8 to 80 Spotlight: Apple

By Charlie Bilello

09 Nov 2020


A new series covering companies in the 8 to 80 Portfolio

1) Why is Apple an 8 to 80 Brand?

Apple now has over 1.5 billion active devices worldwide, including 1 billion iPhone users.

iPhone Installed Base (Above Avalon)
Source: Above Avalon

Its products are used by people of all ages, and it has become the most widely recognized brand in the world.

Source

2) What are its growth and financial trends?

Apple last reported earnings on October 29, 2020.

Overall revenues were down 1% year-over-year and net income was down 7.4%. Free cash flow was up 9.7% over the last year.

Created in YCharts

Importantly, the most recent quarter did not include sales of the new 5G-enabled iPhone 12, which started selling in October. This lead to a decline in iPhone sales of 21% over the prior year.

While the iPhone remains the largest revenue driver for Apple (at over 40%), its share of total company revenue has been declining over time (peak of 69.7% in Q4 2018).

Source: Statista

In its place has been steady growth in “services,” which increased 16% over the prior year.

Wearables (Apple Watch, AirPods) are also becoming a more important driver of growth, with record quarterly revenue of $7.9 billion, up 21% from a year ago.

Apple's Wearables, Home and Accessories Category Sets All-Time Revenue  Record of $7.9 Billion - MacRumors

3) Was the rise in Apple inevitable?

No. While Apple’s rise may seem easy in hindsight, it has had many periods of struggle throughout its history.

Data as of 11/9/20

Since its IPO in 1980, there were three separate periods in which its stock declined over 75%.

Created in YCharts

Few likely recall that Apple’s revenue fell more than 50% from 1995 to 2001.

Created in YCharts

Then they launched the following products that changed the world…
1) iPod: October 2001
2) iPhone: June 2007
3) iPad: April 2010

Before the iPhone release in 2007, Apple had annual revenues of $19 billion. This year, they are expected to report revenues of $273 billion. That’s a 14x increase in 14 years.

4) What are major risks to future growth?

With a net income of over $57 billion in the past year, Apple is currently the most profitable company in the world.

Its high profit margins make it a target for the many competitors in its space (Samsung, Microsoft, Sony, Dell, Lenovo, Google, Huawei, and more).

Created in YCharts

From a stock perspective, valuation is the primary concern, as is the case with many tech companies today. Trading at over 36x earnings and 7x sales, expectations are high, making Apple vulnerable to multiple compression should it fail to meet or beat these lofty expectations.

Created in YCharts
Created in YCharts

5) Howard’s Take

“Apple is now almost all about subscriptions. There are now one billion iPhone users and growing, but the stock won’t be valued on hardware growth anytime soon. This is a great piece on the state of Apple from the research team at Above Avalon that focuses almost completely on Apple research/coverage.

I do think that accessories and wearables like the watch and the airpods are underestimated in terms of the lockdown to the Apple ecosystem. The airpods have brought incredible joy and productivity to my day, opening up the world of podcasts and music and even phone calls.” – Howard Lindzon

To learn more about the 8 to 80 portfolio managed by Compound, click here.

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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