Mar 02: Hey Apple! What’s next?

Today I will summarize all the analysis on Apple that I read in Finimize Premium. Finimize and Quartz are the best newsletters on business updates and analysis/strategy to me.

The State of Play

1. iPhone performance 

• More than 900 million active users today.
• Gross margin (excluding corporate costs) is 40% – very high.
• “Still” bread-and-butter. However, sales are declining. Apple compensates by increasing price.

2. The reasons for falling sales

• Saturation. Penetration reaches 70% in most developed countries. 
• Longer life cycle due to plateauing innovation and improved battery life.
• Heightened competition from Samsung, Huawei, Xiaomi,…

Apple’s Services scenario

1. Why is this segment potential? 

• Apple has a captive market: 1.4 billion devices in active use worldwide which it can sell to.
• Apple is doing well on Services: $46B revenue in 2019 is even bigger than total revenue of Oracle, one of the largest software companies in the world

2. How can Services save Apple?

• Its revenue may offset iPhone declining sales
• It may bring a higher valuation multiple:

(1) Hardware sales can be seasonal and cyclical, why software sales (esp subscription services) are consistent and predictable

(2) It is usually costlier to make and sell hardware

(3) Global supply chains are at risks of disruption: US-China trade war & Coronavirus

• Higher profit margins: Services ’s gross margin is 64% compared to ~34% in Hardware        

3. How can Apple grow its services enough?

      To be a “software” company, >50% of its profit need to stems from Services, which is:

• $5.50 average revenue per user/month (current: $2.75)
• $46B revenue added
• $18B profit added (margin after tax, interests,.. is assumed to be 40%)   
• Value $450B in 5 years (valuation multiple 25x of software companies)
• $280N discounted to today (10% discount rate)

It seems a “fair” estimation as Apple has a diverse Services portfolio: Apple Music, Apple TV+, Apple Arcade,… What about bundling all of them in one package, like Amazon Prime?

But, what will change the world again?

Most products go through a life cycle made up of four stages: introduction, growth, maturity and decline. Apple introduced the iPhone when the IPod was in its mature stage. Now IPhone is on its decline, what will be the successor? Maybe NOTHING

Apple has made a couple of endeavors already:

1. Current bets

• Apple Watch: Introduced in 2015, IPhone’s peak. For the last 4 years, Apple sold 20-25m annually, far from 200m IPhone
• Virtual-assistant market: HomePod, failed to compete with Alexa
• Airpod: successful, but low price lead to low revenue compared to IPhone

These streams only accounts for a minuscule fraction of Apple

2. Future products

• Project Titan (EVs): Apple acquired Drive.ai, working with Volkswagen, and hired formed Tesla chief engineer to work on this hidden project
• VR and AR. Apple is reportedly working on both and will launch Apple Glasses in 2022 pr 2024

Rough estimations for these projects: Valuation = Revenue * Revenue multiple

• EVs:  500,000 cars (10% of 2025 market) * $50,000 each= $25B Revenue *2.5 (Tesla multiple)= $63B in five years’ time
• AR/VR: 20% market share (same with IPhone now) *$80B total market (estimated by GS in 2025)= $16B *4.5x (industry multiple)= $72B in five years’ time

=> Total: $135B in five years -> $84B in 2019 (10% discount rate)

While this is still a very optimistic view for Apple in still-fledgling markets, it’s still far cry from the market valuation of $1.2B today.