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As we move ahead into the September quarter, I’d like to review our outlook, which includes the types of forward-looking information that Saori referred to at the beginning of the call. We expect our September quarter year-over-year revenue performance to be similar to the June quarter, assuming that the macroeconomic outlook doesn’t worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year revenue impact of over 2 percentage points.
We expect iPhone and Services year-over-year performance to accelerate from the June quarter. Also, we expect the revenue for both Mac and iPad to decline by double digits year-over-year due to difficult compares, particularly on the Mac. For both products, we experienced supply disruptions from factory shutdowns in the June quarter a year ago and were able to fulfill significant pent-up demand in the year ago September quarter.
We expect gross margin to be between 44% and 45%. We expect OpEx to be between $13.5 billion and $13.7 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%.
Luca Maestri, CFO Apple Inc., Aug. 03, 2023
In August Apple reported Net sales growth of -1% and EPS growth of 5.4%. My expectation is a 1% sales growth with EPS growth of 11.4%. This might be slightly optimistic but it’s based on the following assumptions:
iPhone unit growth of -1.4% (y/y) but revenue growth of 2% (as per guidance, up from -2% previous quarter’s growth).
Mac unit and revenue growth of -12% (this might be optimistic, low confidence)
iPad unit growth of -2% but revenue growth of -12%.
Services revenue growth of 12% (acceleration from 8% q/q)
Wearables 2% revenue growth (consistent q/q, down from 10% y/y)
I estimate the gross margin to remain at 44.5%, open to be $13.5 billion (low-end of guidance), OI&E at -$250 million (per guidance) and tax rate at 16%.
The number of shares I estimated at 15.666 billion (down 109 million, below 126 million average drop for last 8 quarters.)
To summarize, for the fiscal fourth quarter 2023:
Total revenue: $91.1 billion
EPS: $1.43
Revenue by segment:
iPhone: $43.5 billion
iPad: $6.2 billion
Mac: $10.0 billion
Services: $21.5 billion
Wearables/Home/Accessories: $9.8 billion
Gross margin on total revenue: 44.5%
As can be seen in the following graph, my expectation is that the company will return to a pre-Covid growth trajectory (on a TTM EPS basis) after a transient surge and recovery due to the phenomenon of work-from-home and reduced travel. The uncertainty related to Covid is subsiding but macro and geopolitical uncertainties remain and the company continues to provide limited guidance.
With location is in an area known as the Innovation District, this very new building is walking distance from Boston’s South Station which is a terminus for direct trains from New York City and points south. It’s also walking distance to the World Trade Center stop for the free Silver Line connecting to Boston’s Logan Airport, making it a car-free destination. Local parking garages are available for drivers.
The venue is a media room with intimate access to a very large projection screen.
The agenda has been expanded to include the following topics:
Overview of recent performance (product/services)
Valuation
Growth potential
Limits to growth
Determinants for share price appreciation/depreciation, i.e. signals to look for in deciding your position relative to your risk appetite.
There will be opportunities for private meetings and after-hours networking. Depending on interest, I’m available to conduct a walking tour of historic Boston Waterfront, one of the most interesting historic sites on the continent.
I’m super excited to announce the Apple Investor Event 2023. This will be the third Apple Investor Event I’ve hosted but it’s been a long time since the last one.
The event will take place November 9th, 2023 in Downtown Boston Area (precise location will be announced soon.)
The program is a series of talks with data/visualizations on the following topics:
Products: Financial performance and market overview.
Services: Understanding synergies with products
Valuation: Measuring customer creation and retention
Growth: Opportunities in Products, Services and Geographies. Emphasis on new products in Spatial Computing.
Limits to growth: Market Saturation, Apple Silicon headroom, GDP growth.
Apple has so far returned $761.5 billion to shareholders. 143.3 billion in accumulated dividends and $618.2 billion in share buybacks. These are the gray areas in the graph above. The question that often comes up is: isn’t this capital return program a misallocation? In particular isn’t buying back shares and retiring them a waste of money?
