Apple - The Most Powerful Brand In The World
India, Services, Buybacks & Vision Pro will Power Apple Forward
Apple’s First Store In India - Mumbai
I’ve never been an Apple fanboy. And while I cannot use any other laptop but Apple, I could never get comfortable with the iPhone. I tried the iPhone 6S in 2015 and switched back to Android quickly. Recently, I have considered switching back to Apple again primarily because of the Apple Watch and the Noise Canceling AirPods but haven’t yet.
Anyone who had doubts about Apple, has had to reconsider their stance given the dominance we have seen from Apple in the last decade. Even though Android has closed the gap on mobile phones quite a bit and in fact even leads Apple with some of its features, Apple’s Brand seems untouchable.
Apart from making excellent, cutting edge, high quality, stylish products, Apple also has probably the best management team out there under the guidance of Tim Cook. Known for its supply chain, Apple has also had what is widely acknowledged as one of the best marketing strategies ever, Privacy.
America loves Apple and for most of the developing world, Apple is a status symbol. In this article, I will share some of my thoughts on why I think Apple is a buy today.
I will also touch upon Apple's services business and its margin profile and close with my POV on Apple Vision Pro.
Apple in America:
Around 2014-2016, I was quite bearish on Apple. Android phones with the Nexus line from Google and multiple lines from Samsung had closed the gap with Apple in terms of usability, hardware, OS, etc…Also as mentioned earlier, Android had some features well in advance of Apple like NFC, etc…
A lot of my bearishness was based on the price of the iPhone compared to Android. My assumption was that there wasn’t much differentiation with phone hardware anymore. You could get a high end android phone with similar or better specs than an iPhone for a lower price.
And in software, Android actually seemed further ahead. No way someone will choose to get an iPhone and pay 50-100% more for it.
But that is not what happened. And the reason is that Americans don’t pay for iPhones, the telecom giants do. So the price does not matter to the customer. But for Apple, that means bigger margins.
This basic, obvious fact makes the price of an iPhone almost irrelevant in the US, Apple’s biggest market.
This is also probably why Apple keeps selling so many more Max Pro whatever and no one ever downsizes, no matter the price.
Change is hard:
Once we get past the first 5-7 years of using IOS or Android, most people, I believe, are stuck to what they started with.
Maybe IOS is indeed great but I didn’t like it because I got used to Android.
So once we get past the first few years, things get sticky. Now, even if people want to, switching isn’t that easy.
A lot of people who are already on Apple are likely to stick to Apple and as time passes, they are buying more and more digital goods or they are buying their goods digitally.
Apple in the Developing Markets:
In developing countries, like in India for example, Apple is a status symbol. Most people who can afford it, have it and a lot of the ones that don’t own it, it’s because they can’t afford it, yet.
My point here is that there is no lack of demand.
Additionally, given the high price point, Apple users, in developing economies, are often higher income earners and therefore, have higher disposable income, which leads them to buy more services and make more in-app purchases.
Studies show that on an average, iPhone app users earn something between USD 50,000 to USD 85,000 per year. On the other hand, Android users have an average income between USD 35,000 to USD 60,000 on an average.
Source: AppMySite
Privacy:
Apple’s entire Phone, Watch, and AirPods business is centered around IOS. Apple’s biggest competitor is Android. Apple’s primary marketing strategy is ‘Privacy’ and it is one of the most genius moves in marketing because not only is it one of Apple’s core values. It is exactly the thing that hurts its competitor, Google, the most.
I also believe that Privacy is one of the core human values and a company that aligns itself with such a core human value will have an easier path to success.
Most people who use apple products, love apple products and would rather use everything provided by Apple if possible. They have no intention to switch and given the price range of apple products, these are usually higher income users.
Google is the biggest competitor for Android and ads but Samsung for devices is the only real threat to Apple in devices.
Apple <> India
In recent years, Apple’s gaze has turned to what is now the most populous country on this planet, India. Apple recently opened its first flagship stores in India in Mumbai and Delhi (Prior to this iPhones were sold through joint ventures).
I think Apple’s arrival in India, both its flagship retail as well as its manufacturing units is a landmark move for both Apple & India. For Apple, it’s obvious, India is likely going to be the next big market of iPhone buyers with India GDP growing 8.7% in 2021 and now the 5th largest economy in the world. India's per capita income is still quite low but India’s middle class is growing fast.
Watch Ray Dailo compare India to China in 1984: “India is where China was in 1984, Modi is Deng Xiaoping”.
So Apple needs India.
And from India’s perspective, Apple, the world’s best and most valuable company setting up manufacturing in India is a huge vote of confidence in India’s growth in manufacturing and its arrival on the world stage as a western friendly, democratic ‘factory of the world’. (Even though I think India does and will continue to play a larger part in the services sector for the world, specially IT, given a lot of manufacturing is done increasingly using robotics these days).
When a company like Apple sets up manufacturing in a region in India, that region over the next few years is going to become a manufacturing hub for mobile phones and other technologies. Entire supply chain ecosystems will come up in that region to support the industry. So, Apple’s willingness to bet on India is massively accretive to India too.
It’s a win-win relationship for both.
