Apple's Catalysts for Future Growth In The Next Decade & Key Risks.
Updated: Apr 17, 2022
Table of contents
Catalysts for Apple’s future growth and to continuously strengthen their moat
(Bonus): Apple products, literally the easier choice for shoppers.
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
1. Catalysts for Apple’s future growth and to continuously strengthen their moat
a. Technology & Innovation
Tech specs innovation
The Apple M1 chip released on November 2020 was a revolutionary technological feat achieved by Apple.
It has enabled a killer combination of performance and stellar battery life.
All while cheaper than its Intel counterpart.
This game changing piece of technology sets the path for Apple to target to the larger market with their now more affordable yet performance-superior computers.
It will be similar like how Tesla started out with the targeting premium vehicle buyers with their Roadster and Model S range,
But their subsequent Model 3 has really revolutionized the field of endeavour for the company since it allowed them to reach to the mass market with an electric vehicle that is cheaper and yet superior compared to the alternatives in terms of engineering performance.
The Model 3 became a clear and easy choice for the consumers whenever they are looking to purchase a new vehicle.
The same can be true for Apple’s computer range with their M1 chip,
And their computer chip technologies are expected to continuously improve in the future.
Innovation through understanding customers' importance on privacy, and setting the industry standard for other players to follow suit.
The late Steve Job was popular for having a knack delivering products which were slightly ahead of the time, but customers would come to fancy them.
Since Jobs, Apple's decision to ensure their products provide good digital privacy protection for their users was very innovative business strategy which helps set them apart from their competitors.
As the world is becoming more digitalised, the world may have not been aware of the repercussions of getting their personal information exploited yet since this is something intangible,
but Apple's move to highlight the privacy protection abilities of their devices,
definitely induced the other players in the market to follow suit in order not to miss out on the market share.
b. Brilliant Pricing strategy- Apple to continue charging premium prices for their iPhones
Although Apple has done a great job in bringing down the prices of their more products ranges which are more essential for productivity and education tasks (like their computers and tablets),
It is a good strategy for them to maintain or even continue to increase the premium prices of their iPhone devices.
Reducing the prices of their computers and tablets are merely a part of their customer acquisition strategy to entice more people to buy their other products, such as their premium priced iPhones.
Here are few statistics to be aware of:
i. On average people around the world are willingly spending more money on their smartphone devices.
ii. Whereas the price of desktop personal computers is on a downward trend
With less expenditures on personal computers, this leaves more room for consumer spending on other electronic devices like their phones & tablets too.
iii. We are also spending way more time on our smartphones compare to our computers, and the gap is expected to widen in the future.
iv. As mentioned in Part 2's article, Apples’ products are perceived to have better quality and are more highly promoted by their customers and employees compared to other smartphone brands.
v. And Apple products also have very high value for money rating (meaning customers do not really perceived their products to be expensive).
All these five points connected together indicate that there is a high probability that Apple’s customers (current or prospective ones) have lower reluctance paying premium price for smartphones as long as they continue to provide value for them (quality, improved privacy protection, great Brand, great technology, etc.).
Hence Apple does not have to worry that people will stop buying their iPhones if they maintain or continue to increase their prices at a reasonable market rate.
Bearing in mind, it is one of Apple’s ultimate objective to get as many customers into the ecosystem as possible, which will make it difficult for them to leave once they are in it.
To illustrate why maintaining their iPhones at premium price ranges may be constructive for Apple’s goal to entice more users into their ecosystem.
(Group A & B): How owning one of these Apple products entices customers to purchase more of the other product ranges.
For simplification, there are 2 groups of Apple customers:
Group A: Customers who already own an iPhone, but do not own an Apple computer nor iPad.
Group B: Customers who do not own an iPhone yet, but already own an Apple computer and/or iPad.
(Note: With Apple’s M1 chip and Apple Education promotion programs,
The amount of people in Group B are expected to increase in the future since their computers and tablets are now more affordable.)
Now consider the scenario when both groups are looking to purchase/ upgrade additional electronic devices apart from their existing ones.
This strategy works because it will make it easier for iPhone users (Group A) to justify buying MacBooks and iPads which cost less than their phones for them to start enjoying the Apple ecosystem.
And for customers who already own the Macbook and/or iPads (Group B),
it is justifiable for them to complete the ecosystem by purchasing a premium priced iPhone because they have already spent a significant amount of money on their Mac computer and iPad.
Once both Groups are locked into the ecosystem, it will increase their tendency to purchase other Apple accessories like the Air pods and iWatch,
locking them further into ecosystem and increasing Apple’s top line.