By definition, it cannot be. The mechanism of buying shares and retiring them is a process of returning retained capital to shareholders. The other ways this can be done are through dividends (periodic or one-time) or the sale of the company (liquidation). Ignoring the liquidation option which does not make sense for viable companies, the decision between dividends and buybacks comes down to a tax efficiency question.
The result is, however, roughly the same: retained earnings, which are stored by the company as cash typically (net value for Apple today is $57.2 billion), are an asset balanced by a liability to the shareholder called Total Shareholder Equity (valued today as $60.3 billion.) As such, the retained earnings belong to the shareholders. It’s why they own the company. It’s what their cash share of the value in the company is.
It’s also surplus to the company’s needs. Had the company needed this cash, it would have spent it on building the products and services it sells or operations that maintain or grow the business. Those expenses appear in cost of sales (COS) or cost of goods sold (COGS) or in operating expenses Sales, General and Administrative (SG&A) or Research and Development (R&D). If it’s not spent this way then it drops to the net income line and, crucially, is subject to taxation (about 12% to 15% for Apple). After taxation, once returned, it’s taxed again as either capital gains (in the case of buybacks) or dividend income. These rates vary on the jurisdiction of the owner and the current tax policy.
Note that the spending on R&D includes development of future projects which are not directly related to current products. Engineering of current products is expensed against COGS. R&D for Apple ($29.4 billion in last 12 months) is significant, having grown to 9% of sales, as the graph below shows.
For the company to decide to return capital it really does mean that it has no good ideas on how to spend it given what the company knows it can and cannot do. It’s a judicious decision and one which honors the relationship between owner and manager with fiduciary responsibility to the owner.
Still, doesn’t that mean it’s wasted?
No. Giving it to the shareholder means that the company says “It belongs to you, I don’t know what to do with it on your behalf, so here, you figure out what to do with it.” The shareholder can then make an allocation decision that suits their sense of what is valuable or useful. The return is a deferral of decision to the owner rather than their agent.
To the extent that once returned, the capital is misspent, that is on the spender, not on Apple.
Consider the alternatives. Instead of returning capital, what some managers decide to do is to re-allocate those retained earnings to acquire other companies with the promise of value creation through synergies. However these are often huge wastes of money. The new asset is recorded as “goodwill” on the balance sheet, offsetting the retained shareholder equity. As the synergies fail to materialize, the asset (goodwill) is written off, and shareholder equity decreases accordingly, and so, value evaporates or is transferred to the owners of the acquired company who cash out above market value.
Acquisitions are a process of picking the pocket of shareholders.
The alternative might be to spend heavily on R&D. That is more admirable but the amount involved is enormous and it’s very difficult to find enough people and projects worth pursuing without turning R&D into an academic organization. Remember that with R&D at $7.4 billion per quarter, the company is spending 41 times more than it did in 2006.
And doubling or tripling R&D, even if possible, would impact margins to such an extent that Apple’s profitability would show very poorly indeed. That would collapse share prices and decrease share-based compensation, limiting the possibility of recruiting talented engineers. It would bring quite a lot of negative consequences.
Another exercise to undertake would be to ask what would happen if the mechanism of share buybacks were made illegal. It was not always legal anyway. That is left as an exercise to the reader.
Before the iPhone launched in late 2007, Apple was trading consistently at a P/E ratio above 30. Here is a table for the P/E ratio on each Friday’s closing price from May to August, 2007. The iPhone launched on June 29, 2007.
Date
P/E Ratio
5/23/07
31.5
5/30/07
31.6
6/6/07
34.1
6/13/07
33.7
6/20/07
34.6
6/27/07
33.6 (2 days before iPhone launch)
7/11/07
37.2
7/18/07
34.6
7/25/07
34.3
8/1/07
33.3
8/8/07
34.2
8/15/07
30.2
Apple’s P/E ratio around the iPhone launch
Apple was not super powerful but it was not doomed either. It was a time when the iPod was dominant and the Mac was still alive. iTunes re-wrote the rules of the music industry and debate was raging whether Apple should be considered a media company. Platforms were not its strength but Steve Jobs showed he was still able to distort reality.
