The Healthy Apple

Years of doubt and anxiety

– In April 2016, the famous investor Carl Icahn announced the sale of his stake in Apple, justifying the decision on the risk that it could be greatly affected by the situation in China.

– Icahn was for a long time optimistic about the company and its products, and considered selling the stock to be unthinkable, but he later retreated due to the fear of slowing growth of China’s economy and the possibility of its government imposing obstacles to doing business there.

– The famous investor said that he gained almost two billion dollars from his investment in the company’s shares, exiting his position while the market value of the company was around half a trillion dollars.

Icahn’s concerns were not unjustified. In the first quarter of 2016, Apple’s revenues fell for the first time in 13 years, due a decrease in iPhone sales by 16% year-on-year with the decline in demand in China.

The decline in iPhone sales raised great concern among investors as smartphone sales represented about two-thirds of Apple’s total revenue at the time.

– Despite falling sales and increasing warnings about the company’s future, Tim Cook, who took over the leadership after the death of its founder, Steve Jobs, in 2011, said that the prospects for Apple were very bright and promised there were “amazing innovations” in the pipeline.

The decline in iPhone sales continued as the company faced strong competition – especially in China – from cheaper phones such as Huawei, Xiaomi and others, in the first quarter of 2019 sales of the iPhone saw a record drop of 17%.

Despite a change in direction of the American company to reducing prices in China and offering cheaper phones to face the fierce competition, its market share in the smart phone market has continued to decline.

– In 2019, Apple fell to the third place in the list of the best-selling smartphones in the world, coming after Samsung and Huawei with the number of units sold reached 193 million units, compared to 209 million units one year ago.

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Services win the day

– Apple dealt with the decline in iPhone sales by offering lower-priced phones to compete with other companies in the lower price categories, in addition to raising the efficiency and features of its phones.

– But the real change was the shift from the iPhone’s domination of the company’s sales and growth prospects to increased importance for services, leading Apple to become a comprehensive provider of digital products.

– Apple has traditionally paid attention to the services sector, which included making digital content such as books, music, video clips and games available through Apple’s App Store, in addition to Apple Music, Apple TV and  iCloud among others, but focus and offerings have increased in the last few years.

Apple’s revenues from services increased by 16% during the fiscal year 2019 to record $ 46.2 billion, after growing by about 22% in 2018.

– Despite the novel coronavirus and the disruptions it caused to global supply chains, the company has been able to continue production and generate sales that exceeded expectations.

– In the third fiscal quarter of 2020 – the three months ending on the 27th of June – the services sector achieved sales of 13.1 billion dollars, compared to 11.4 billion in the same period a year ago. Cook announced that it had reached the goal of doubling the services sector revenues compared to 2016, six months earlier than planned.

Overall, Apple achieved revenues that far exceeded all expectations in the third quarter of the current fiscal year at $ 59.7 billion with increased services revenue being and important contributor.

The American company continues to achieve strong profits from its products such as the iPhone, iPad and Mac devices, as well as the successful services business.  At Apple’s September 2020 event the Company announced the long-awaited Apple One subscription service that allows customers to bundle Apple’s services into one monthly payment.  Apple One includes iCloud, Apple Music, Apple Arcade, Apple Fitness+, and Apple News+.   Traders and stock analysts have been waiting for Apple to offer a product bundle of this nature and it is expected to drive incremental revenue from services going forward. 

Apple’s move to increase service revenue has paid off handsomely and there are still new projects such as artificial intelligence and self-driving cars waiting in the wings.

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The Trillion Dollar Club

With the company’s financial results clearly growing thanks to the recovery in product sales and the acceleration of the services boom, Apple’s stock made a strong rally.

– Apple’s shares have risen by over 112% over the past year as of the end of the September 15, 2020 trading session, and now trading at $115 the March 2020 low of $53.15 due to Covid-19 appears to be well behind the Company.

– The company’s share also received support from the announcement of the decision to split the stock on the basis of splitting one share into four starting from August 31, in an effort to facilitate individual investors’ possession of the share, which is the fifth in the company’s history.

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– Apple did not release any new iPhones at the September product event, but most observers expect new or upgraded smartphones to be unveiled before the end of October.

It took the company 38 years since its public offering – December 1980 – to reach the trillion-dollar mark, but it took only two years to add the second trillion.

– At the beginning of August of 2018, Apple succeeded in reaching the trillion dollar barrier for the first time in the history of American companies, and after nearly two years and on August 19, it broker the two trillion barrier for the first time.

Currently, the market value of Apple is about 400 billion dollars more than its closest competitor – Amazon – and these two companies seem well positioned for continued growth into the future.

Obstacles on the way

The road to the third trillion may not be easy for the company, given that a greater rise in the share price needs to be justified by an acceleration of revenues for most business groups.

Apple also suffers from mounting regulatory concerns in several parts of the world regarding its dominant position in the smartphone market and its associated services.

Apple is facing investigations from regulators in Europe about its dominant position and whether it is pursuing a path that harms competitors, especially in the services sector.

Tim Cook was recently forced to defend the App Store implementation policy and the high fee structure it imposes on other companies before the US House of Representatives antitrust committee.

– Apple is already fighting a legal war with the company, Epic for video games, over the policies of App Store, after the American company decided to delete the game Fortnite from its digital store.

– Apple currently collects 30% of total revenues from App Store sales, but lawsuits may end up allowing developers to install games directly on the iOS operating system while making their presence through the App Store optional.

It will be interesting to see the future moves Apple will make to reach a three trillion dollar market cap.

Mohamed Shraka

Head of Business Development (EMEA)
mshraka@tvmarkets.com