Not having to reduce their iPhones prices will also allow Apple to continue to maintain their high profit margins given that iPhones’ sale contribute up to 50% of company’s revenue.
iPhone SE 3rd Generation (now users can enjoy great iPhone performance at an affordable price)
In Apple's Peek performance event in March 2022,
they revealed that their iPhone SE (budget range) models will now be utilising A15 Bionic chip,
which is the same chip used in their highest end iPhone models.
This makes iPhone SE one of the most powerful smartphone out in the market today,
sold at an affordable price, which is expected to capture more market share from other smart phone manufacturers out there,
further increasing the amount of people who fall into Group A (as illustrated above).
c. (Concept 1): Apple Glasses
Up till this point there has been a-lot of speculation on the development of Apple Glasses,
and it is expected to be revealed by end of 2022.
Since this is purely a speculation at this point,
I will not dwell on this topic for now.
However if Apple really does succeed in this project,
it will inevitably act as a huge catalyst for the company's growth,
given the rise of Metaverse industry.
d. (Concept 2): Project Titan
Similar to Apple Glasses project,
Another exciting project which Apple fans and investors can look forward to is Apple’s Project Titan- where they venture into the Electric Vehicles industry.
Although there is limited information disclosed by Apple at this point, and production is expected to start around 2024,
the electric vehicle is a huge addressable market up for grabs and it makes sense for Apple to venture into it since they have an edge when it comes to software, design and battery technology.
A car is also a sensible component to be added into the Apple's ecosystem for its users,
as it will make Apple products more prevalently used in various areas of our lives.
This is likely why Google wanted to get car making space too.
4. (Bonus): Apple products, literally the easier choice for shoppers.
One thing which we may notice when we shop for new phone/ computer for most brands,
is that there is an overabundance of variety to choose from from the same brand provider.
As a result, their model numbers/ names end up looking like cryptic codes because there are way too many models to keep track of.
And don’t even get me started about the Laptop’s model names and numbers..
· Lenovo IdeaPad L3i (15) 82HL0010SB
· Asus ZenBook 13 UX325EA.
· Dell G5 15 SE 5505
· Acer Aspire 5 A514-54G
· ThinkPad 14-inch T490
· Lenovo Yoga C930
· Asus ROG ZEPHYRUS G15
As a vendor, giving customers and overabundant of choices to choose from can lead customers into a state of analysis paralysis,
causing decision fatigue when they are looking to purchase from them.
What Apple has done so well is that they limit the varieties of their product ranges.
And keeping their model names clean and simple (be it phones, computers, tablets, or headphones) so they are easy to remember and recognizable.
The genius and simplicity of Apple products model naming methods, making customers smarter and enabling better decision making.
Simplifying the process of their customers when they are looking to buy or upgrade their devices.
2. Keyrisks
a. What if Apple could not keep up with the latest Smartphone technology trends and the iPhone becomes irrelevant?
Because iPhone sales contribute up to 50% if Apple’s total Revenue,
If the smartphone technology evolves at a rapid rate and its main form factor evolved (i.e. to flexible screens forms) resulting in the Slate phones (which is the form for majority of the phones in the market now[54]) becoming outdated.
And if Apple still has yet to keep up with the market changes by then, they will be left behind and lose their position as one of the leading smartphones seller in the market.
(Similar to how Apple took away the majority of Nokia’s market share in the past, when they launched the iPhone, a device which moved the market trend away from keypad to touchscreen phones)
Unlike the luxury brands apparel industry,
Cutting-edge technology capabilities are important in the electronic devices industry for the players if they are to remain relevant and continue to thrive in the industry.
So, if Apple fail to innovate fast enough, they may be made obsolete and Brand power alone will not be sufficient to justify customers’ decision to continue using their products at that point.
For Apple to continue to enjoy their position as the leader in the marketplace, maintaining their technology competitiveness is a must.
(Case): What happened to Blackberry when they failed to keep up with the latest phone technology in the market.
The Blackberry 9780 released in 2010 was an immensely popular choice amongst customers.
And Blackberry company had a very strong brand and group of loyal customers at that point too.
However, ever since the first iPhone was released in market, many other phone manufacturers like HTC, LG and Samsung followed suit and started manufacturing their own versions of touch screen phones. [55]
Blackberry on the other hand, could not keep up with the technology trend and failed to produce a touch screen phone which was as user friendly as the ones in the market.
And within a short few years’, their once loyal customers who stood by the Blackberry brand and swore by their signature physical keyboard design eventually relented, abandoned the brand and succumbed to other companies’ touchscreen phones which were clearly more user friendly and had more advanced features.
And today Blackberry is no longer in the phone business.