These good times did not last. The first year of the iPhone was a period of minimal contribution from the new category with Apple still largely valued on the basis of the iPod. The predictions of failure for the new communications product, especially given its high price, were legendary. It wasn’t until 2008 that the iPhone began accelerating and making a meaningful contribution to the bottom line.
It was then, in late 2008, that Apple’s valuation broke. The P/E ratio fell from above 30 to nearly 10. The following graph shows the catastrophic 53% share price collapse coupled to the triple digit surge in earnings which led to the P/E ratio tanking.
[The graph shows earnings per share for the trailing 12 months (blue line) and 10x, 15x, 20x, 30x and 40x that value (colored lines). The share price is the black line. The share prices are sampled every Friday. The graph is notably logarithmic. The grey shaded areas are periods of significant contraction. The percent drops/increases during these periods of contraction/expansion are shown in the annotation arrows near the bottom.]
The valuation remained broken for 12 years, between late 2008 and late 2020. This period being, arguably, the most remarkable wealth creation event in history of business. For evidence see the following graph showing the amount of retained earnings returned to shareholders building inexorably toward one trillion dollars. This is not share price appreciation but cash returns. [If you have evidence of a larger wealth-creation event do let me know.]
The creation of $800 billion of shareholder wealth at fire-sale share pricing.
As I explained throughout this period, motivation to dispose of shares which create immense wealth is explained by the fable The Goose That Laid the Golden Eggs but the question some are asking now is whether more wealth can still be created, and if so, can we expect Apple’s valuation to collapse accordingly?
I should note that during the long, dark years of wealth creation, other technology companies such as FaceBook, Amazon and Netflix, Google (so-called FAANG) and Microsoft enjoyed far higher multiples than Apple, sometimes 3x higher. This was not seen as abnormal by analysts because those companies were always assumed to have higher growth potential, with a diverse portfolio of opportunities while Apple’s growth was perpetually in its past, based on one product.
Paradoxically perhaps, since the Covid-19 pandemic Apple shares have enjoyed P/E ratio roughly equivalent to the other tech companies. For instance, peaking at 42 in January 2021, the P/E ratio has averaged about 27.5 since then. Simultaneously, diversified companies such as FaceBook (now Meta) and Netflix collapsed due to serious business model flaws (based on single sources of income) and Google (now Alphabet) and Amazon have slowed growth and are facing anti-trust scrutiny. Having lost any presence in mobile computing Microsoft has become entrenched in enterprise, finding new businesses in cloud and (possibly) generative AI. As a result of these reversals, the contrast between Apple and the mega-cap cohort has become fuzzy.
So back to the question: does it make sense to price Apple in the 30x P/E or should it go back in the gutter at 10 to 20?
I would argue that the big change in perception hasn’t been the surge in earnings during Covid (see graph below). The big change is the realization that Apple is no longer about to go out of business.
How could Apple not be going out of business?
Remember that a P/E ratio in the teens is a clear signal from the market that the company is a questionable “going concern”. This is parlance indicating doubt that the company will continue in its present form..
What has changed since 2020 is that even though there were a multitude of crises—from war to pestilence—the eggs kept coming. Perhaps, perhaps, Apple was not doomed after all. In that time it managed to create 1 billion customers. Perhaps having 1 billion customers was a positive outcome. Perhaps counting iPhones during a single quarter was not the only way to value the company. Perhaps having 1 billion satisfied customers made it viable. Perhaps having 1 billion satisfied and loyal customers returning every year was interesting. Perhaps having 1 billion satisfied wealthy customers meant the end is not around the corner. Perhaps having 2 billion active devices in use was sustainable. Perhaps providing services to 1 billion customers using 2 billion devices delivered through 1 billion subscriptions made some sense. Perhaps having all this data in a linear graph made it predictable?
