive global market. Phrases like “halo effect” had become part of the vernacular describing Apple’s business model. “Ecosystem” would soon follow.
We now know that the iPhone was more than a glimmer in Steve Jobs’ eye at the time. When he introduced the iPhone at MacWorld in 2007 the technology world first gasped, then abruptly inflected to a new paradigm. Apple would never look back. Since its introduction, Apple has sold more than 1,300,000,000 iPhones!
The Company’s digital distribution platform, App Store, was launched in the summer of 2008 with just 500 Apps. Thus, began the personalization of a technology product that from a hardware-only perspective would certainly follow the path to commoditization like every other technology hardware product. Today the App Store features over 2.5 million apps – and the iPhone’s price inelasticity continues to defy skeptics to this day.
The iPad was released in April 2010. The world of portable computing would never be the same. Apple Watch and AirPods would join the iPad and iPhone to earn best product accolades from Time magazine.
Fast forward to 2020, and the state of Apple remains quite robust. One could argue that Apple dominates its collective competition as never before – by almost every measure: unit sales, market share, profitability per unit, product pipeline, customer loyalty, Company sales, profits, cash flow, R&D expenditures, balance sheet strength, global hardware, software and services ecosystem, and over 1 billion active users. Competitor (and regulator) cries of Monopoly! are well deserved.
As of the Company’s last quarterly earnings conference call in late April, the Company reports the following:
- All-time record quarter in Services revenues in Wearables, Apple Care, and Apple Store Online.
- All-time high in active users.
- User base for iPad and Mac at all-time high.
- Over 75% of Watch buyers new to watch.
- 50% of both iPad Pro and MacBook Air customers new to those products.
- 515 million paid subscriptions, and over 600 million by year-end.
The Company recently held its annual World Wide Developers Conference (WWDC) two weeks ago (online). The numerous software updates ratified, in our view, that our long-held “Apple as an Ecosystem” investment thesis is as strong as ever as product platform (iPad and Mac) converge at an accelerated pace.
This year’s WWDC will be noted as ushering in a new chapter for the Company’s Mac lineup. Investors have long anticipated Apple terminating its processor (CPU) relationship with Intel’s x86 architecture and moving to the Company’s in-house ARM CPU for Macs once its ARM architecture was ready for prime time. That day has finally arrived. This day was likely accelerated given Apple’s increasingly fractured relationship with Intel. Recall that Intel was late delivering its most recent generation of CPUs to Apple, plus Intel’s complete failure to deliver a competitive iPhone ARM processor to ward off Qualcomm’s competitive entreaties no doubt played the primary role in Apple’s titanic reversal of the Company’s heretofore success in suing Qualcomm. The complete ARM architecture switch will likely mirror the 2-year timeline when, back in the summer of 2005, Apple switched to Intel’s x86 architecture from Motorola’s PowerPC architecture. Apple has demonstrated time and again that once its hardware and software engineers control the complete vertical product technology stack, the resultant performance and user experience typically laps its respective product competitors.
The Company continues to generate enormous operating cash flows to fund multi-billion R&D, capex budgets, and quite sizable capital returns to shareholders. Note the multibillion share count reduction since 2012. Apple is one of the rare companies that excels at accretive earnings per share buybacks.
The Company is weathering the pandemic as well as can be expected. Like most companies, any forecast of forward results is little more than guesswork. Yet, the Company has noted that business pre-pandemic was on pace for record results. That said, the Company reports that the all-important China market is recovering. Store sales are recuperating, traffic has improved, and online sales are strong. The Company also reports that it has seen incredibly strong corporate orders (Macs) for work-at-home employees – a current pandemic trend that we expect to turn into a longer-term secular trend as companies significantly rationalize their existing office spaces.
The Company’s stock is weathering the pandemic exceptionally well. As of this writing, the stock is up a sterling +71% since the late-March lows and the Company’s market cap has reached $1.6 trillion.
From David Rolfe (Trades, Portfolio)'s Wedgewood Funds second-quarter 2020 shareholder letter.
