ResearchThesis Strengthens on Apple

Thesis Strengthens on Apple

Jul 31, 2018

Apple posted strong fiscal Q3 results Tuesday, demonstrating the continued pricing power of the iPhone and the stickiness of the company's software & services ecosystem. At the after-hours price on Tuesday, it reached $995 billion in market cap and could shortly become the world's first $1 trillion public company.

The company grew its quarterly revenue and EPS by +17% and +40% year-over-year, in line with Wall Street estimates. Next quarter's guidance was also above estimates.

More important for Apple's future business and financial prospects is the complexion of that performance. Let's dive into how this quarter and management's guidance reflect Apple's two most fundamental moats: brand equity and network effects.

First, on the hardware front:

Many were hanging high hopes on Apple's flagship handset (the iPhone, which is 60% of Apple's revenue) and its climbing ASP. This quarter, the company delivered. The 41.3 million iPhones shipped during Q3 is basically flat from last year, but the average selling price of $724 is a notable jump. This bump is likely due to an increasing mix of the pricier iPhone X, which starts at $999.

Our main takeaway from this robust pricing growth is that Apple continues to improve its brand equity and expand its pricing power.

In a world of ever-increasing selection of lower-priced Android phones and already-high Apple penetration, Apple is undoubtedly seeing its iPhone unit sales growth slow. But the company is building digital services and a suite of other gadgets around the device. Those newer businesses, along with higher price iPhones, are widening Apple's brand equity and supporting continued pricing power and revenue growth. And pricing power, as Buffett often puts it, is the "holy grail" in investing.

Next, on the software front:

Investors have been watching closely as Apple ups its software and services revenue -- a catch-all category that includes the App Store, Apple Care, Apple Pay, iTunes, and iCloud services. This segment has been outpacing iPhone revenue growth for several quarters.

Apple positively surprised with $9.55 billion in software and services revenue this quarter (+31% growth). We think there's still tremendous opportunity left for growth in this sticky, high-margin app/developer ecosystem. The reason (and the moat): network effects.

As Apple acquires more iPhone users from a hardware perspective, it grows the distribution channel through which app developers sell/offer their apps. This is great for developers because it widens their consumer audiences, and it's great for consumers because it widens the selection of apps, software and other services to make the smartphone experience more rich and engaging. As each side of the network grows in size, so does the value that each side of the network gets out of it.

CEO Tim Cook said in January 2017 that the company hoped to double services revenue to more than $14 billion per quarter by 2020. That's almost 50% higher than Apple's current sales for that segment. Oh and it's a much higher margin business than iPhones too (because it costs almost nothing to plug a new developer into the App Store ecosystem, vs. the hardware that goes into an iPhone).

Finally, on the forward-looking guidance:

Apple expects Q3 revenue to come between $60-62 billion (+23% growth), edging out Wall Street predictions of $59.5 billion.

Recall that the company's recent quarterly results have been weighed down by concerns that it has saturated the smartphone market, marking the end of the iPhone "supercycle." The next quarter (fiscal Q4) is when Apple typically introduces new iPhone models -- usually in mid-September. Therefore, Q4 guidance is arguably the most important operating forecast that management provides to investors to gauge how the business and its product cycles will fare.

The company's strong guidance today suggests that multiple new hardware devices are coming in the fall (up to three new iPhone models). Per Tim Cook, "we are very excited about the products and services in our pipeline."

Overall, our thesis has become even stronger on Apple. Similar to Warren Buffett's investment case, we believe Apple is truly a consumer brand at heart (vs. a classic technology or hardware company). Steady-growing consumer brands not only warrant higher prices and profits over time, but they tend to command higher public market valuations (given the predictability and secular growth of their earnings) than the hardware companies (which tend to be more cyclical, harder to predict and more susceptible to commoditization/price erosion from competition).

At only 14x P/E on Wall Street's 2019 earnings estimates, AAPL still appears too cheap for a growing consumer brand with pricing power and network effects.

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

InstagramTwitterYoutubeLinkedIn

© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.