Perhaps. Though Apple provided updates on these figures regularly, the questions everyone asked were still on unit shipments (which Apple stopped providing.) While Services grew at double digits and 70% margins the questions from analysts on conference calls persist on the iPhone and currency or production “headwinds”. Perceptions take time to change. They are still changing.
Maybe at this point it’s time to agree that Apple’s end will not come through being easily replaced by the competition (first Windows then Android, etc.) but by having access to its markets restricted. Being the only American company to have cracked the China puzzle, it’s surely vulnerable there. And please don’t mention India.
Apple is no longer doomed because it’s too weak. It’s doomed because it’s too strong.
It seems that it’s not too hard to believe the end is still near.
iPhone 15 has just been released and, as usual, all the products in the iPhone line-up have received new prices. The following graph shows the current product line-up (US prices before tax) and the historic price points for all the previous versions of iPhones since inception.
It was amusing before the launch to see reports that the iPhone 15 would see a price increase. If I were a betting man I would have bet against it. The reason is that, as the graph shows, pricing changes are regularly made every three years and the last one was in 2021, two years ago. It would be an extraordinary claim to expect a price increase this year.
Also, as you can see, price increases only occur when there is a new “top-of-the-line” model introduced. This new highest spec, usually, but not only, in memory, justifies the new top of the range. For instance, the top of the range in 2015 was the 6S Plus with 128GB of storage. Three years later is was the Xs Max 512GB. Three years later it was 14 Pro Max 1 TB. In nine years the top memory increased by an order of magnitude but the top size also increased as did the number of cameras. Naturally, the price increased by about $650.
Therefore we can predict with some comfort that the next “highest price” point will be $1699 for the iPhone 16 Pro Max 2TB, or equivalent. The possibility exists that the iPhone 16 Pro will also include a leap higher in optics and have more technological tie-ins with Spatial Computing.
But this highest price point is not necessarily the most common price point. Indeed, we can guess that the most common point is visible in our graph above. The density of product choices increases toward the middle of the range. The highest and lowest price points are populated with one product. The middle price points from $800 to $1,100 are populated with\ three products each. Therefore a good guess is that the $900 is likely most popular and that the average selling price is also very near there.
Note that the average sales price (ASP) has not been available from Apple since 2018. At that time the ASP was $790 (holiday quarter of 2017). A gradual increase to $900 over five years is not unreasonable. In fact, it probably should be higher given inflationary pressures. We can only guess.
We have to understand that Apple does not set pricing in response to competitive pressures, commodity pricing, inflation, currency exchange rates or internal sales or margin targets.
Pricing is sacred and is a decision made based on consumer understanding.
The anecdotes of Steve Jobs preferring certain price points because of their poetic value are legendary. 99c for a song sounds right and looks good. The iPod was priced in lovely, alliterative $100 increments. Same logic applies to services.
Pricing is an art and when you see the spectrum above you also see how the increments nudge the decision process. Pricing is a signal. It’s a conversation between seller and buyer containing information that both parties will exchange. On the part of the seller it suggests both the cost of the offering and the value it provides. Buyers are inclined to see if they can stretch to the next higher increment given the increased value proposition. Once their decisions in the collective are tallied, the seller knows well what buyers prefer.
Apple has been having this conversation for decades and it shows.
After the Apple iPhone 15 launch event of September 12, 2023 I was a guest on the Claman Countdown show on FOX Business News (FBN) and here is the video.
In advance of the event I was asked for a few thoughts that might be topics I would like to discuss.
My answer was:
Apple has been pushing hard on imaging in their iPhone evolution. It has also released the Vision Pro that offers so-called Spatial Photos and Video. There is speculation that there will be some linkage at some level with Vision Pro and iPhone imaging. I do wonder if we’ll get hints of possible new optics that can support the Spatial Photography
Remember that Apple hinted at Spatial capabilities with its iPhone Lidar sensor some time ago. Apart from better focus at night, there was little purpose for laser distance measurements in a 2D photo device.
Additional Apple Watch health features are also always interesting. Apple’s efforts in health are hiding in plain sight and point to major value proposition to a large audience that skews older.”
