Apple's financial growth and competitive position in consumer electronics

Apple

Company Overview

Apple Inc. is a designer and marketer of consumer electronic devices. The company's main products are the iPhone smartphone, the iPad tablet, the iPod line of music players, and lines of personal computers. The company is vertically integrated with respect to design, so it also has a significant revenue source from its software, most of which complements its devices. Apple has its design headquarters in California. The company operates retail locations in several countries around the world, including dozens of locations in the United States. Where there is no Apple retail outlet, the company uses third party retailers. Apple is also one of the world's largest Internet retailers.

Vulnerability to Financial Threats

The consumer electronics industry is heavily driven by new product development. The product life cycle is generally short, and must be extended with new product iterations every year or two. Consumption of consumer electronics is increasing globally, and rapidly. The companies that can deliver the cutting edge devices are the ones that the market is most willing to reward. The need for consumer electronics from consumers is very high, so there is demand for these products even during recession. Apple's two largest products -- the iPhone and the iPad -- rose to prominence during the latest recession. As such, Apple's financial condition has improved rapidly over the past five years. Revenue in 2008 was $37.4 billion, and in 2012 it was $156.5 billion. Net income in 2008 was $6.1 billion and in 2012 it was $41.7 billion.

This rapid growth in the company has translated to its balance sheet as well. The company's total assets have increased from $36 billion in 2008 to $176 billion in 2012. During that period, the company's liabilities grew from $13.8 billion to $57.8 billion, and the company did not add any long-term debt. The value of Apple equity has therefore increased significantly, from $22.3 billion in 2008 to $118.2 billion in 2012. The growth of the company has been so rapid that it has had little opportunity to plow that money back into new business ventures. Apple has instead kept most of its profits on the balance sheet in the form of long-term investments. These were worth $2.3 billion in 2008, and total the book value of these is $92.1 billion.

Given these figures, and the fact that they occurred during the worst recession since the 1930s, the only reasonable conclusion is that Apple's performance is based on new product introductions, and is not in the slightest bit affected by the external economic conditions. Interest rates are not a big factor, apparently. Moreover, Apple competes globally, and quite effectively if the numbers are any indication. Competition has reduced the company's market share in both smartphones and tablets (Satariano, 2013), but this reduced competition has not removed Apple's status as a superstar financial performer. Over time, however, if the competition launches products that are superior to Apple's, competition can have a negative impact on the company (Shaughnessy, 2013).

Stock Price Analysis

Apple is currently trading at $432.50. This is significantly down from its high but still gives the company a market cap of $406 billion, substantially more than the book value of its equity. This stock price gives Apple a forward price/earnings ratio of 8.33, which reflects the company's absurdly high EPS. The market, therefore, does not believe that Apple is going to experience significant growth. The appeal of Apple's stock price is therefore going to be in the company's willingness to pay out dividends with its massive cash pile, and with the proceeds from its lineup of cash cow products. As long as Apple pays a relatively small dividend, its stock price is mostly going to reflect how much growth the market sees in the company. Today, it is hard to see much growth, even if the current multiple is a little bit stingy.

At this point, an investor drawn to Apple would be one who believes in the current leadership of the company, specifically in its ability to develop another hit product. Without such a product, the stock performance is going to be lackluster -- it might not fall much but it will not rise much either. There is little to indicate one way or another what the new management team is capable of, since the last hit product came under Steve Jobs. As recommendations go, the biggest one is simply to continue making massive amounts of money. A new hit product would be great, but that is hardly something one can randomly recommend (I think every company would benefit from a hit product). Apple might serve its stockholders well to spend some of the cash it has on share buybacks at this point, to boost stock price and lock in returns for shareholders who might be willing to accept a small premium for their shares.

Works Cited:

Apple 2012 Form 10-K

MSN Moneycentral. (2013) Apple. Retrieved March 14, 2013 http://investing.money.msn.com/investments/stock-income-statement/?symbol=AAPL

Satariano, A. (2013). http://www.bloomberg.com/news/2013-01-23/apple-s-holiday-sales-miss-predictions.html Bloomberg. Retrieved March 14, 2013 from http://www.bloomberg.com/news/2013-01-23/apple-s-holiday-sales-miss-predictions.html

Shaughnessy, H. (2013). Will the Samsung S4 launch drive Apple's share price down?