Apple made history on August 2nd, 2018 when it became the first US-owned publicly-traded company to reach a market capitalization in access of one trillion dollars. This is no small feat. Of course, Tim Cook insists it is just another milestone on the road to a brighter future. “It’s not the most important measure of our success,” Cook told Apple employees in an email after the event. “Financial returns are simply the result of Apple’s innovation, putting our products and customers first, and always staying true to our values.”
At $216.7 per stock as of 24th August, Apple’s stock market cap is now greater than the combined capitalization of Exxon Mobil, Procter & Gamble and AT&T. Apple shares constitute 4% of the S&P 500 index. So far, Apple shares have gained 23% in 2018, while the Dow Jones Industrial Average has only gained 3% and the S&P 500 has gained 6%.
How did we get here?
Most folks reach for the movies and documentaries on Steve Jobs for an overview of Apple’s history. Other than to watch an uncannily good performance by Fassbender as Jobs, the visual adaptations do not feel necessary to understand Apple’s success.
Apple was founded in the late 1970s by Steve Jobs and Steve Wozniak. They went public with the venture in 1980 after the success of the Apple IIs helped usher in the PC era. Job was driven out of Apple, but returned in the 90s to rescue the company from near bankruptcy. Since then, Apple has gained a firm foothold in the tech industry, selling its Macs and MacBooks. The iPhone helped usher in the current smartphone era.
The iPhone, introduced by Jobs in 2007, has sold more than one billion units and remains the most profitable smartphone product worldwide.
Cook, who took over as CEO following Jobs death in 2011, is no visionary. However, Cook played an instrumental role in streamlining Apple’s operations during Jobs second tenure with the company. He reduced inventories, offshored manufacturing to contractors and reached long-term deals for memory chips and other important components.
However, in the last decade, Apple’s innovations are sparse. iPhone sales slowed down in 2016 and Apple compensated by releasing increasingly expensive phones and introducing more accessories such as the Apple Watch. Pushing products such as the Homepod and new services such as Apple Music were economically great decisions but were not ‘out of the box’.
In the services sector alone, Apple is doing very, very well. In Q2 2018, revenue from services surged by 31% over Q1 to $9.5 billion. The expected annual revenue for FY2018-19 is $37 billion. Wearables sales, including the Apple Watch and AirPods, increased by 37% to $3.7 billion.
We are here. But what are the issues to deal with for the future?
Clearly, things are going swimmingly right now at the house of Jobs. But will it continue in the future?
Stagnant iPhone Sales
The most important issue is that iPhones sales have remained stagnant on an annual basis. Apple only shipped 41 million units in Q2 2018. This is partly due to smartphone saturation and fatigue. It is partly due to having far too many iPhone models on the market, at the same time. The iPhone 6S, SE, 7, 7 Plus, 8, 8 Plus and X– that’s seven different iPhones!
This is in stark contrast to previous lineups, which included, at most, three variants at any one point of time. There are significant price differentials and different features (such as dual cameras, bezel-less displays, and face ID), so the threat of product cannibalization is not yet serious. However, a fuzziness exists between the different product lines. This holds true for other product categories as well, such as MacBooks and iPads.
Products are not differentiated enough
A clear case can be made between buying the 12.9 inch iPad Pro and the 7.9 inch iPad Mini. But what feature will influence my buying decisions for the middle form the 9.7 iPad? Similarly, the MacBook Air remains hugely popular. But it is a heavily dated product, bordering on obsolescence. Meanwhile, the MacBook Pro’s current design continues to be divisive. It’s a stylish notebook but offers little power for users who need a little more bang for their (considerable) buck. Worldwide Mac sales were down by 5% to $6.9 billion compared to FY2017-18. iPad sales rose by 6% to $5.9 billion.
No future without China & India
China and India are the world’s two largest markets by population size. Mainland China accounts for around one-third of all iPhone users globally. Apple is a distant fifth in China. At 11% market share, Apple trails behind Huawei (19%), Oppo (18%), Vivo (17%) and Xiaomi (12%). According to Newzoo, as of July 2017, there were 243 million iPhone users from Mainland China. iPhones constitute 33% of a total of 728 million users. Apple’s market share in this huge markets needs a lot more attention.
Apple’s market share in India is even drier, posting a 3% overall market share. It leads the premium sub-category with around 47% market share, leading ahead of Samsung and One Plus.
Cook recognizes that Apple’s position in India needs a lot more focus.
“We continue to put great energy there, and our objective over time is to go in there with all of our different initiatives from retail and everything else. It’s a huge market and it’s clear that many people will be moving into the middle class over time, as we’ve seen in other countries.”
To Apple’s credit, the Cupertino based company posted great financial results in both South Asian countries: Indian revenues were up by 20%, and Chinese revenues were up by 21%. Is it enough?
After Apple, the four other biggest tech companies are locked in a tight race for second place. Right now, Amazon is a safe bet to become the second company to reach the trillion-dollar milestone. Apples enjoyed a 34% increase in market cap which outstrips the S&P 500’s 14% increase in the last 12 months. However, Apple’s numbers are pale in comparison to the gargantuan 85% increase by Amazon in the same time period.
Valued at $889 billion, Amazon is now the second-largest publicly-listed U.S. company. Alphabet and Microsoft follow closely at $856 billion and $830 billion, respectively. Google-owner, Alphabet’s stock rose 32 percent over the past 12 months and is up by nearly 18 percent in 2018. Together with Facebook, the five largest U.S. companies account for 15 percent of the S&P 500.
Huawei, in the meanwhile, leapfrogged Apple to become the second largest smartphone manufacturer worldwide, shipping 54 million units in Q2 2018. Huawei posted a 41% year-on-year growth. They built on the strong sales of the flagship, P20, and the strong performance of the Honor sub-brand, which contributed to two-thirds of this quarter’s sales growth.
Moving beyond milestones: Updated products, more services
Apple isn’t idle by any means. It’s set to release new iPhones this fall. This new lineup is rumored to include a much larger (and more expensive) version of the iPhone X. A cheaper alternative of the premium flagship may also be on the way. On the service end, Apple is investing a billion dollars into developing its own original library of television programming. Big names like Steven Spielberg, David S Goyer, and Oprah Winfrey are already attached to the projects, including an adaptation of Asimov’s Foundation series.
On the other products end, Apple is planning to update its earphones lineup. A pair of high-end headphones and Airpods with noise cancellation in 2019 will launch. Further into the future, Apple is increasing its focus on AR. There is speculation of its involvement in the self-driving industry. There were initial plans to build an Apple Car of some sort, but those ambitions may be on hold for more manageable pursuits. These may include a bid to create an operating system for self-driving cars or infotainment systems augmenting driving functions.
Another often overlooked segment where Apple is poised to win big time is its increasing dominance with Apple Pay. According to Juniper Research, the total number of OEM mobile wallet users will increase to 450 million by 2020. Apple is set to corner 50% of a market. That 50% is worth a whopping $300 billion in revenues. However, this road is not without competition, like it already faces from Alibaba’s Alipay in China.. It will face stiff competition from the likes of Walmart and Amazon in the US,
Whatever the case, it looks like Apple’s trillion-dollar train shows no sign of slowing down. Let’s hope the company will use its considerable market power and leverage to bring more exciting products and disruptive innovations down the line.