Based on this, I’m rather happy to see the support for Spatial Photos and Videos in iPhone 15 Pro. The surprise on the watch was not a new Health feature per se but the Double Tap interaction mode.
Also of interest to me was the Roadside Assistance via Satellite. This will be a very well received feature and many news stories will be written about it.
As I remember it, at least 10 years ago, I began to hear anecdotes from developers who built apps for both iOS and Android about their economics. The story is that they tended to have twice as many users using Android but that iPhone App Store revenues were roughly twice those of Google Play Store. From that I devised a rule of thumb that an iPhone user was about 4 times more valuable than an Android user. Half the users, paying 4 times as much means double the income.
Over the years I came across a lot more data about market development (the diffusion of innovations) and market creation (the innovation process) and applied it to transportation. Along the way I also became more aware that figures of consumption and spending are not normally distributed. That it turns out that the governing function of much of human behavior is log-normal. That is, it is skewed rather than balanced or symmetric around an average. Classic examples are income distribution and the distribution of travel distances.
Consider the following diagrams: Trip Distances vs. Trip Speeds for New York Citi Bike travelers (n=42.7 million.)
The different lines represent different time periods spanning the months of the year.
The top graph shows that most trips are short, and the average distance is not the most common distance. The bottom graph shows that the average speed is the most common speed. The top graph is very accurately modeled with the log-normal function. The bottom graph is the classic bell curve of the normal or Gaussian function.
Income is log-normally distributed and so it has to be with services revenues. There must be a definite skew where there is a disproportionate spend by those who have more income. Thus segmenting or, to put it less kindly, discriminating customers properly is super important. Customer quality is just as important, perhaps more so, than quantity.
So let’s revisit the question of user quality for online services.
Unlike 10 years ago, there is a lot more data. The EU, for instance requires a report of the number of users on each platform.
The figures I want to focus on are those of Apple App Store and Google Play Store: 123 million and 284.6 million respectively. These are strikingly similar to the ratio of 2x between iOS and Android from my old anecdotes. However, if we look at global data, Apple claims 650 million active App Store users while Google claims 2.5 billion active users. That makes the global ratio closer to 4x Android. However, if we look at the US, the ratio is 167 million iPhone users vs. 144 million Android. In the US, iOS is a majority.
This is explained by income. The wealthier the user base the more iOS seems to be in use.
Now let’s look at revenues for the platform stores.
On the right side is the history of retail revenues by year from 2016 to 2022 and split between Apple App Store and Google Play Store. Mirrored on the left is the number of users, also split by store but also by region, but only for 2022. [App Store revenues are my own analysis (with validation against other sources) and include billings not just Apple’s own cut. Play Store revenues are from Business of Apps.]
The ratio between revenues has kept remarkably steady, with 2016 revenues at a Apple:Google ratio of 29:15 (1.93) and 2022 at a ratio of 81:42 (1.93).
The global user numbers are, as mentioned, 3.8 to 1.
[Aside: One sanity check on the data is that the 650 million App Store users is about half of my estimate of iPhones in use (1.2 billion). That might be alarming. Why are only 54% of iPhones in use paired with App Store use? However, if we take the sum of both App Store and Play store users (3.15 billion) and compare it with the total number of global smartphone users (6.92 billion), we discover that 45.5% of all smartphone users use some store. Adding Chinese Android stores we can see that the ratio of 54% for iOS is somewhat consistent.]
Thus we can compare the app revenue per user of the two platforms by dividing global revenue number by the global user numbers. The results are shown below:
I scaled the spending to a per-month basis.
So the picture becomes clearer. The iPhone customer is 7.4 times more valuable than the Android customer. This is more impressive than the 4x rule I had 10 years ago. The reasons are mainly that my anecdotes were from developers who sold products in the US or EU whereas expansion of smartphones to 7 billion global users has drawn in more lower spending customers.
But Apple’s base has also grown to over 1 billion users (650 million store users). This highlights that Apple has effectively grown and discriminated customers effectively. It obtained not just 1 billion customers but the best 1 billion customers.