Here are some recent headlines underscoring the growing relationship between India and Apple:
Apple gains as Morgan Stanley sees India as next big market - Link to Seeking Alpha News Article - July 17th, 2023
Apple reportedly in talks to bring Apple Card, Apple Pay to India - Link to Seeking Alpha News Article - June 23rd, 2023
Can India become a new China for Apple? - Bernstein - Link to Seeking Alpha News Article - Monday, May 22nd, 2023
Apple opens its first store in India, building out consumer base - Link to Seeking Alpha News Article - Mon, April 18th, 2023
Apple's India push is 'strategic poker move' that could boost revenues - Link to Seeking Alpha News Article - Mon, April 17th, 2023
Apple is Luxury
Smartphones are essential and literally something you carry everywhere. Not only does it need to work perfectly, it has to look great. I, in fact, think that this is the biggest flaw in the Pixel lineup. Until recently, the pixel phones looked very basic. I think phones need to be ‘Sexy’ and I think the iPhone has always delivered on it, with its aluminum casing in the beginning to titanium now.
Apple, while a tech company, should also be compared to LVMH or a Ferrari:
Apple has evolved from a tech company into a full-blown aspirational luxury brand.
Apple has a habit of steadily growing market share and coming to dominate every product category it enters.
Source: Seeking Alpha Opinion Piece Apple - Dividend Sensei - May 13th, 2023
Services, other Apple Products Over iPhones:
In November 2018, Apple said it will no longer report iPhone sales numbers.
(Apple CFO Luca) Maestri said the number of units Apple sells each quarter is “not necessarily representative of the underlying strength of our business.” He added that “a unit of sale is less relevant for us today than it was in the past, given our breadth of our portfolio and the wider sales price dispersion within any given product line.”
Source: CNBC - Nov 1st, 2018
This is a classic “Don’t Look Here, Look Here Instead”. Apple could see that the iPhone unit sales are starting to mature and that they need to get Wall Street to focus on EPS instead. As Maestri mentioned in his quote above, Apple’s “breadth of our portfolio and the wider sales price dispersion within any given product line” meaning, while customers come for the iPhone, their lifetime value to apple is much higher when take into consideration AirPods, the Apple Watch and the ever growing services revenue.
Source: Statista - Aug 2023
In the graph above, you can clearly see the green starting to take more of your screen as you move from left to right.
The reason services revenue is so important is because it is a higher margin business.
Apple’s services’ segment margin was ~72% in fiscal 2022 compared to Apple products' margin of 36% last year.
Source: The Street - July 6th, 2023 (Paraphrased)
Apple’s overall margin has also been climbing in the last few years owing to services increasing as a percentage of total revenues.
Source: Statista - Aug 2023
Buybacks:
Additionally Apple is a buy back machine. In 2013, they switched the buy back switch on and they have not looked back since.
I care about unit growth and revenue growth to the extent that it is a sign of business health and further headroom to grow. In Apple’s case I have already shared:
How emerging markets like India will play a huge role in unit growth
Apple's growing breadth of product portfolio, makes the iPhone a gateway drug of sorts leading to higher customer lifetime value over time.
Services growing fast which is a higher margin business
And that leads us into our last bullish note: Apple Vision Pro
Vision Pro:
I purchased a new laptop in July 2023. It is a 14 Inch Mac-Book Pro and I paid over $2200 for it. As is obvious it comes with one 14 inch screen and it costs more than half of what a Vision Pro would cost me.
Now, I am going to lay this down from my perspective, I am sure there are many other ways to make this case. But here is why I think it is a good deal.
I think a $3500 price tag is reasonable and maybe even cheap for the value the Vision Pro will deliver.
As a content creator, photographer, videographer, it would be an absolute dream to have a massive screen to edit on. But then travel is essential to me too. So I don’t always have the luxury to have a large screen to edit my videos on which makes life a little bit difficult.
As you can imagine, The Apple Vision Pro solves that problem for me.
However, as a video editor, I also often need more than one screen to work on. With the Vision Pro that issue is resolved to. I could work with 3 or more screens at the same time, rather conveniently and each one of those screens can be massive.
Not to mention, I am movie buff and can’t wait to experience movies and sports on the Vision Pro.
I have not put too much thought into the Vision Pro, these are just very obvious use cases that I can see and I find it ridiculous when people say that $3500 is too high.
Compute is changing, thanks to Nvidia, Computing interface is changing thanks to Apple and Neurolink (in the longer run). We are in a brave new world, and I think The Apple Vision Pro is a step in the right direction.
Apple Car:
Apple car is another wildcard on the horizon and while I don’t think it is weighing into my decision to buy Apple today, it is something I am looking forward to. Just that I don’t think the stock will be at $175 when we get close to an Apple Car unveil.
China:
The biggest risk to my bull case for Apple is and remains China. Apple and Tesla’s exposure to China bothers me quite a bit. While I don’t think the Chinese people would actively choose to use a product that is generations behind the latest and greatest from Apple, one cannot account for the risks associated with one man’s feelings. As such, I am actively looking for ways to reduce exposure to China.
I sold out of my $KWEB position last week to reduce China exposure and might eventually sell out of $KGRN too. $KWEB was always a trade for me and when I felt like I needed to reduce China exposure, I felt more comfortable taking off core China positions as opposed to selling the best companies in the world.
$KGRN is harder because investing in green energy is one of my core bull thesis and China runs the renewable energy show as things stand today. However, with the US now taking a leadership position in the global race to decarbonize, I am open to the idea of letting go off $KGRN too but have not pulled the trigger just yet.
My Positioning:
My positioning in Apple is at 65% to target based on equity and I am continuing to add to my position below $175. I have a much larger position in Tesla and if I were to look to reduce China exposure further, I would start with KGRN, followed by Tesla before I get to Apple.
“Own it, don’t trade it” - Jim Cramer on AAPL 0.00%↑
Borrowed Conviction Rarely Works
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
I reserve the right to change my mind if the facts change.
Disclosure: We own positions in some/all of the tickers mentioned in this article.