Apple Inc. Investment Analysis: Financial Performance Review

Introduction to Apple Inc.

Apple Inc. is an American multinational company specializing in designing and producing mobile telecommunication devices, including the iPhone, Apple TV, Apple Watch, iPod, computer software, and computer hardware. Apple was incorporated and publicly registered in 1977. Headquartered in California, Apple is one of the most successful American companies in terms of revenue, with annual revenue reaching $233.7 billion at the end of the 2015 fiscal year. In February 2016, Apple recorded $521.3 billion in market capitalization. While Apple designs the bulk of its products in the United States, its manufacturing plants are located in China. Apple also operates in Europe, Japan, Canada, and Latin America (Apple Inc., 2015).

Board of Directors and Corporate Governance

Apple Inc.'s Board of Directors is overseen by the company's CEO and other senior management. The Board oversees day-to-day operations and ensures the long-term interests of shareholders. Apple's Board also takes a proactive approach to setting ethical standards by maintaining a high level of ethical responsibility. According to the 2015 annual report, the Board of Directors consists of eight members. Shareholders annually elect Board members based on their competencies, attributes, and experiences. The Apple proxy statement provides biographical data, experiences, and attributes for each Board member, as well as information regarding the Board member selection process, the composition of committees, and committee charters (Apple, 2015).

Apple's Board believes in using its current leadership to achieve the company's objectives and in enhancing corporate governance by periodically reviewing the leadership structure to meet shareholders' interests. The Board is composed of leaders with diverse backgrounds in finance, risk management, and senior leadership. Apple has established several committees to monitor the activities of its Board members (Adjaoud & Ben-Amar, 2010).

The Audit and Finance Committee is responsible for monitoring and overseeing Apple's financial statements and other financial information. The committee ensures that financial reporting complies with legal, ethical, and regulatory requirements, and it also oversees internal control systems and data security (Mukherji, 2002). The Compensation Committee reviews and approves compensation for the Board and the company's executive officers, administers equity compensation plans for Board members, and performs other duties set forth by the company charter. The Nominating and Corporate Governance Committee implements periodic reporting on the selection, identification, and qualification of Board members and makes recommendations for competent candidates. The Governance Committee also advises the Board on critical matters and recommends modifications to policies as deemed appropriate and assigned by law (Kotler & Keller, 2012).

One of the strengths of Apple's Board lies in the leadership skills of its members. For example, Tim Cook, the CEO, has accumulated extensive experience in strategic global operations, including a wealth of knowledge in supply chain management and product inventory. Other Board members also bring relevant working experience. For example, Luca Maestri, Apple's Chief Financial Officer, has more than 25 years of experience as a finance and corporate controller and has been a global leader in building finance teams for various international companies. The working experience and advanced educational qualifications of the Board's members have helped Apple record superior financial performance year after year.

Another strength of the Board is the performance and composition of the Audit Committee. The Audit Committee helps the Board implement ethical financial controls, ensures compliance with GAAP financial requirements, and implements risk management processes at the enterprise level. The Board also sets appropriate internal control systems to ensure the organization complies with the findings of internal and independent auditors.

Despite these strengths, one shortcoming of the Board is that Tim Cook has not been able to replicate the unique leadership style that Steve Jobs left behind. Steve Jobs' legacy remains the core of the products and services that continue to drive Apple's revenue. Apple Watch, which was the first major post-Jobs release, has yet to fully impress customers. Moreover, the iPhone 6 Plus was largely a design iteration of previous iPhones rather than a groundbreaking innovation. Apple would benefit from expanding its Board membership to include more visionary members capable of sustaining the company's revenue growth.

Ethical Concerns

Apple's Board has attempted to implement ethical standards across all countries in which the company operates by encouraging employees to uphold appropriate ethical conduct. Apple's main principles are based on respect, honesty, integrity, compliance, and confidentiality — values that have served as the company's code of business for more than two decades, both inside and outside the United States. The Audit Committee has further enhanced ethical standards by ensuring that Apple's financial reports are free of fraud. The Board also conducts factory audits and adheres to the "Supplier Code of Conduct, which is one of the strictest in the industry" (Apple, 2015, p. 1). Apple provides support to suppliers to help them operate effectively, sets standards that all suppliers must meet, and holds suppliers accountable for the products they supply. The company may refuse to do business with suppliers that do not abide by its code of conduct.

Despite these ethical standards, Apple has faced some ethical issues that have affected its reputation. Some iPhone users have complained that their devices collect user location data, which has been identified as an infringement on consumer privacy. Although Apple announced that users can disable this feature, some devices reportedly continued to collect location information even after the feature had been disabled.

Financial Analysis: Apple vs. Microsoft

Apple operates in a highly competitive business environment. Its top competitors include Samsung, Microsoft, Hewlett-Packard, Dell, and Nokia. This analysis selects Microsoft as Apple's primary competitor for competitive analysis purposes. Microsoft Corporation is an American multinational company specializing in the manufacture and marketing of smartphones, computers, software, and computing devices. Both Apple and Microsoft are listed on major U.S. stock exchanges and raise funds by selling shares to the public (Microsoft Corporation, 2015).

Apple performed better than Microsoft in terms of financial performance between 2013 and 2015. Apple's net income increased from $37.0 billion to $53.3 billion during this period, while Microsoft's net income decreased from $21.8 billion to $12.1 billion. Although both companies increased the value of their total assets, Apple recorded greater revenue growth than Microsoft. Apple's return on equity (ROE) increased from 30.64% to 47.86% between 2013 and 2015, while Microsoft's ROE declined from 30.09% to 14.36% over the same period, largely due to the decline in Microsoft's net income. Apple also recorded an increase in profit margin from 21.67% to 22.85%, while Microsoft experienced a decline in its profit margin during the same period.

Apple also exhibited improved financial stability during the review period. As reported by GlobalData (2016, p. 3), Apple "generated revenues of U.S.$233,715 million in FY2015 as compared to U.S.$182,795 million in FY2014, representing an annual growth of 27.9%. This was primarily due to 52% higher retail sales recorded by iPhone, 6% by Mac, 10% by services and 20% by other products. The higher revenue of the iPhone division could be attributed to strong demand for iPhone 6 and 6 Plus. iPhone unit sales increased by 37% over FY2014. Mac's revenue increased due to strong demand for Mac portables."

The increase in Apple's growth rate has been attributed to the integration of innovation into the company's business model. Apple is one of the top companies in the United States that believes in delivering quality products to consumers, and over the years it has spent billions of dollars on research and development — more than $8 billion in the 2015 fiscal year alone. Apple also relies on marketing and advertising tools to promote its products and services. Although Apple has not pursued a major merger or acquisition strategy in recent years, the company targets educational institutions, government agencies, individual consumers, and businesses in the United States and internationally. Apple's marketing strategy is distinctive because the company uses modern technology to design products that meet consumer tastes, and it leverages consumer loyalty, product innovation, and brand awareness to maintain a leadership position in the industry. The company's ability to maintain that leadership depends on its continued capacity to produce innovative, high-quality products.