How to discriminate effectively is the holy grail of marketing. The naïve approach is to keep prices high. But that usually only results in a “luxury” branding and a small base that tends not to grow. The alternative “premium” approach is to offer functionality and multiple tiers and distribution options and financing and merchandising. There is no simple formula.
The bottom line is that Apple’s approach is attracting 650 million $10/month app spenders. When we factor in additional subscription services, we get to the juggernaut that is Apple Services. This analysis has shown how difficult it is for anyone to come close to this quality of revenue.
As we look forward to Spatial Computing, the idea of increasing that spend from $10/month for a small glass rectangle in your palm to perhaps $100/month for an immersive 360-degree 3D experience does not sound too crazy.
But only if you can find those customers. I suspect Apple already knows who they are.
If you want to learn more and hear an in-depth discussion on this topic make sure you subscribe to the Asymetric Podcast on Supercast and Apple Podcasts.
The App Store ecosystem crossed $1 Trillion in 2022.
To be precise, in a report published in May 2023 by the Analysis Group the ecosystem is estimated to have exceeded $1.1 trillion. This ecosystem is defined as the total transactional value of the sale or distribution of digital and physical goods and services through apps. It also includes in-app advertising. The analysts relied on a variety of data sources, including data from Apple, app analytics companies, market research firms, and individual companies.
Note that this includes Apple’s own services as well as App Store developers. Unlike Apple’s own reporting of payments to developers (and thus partially revealing its own App Store revenues) this data includes payments which are not captured by Apple directly. In the words of the authors, “More than 90% of this figure originated from transactions that did not happen through the App Store, meaning that these amounts accrued solely to developers and other third parties, and that Apple collected no commission on them.”
This $1.1 trillion figure is almost double the value from 2019. Ecosystem estimates were first provided in 2019 at $519 billion, with $643 billion in 2020, $868 billion in 2021 and $1,123 billion in 2023. These correspond to growth rates of 24% in 2020, 35% in 2021 and 29% in 2022. The compound growth rate has been 29.4% since 2019.
It would be ambitious to expect this CAGR to continue after the Covid boom but at the same time, it’s worth noting that this growth out-paces Apple’s own services growth rate. Services (reported) revenues grew at 18%, 27% and 10%. The actual figures and growth rates are shown below.
This Analysis Group report is very much worth reading and adds an important new metric of resilience and scope and scale of the platform and ecosystem that Apple has created.
However it is also not the complete picture. I strive to see the larger picture of what I call the Apple Economy. This includes the ecosystem as well as the direct revenues Apple obtains from products and services. [Of these revenues, roughly 60% is then passed on to Apple’s suppliers, with less than 20% retained as earnings].
Therefore, the combination of ecosystem and revenues is shown in the following diagram.
Note that the “Economy” size was over $1.4 trillion when the ecosystem alone was $1.1 trillion. Note also that I’m also suggesting that it’s likely to be $1.6 Trillion this year. This diagram shows the story since 2019 but also makes a forecast to 2025.
I’m expecting the ecosystem to grow more modestly at 18% in 2023 (down from 29%) and 16% in 2024 and 15% in 2025. Apple’s own product and services sales are also subject to estimation error.
Nevertheless, it’s not unreasonable to believe the forecast above where the Apple Economy expands to over $2 Trillion by 2025. This is an acceleration from previous forecasts.
It’s difficult to write about the implications of this. Any value in the trillions is hard to put in context. Certainly, Apple’s market capitalization is in the trillions. For fun, we can calculate that Apple is trading at a multiple of 1.74 of its economy.
But rather than trying to assess valuation directly, Apple’s Economy is more like a GDP figure: I think it’s helps to understand the overall scale and resilience. You might even ask what would happen if it were to cease to exist. The number of people who are employed in a $2 trillion economy is in the millions; perhaps 10s of millions of people.
In 2023, global GDP is expected to reach $105 trillion. It’s nice to think that Apple could soon be about 2% of the world.
