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Could Apple’s share price bag its best annual performance in a decade?

This year has been a good year for Apple [AAPL]. With the exception of a dip in May, the tech giant has seen its share price rise steadily throughout 2019. The stock, which has climbed 6.2% so far this month to $266.37 (at close on 26 November), last week closed at an all-time high of $267.10. Apple’s share price is up 68.4% YTD, putting it on track for its best annual performance since 2009. By comparison, the S&P 500 is up around 25% in the same period of time.

 

 

Reporting its Q4 results at the end of October, Apple announced a year-on-year increase in revenue to $64bn and record earnings of $3.03 per share. The strongest performance came from the Americas, in which Apple reported more than $29bn in sales, while its services accounted for more than $12bn.

Tim Cook, CEO of the tech giant, highlighted accelerating growth in services as well as strong wearables and iPad sales (totalling a combined $11bn for the quarter). He also highlighted customer support from the new generation of iPhone, its AirPods Pro headphones, and the “hotly anticipated arrival of Apple TV+”, which launched at the start of November.

$64Billion

Apple's revenue from Q4 earnings

  

Combine and conquer

Since the first iPhone was released in 2007, Apple has become synonymous with the smartphone, dominating the market and providing it a huge customer base. Smartphone penetration in many countries is now up to 90%, Forbes reports. Meanwhile, and although figures are inexact, estimates put Apple’s smartphone profit share between 70% and 90%, according to Stratechery.

Unlike many of its competitors, Apple gained its dominance through its integrated operating system, iOS. Despite this originally flying in the face of conventional wisdom, which favoured “modularized ecosystems”, the benefits, as considered by Stratechery, have since included superior user experience, which in turn has helped to increase the chances of success of future products.

The system has also allowed Apple to corner the market. “What makes Apple so brilliant from a business perspective is that it has managed to, via hardware and software integration, earn monopoly profits in a way that would not normally be classified as a monopoly,” the Stratechery considers.

“What makes Apple so brilliant from a business perspective is that it has managed to, via hardware and software integration, earn monopoly profits in a way that would not normally be classified as a monopoly” - The Stratechery

 

A question of trust

This integration of Apple’s hardware and software, and the fact that only Apple products support iOS, also means Apple can cherry-pick what apps it features on its App Store, allowing it to charge a 30% commission. Apple is not the only one to benefit though, as developers have been able to piggyback off the App Store’s reputation as a safe place to download and pay for apps from, Stratechery notes.

However, there are also questions over the company’s ability to stymie competition and this, alongside its commission fee, has led to a tricky antitrust lawsuit for the company. In May, after eight years of back and forth, the Supreme Court ruled against Apple, greenlighting a class action antitrust lawsuit against the tech giant.

 

Market cap $1.202trn
PE ratio (TTM) 22.38
EPS (TTM) 11.89
Operating Margin (TTM) 24.57%

Apple share price vitals, Yahoo Finance, 27 November 2019

 

The crux of this was the claim by some iOS users that Apple was driving up prices through its App store “monopoly”, which Apple strongly disputes. The Supreme Court has not ruled on if Apple actually has a monopoly. Instead, its recent decision established that app buyers are direct customers of Apple, allowing them to proceed with their antitrust suit, according to The Verge.

 

Servicing the masses

Aside from potential legal headwinds, Apple could face headwinds in the wider smartphone market. In August, Gartner reported that global smartphone sales had continued to decline in the second quarter of 2019, while Apple’s market share declined from 11.9% in Q2 2018 to 10.5%.

This is where Apple’s burgeoning services offering comes in to play. “While much of the recent commentary on Apple’s strategy focuses on declines in smartphone sales, the company has been consistently ramping its services play,” Forbes explains, pointing to increasing sophistication in these services focussed on three key areas – content, financial services and wearables.

The thing underpinning all of this is an active consumer base. According to Forbes, the company has 1.4 billion active users across its portfolio. While well below the 2.5 billion active users Android is able to boast, only 10% of Android users are running the latest operating version as of May. “A fragmented Android ecosystem presents challenges for companies trying to create a set of services that operate on the latest versions of Android but spells opportunity for Apple,” the publication considers.

1.4billion

Apple's active users, according to Forbes

  

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