Apple: Great Company, But Can It Grow?

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Quick Summary

Apple is a technology company. The firm sells several well-known consumer electronics devices and related services. iPhone is its single largest revenue driver, delivering 50% of sales in 2020. Services, such as App Store app sales, subscriptions to Apple Music and Apple TV+, and extended iCloud storage plans, make up 20% of sales. Wearables, Home, and Accessories, which include Apple Watch, Apple TV devices, and HomePod smart speaker, account for 11% of sales. Mac laptop and desktop computer offerings are 10% of sales. Finally, iPad tablet computing devices make up about 9% of revenue. Apple is a global company, with over 55% of sales originating outside of the United States.

Does The Company Have Rising and Recurring Revenues?

SOMEWHAT. Apple has reached such an enormous revenue size where rapid growth becomes very difficult. Despite what are generally seen as good results, the company's revenue has still only risen about 6% annually over the past 3 years. Future growth will be driven by 2 things. New product introductions represent an opportunity. Its fastest-growing segment is Wearables and Home, which grew 25% in 2020. Entries into large categories like electric vehicles or virtual/augmented reality devices could drive meaningful growth. Continued build-out of its service offerings to leverage its large device base is the other opportunity. Services is Apple's second-largest grower, at 16% in 2020. On the recurring side, most of Apple's services are subscription-based, making them recurring sales. However, its product offerings (80% of sales) represent one-time, non-recurring revenues that are at risk of a replacement down the line.

Does The Company Have Durable Competitive Advantages?

YES. Clearly, Apple's primary moat source is its BRAND. We feel Apple enjoys both sides of the brand advantage. The "automatic purchase" aspect is clear in an 80% iPhone replacement rate (Mac has a similar number), and both iPad and Apple Watch dominating their respective categories (55% and 75% market share, respectively). It also enjoys the "premium pricing" aspect from its brand, with all of its products selling for higher average prices than competing offerings. There are also modest SWITCHING COSTS in effect here. Not all apps can be easily replaced when moving from iPhone to Android, or Mac to PC, and there is a learning curve to doing so that many consumers do not want to undertake. Changing some consumer services, like photo storage, can also be a pain.

GreenDot Rating: YELLOW

Apple is a classic case of a YELLOW (modestly attractive) business. The company, in some ways as an investment, is a victim of its own success, reaching such a massive size that generating out-sized sales growth has become extremely difficult. Some product categories it has not yet explored offer growth opportunities, but it will be expensive and uncertain if the firm can capitalize on them. Services are most attractive from a recurring standpoint, but Apple's success here has been hit-and-miss, with many of its services seen as inferior to competitors (Apple Music to Spotify, or Apple TV+ to anything!). To be sure, this is a great company that realizes its limitations and has done a good job providing shareholder returns with share buybacks and dividends. But growth limitations, a large portion of non-recurring revenues, and technological disruption risks keep it from reaching a GREEN rating.