Things Apple investors should monitor
Here are some of the things which investors can monitor to get a gauge on how Apple R&D efforts and technology competitiveness fare against their peers in the industry.
(Things to monitor 1): Returns on Research Capital (RORC)
Keeping an eye on Apple’s returns on research capital (RORC) vs their peers’.
Returns on Research Capital (RORC) measures how competitive is a firm’s R&D efforts and how effective they are in generating revenue for the company in the future.[56]
RORC is calculated by dividing current gross profits by the prior year's R&D expenditures.
If a company’s RORC is consecutively higher than their peers, it is a good sign.
One important thing though, is in order for this ratio to show meaningful result, the company must be continuously increasing their Research and Development expenses on year-on-year basis.
Apple is showing to increase their R&D expenses on a consistent basis throughout the years, hence the RORC ratio can be used on Apple. (Chart source: wallstreetzen)
[How does Apple fare against their peers?]:
Apple seems to be faring well against their peers in this area, this can be one of the indicators that their R&D efforts are paying off well.
Although Dell’s RORC is as high as Apple’s,
it should not be much of a concern for Apple stock investors since Dell are more focused on the computers and not on the smartphones market.
Also, Apple’s new range of computers with the M1 chip are expected to gain more market share from other computer manufacturers in the span of next few years.
(Things to monitor 2): Is the Technology department a main focus for Apple’s Human Capital?
When we take a look at Apple’s hiring categories pie chart below,
We can see that their opening jobs they are looking to hire comprise of mostly Technology related positions,
which is a good sign because it indicates that this is a department of focus for the company.
It is also helpful to compare this with their peers in the industry to get a better picture.
Samsung on the other hand places has less than half of their recruiting positions focusing on Technology related roles.
Furthermore, it is a promising sign to see that Apple is steadily increasing their employees’ amount,
which is a sign that the company is expanding and growing.
In oppose to Samsung which is decreasing their number of employees over time.
(Things to monitor 3): Does the management place high importance in upholding a culture of continuous innovation across the organization?
It is without a question that the late Steve Jobs was a phenomenal innovator and he had a knack for creating product designs which provided the best user experience possible for Apple’s customers.
Although Tim Cook has been a great leader for Apple since Steve Job’s passing,
Cook shone as a excellent manager for the company, probably a better manager than Steve Jobs ever was.
However, he will probably not become as great of an innovator that Steve once was.
So, it is extremely important that Apple’s future leadership be placed in the right hands of someone who can excel in both areas of innovation and management when Tim Cook retires.
Read this article on the importance continuous innovation if companies are to not only survive but continue to thrive in the marketplace.
and this article by Harvard Business Review on how Apple's organizational structure is organized for innovation.
(Silver lining): Apple’s product segment sales trend indicate they are reducing their reliance on iPhones for their company’s sales.
Although Apple’s iPhones’ sales are showing to be in an increasing trend,
Their iPhones’ sales are contributing less to the company’s total revenue overtime.
This is a good sign since it shows that their other business segments are growing at very robust rates therefore reducing Apple’s reliance on their iPhones for sales.
b. Antitrust laws threats
Because of Apple’s dominance in the marketplace,
They will be falling under constant scrutiny of policymakers making them susceptible to antitrust threats.
As the government would like to prevent monopolistic behaviours by these companies and encourage competition in the marketplace so the consumers as a whole will benefit.
So, in the event if Apple is threatened by such Antitrust policies, it may affect some of their revenue segments.
Disclaimer:
This is not a buy or sell recommendation,
The objective of this article is to provide some new insights/ ideas and help readers improve their investment analysis process.
There are many other factors which are not covered here, ie company valuation, quality of management, supply chain analysis etc.
Please do your own due diligence before making any investment decisions.
If you are looking for Strategies to discover companies you can add into your portfolio which will likely continue beating the market over the long run, check out this article here.
Endnotes:
[54] Wikimedia Foundation. (2021, July 22). Form factor (mobile phones). Wikipedia. https://en.wikipedia.org/wiki/Form_factor_(mobile_phones)#Brick.
[55] Top 10 most popular cell phones of 2009 (photos). CNET. (n.d.). https://www.cnet.com/pictures/top-10-most-popular-cell-phones-of-2009-photos/5/.
[56] Frankenfield, J. (2021, May 19). How Return on Research Capital (RORC) Works. Investopedia. https://www.investopedia.com/terms/r/return-on-research-capital.asp.
[57] Gilbert, B. (2021, April 5). Apple CEO Tim Cook says he doesn't expect to be running the company a decade from now. Business Insider. https://www.businessinsider.com/apple-ceo-tim-cook-unlikely-to-stay-10-more-years-2021-4.