Roy Davidson, 9 August 2018


Apple (AAPL) is a world leader in the design and manufacture of mobile devices and personal computers. The company's well-known products include its Mac computers, iPods, iPhones, iPads and the Apple Watch.


Through the success of the iPhone, AAPL has built up very strong brand loyalty and what we consider to be one of the most valuable consumer platforms in the world. Over the long-term, we believe that AAPL will be able to continue to grow revenue, not just through the monetisation of its iPhone franchise, but also through the monetisation of its vast ecosystem of products and services. With over 800 million active iTunes accounts and 1 billion active devices, AAPL has built up an enormous captive audience. It has been effectively utilising this customer base by expanding its total addressable market through the release of a number of new products and services. This includes the Apple Watch, Apple TV, Apple Pay, original content (with both music and video-streaming), and in a few years’ time, potentially an Apple Car.

Along with the release of the iPhone 8 and iPhone X, we believe there are a number of other catalysts that could help drive AAPL’s share price higher. First, the company is a huge beneficiary of the recently enacted US tax legislation. A reduction in the US tax rate is estimated to provide a 6% benefit to AAPL’s earnings while the cash repatriation holiday and share buyback could boost earnings by over 10%. Second, revenue from its wide range of services now represent around 15% of AAPL’s total sales and management are aiming to double the size of this business by 2020. Lastly, AAPL is broadening its total addressable market by targeting less mature markets. In countries such as India, Russia and Vietnam, smartphones selling for under US$400 make up 80% of the market. This is the perfect target market for the company’s lower priced phones.

Investor sentiment has continued to rebound as confidence around the company’s growth outlook improves. While sales for the iPhone X may not be living up to the overly optimistic expectations set by some market analysts, management guidance indicates healthy demand for the iPhone X, and we expect there to be the usual level of conservatism to this guidance as well. We suspect the strong acceleration in growth in emerging markets will remain a strong tailwind to revenue and earnings over the current quarter.

AAPL remains a quality tech stock, albeit with a lower growth outlook. The company has strong margins, an unmatched cash hoard, and enormous captive audience. We acknowledge that AAPL faces strong competition from other device manufacturers such as Samsung, Lenovo and LG. However, the AAPL ecosystem generates very strong brand loyalty; purchasing one AAPL product is likely to lead to purchases of additional devices, accessories and services. We believe the company is only starting to make progress in software and services that will help to retain, create and monetise its large customer base.

Risks to AAPL include: 1) economic downturn, 2) failed product launches 3) increased competition.