Apple cash cow or star – apple inc. (nasdaq aapl) seeking alpha database interview questions

They say it is more difficult to stay on top than to get there. This wise saying can be fairly applied to Apple (NASDAQ: AAPL). Risks to Apple’s size and growth story are always around the corner. The main risk that Apple is always facing is that suddenly the music stops and their sales of iPhones fall off a cliff. A new version does not sell as well, repeat customers wait one or two extra years before upgrading, etc. And if that happens, investors can stampede to exit.

Complacency and lack of innovation and adaptability are the biggest risks for companies operating in the technology and electronics space. It is what led to the demise of once leaders Yahoo, BlackBerry (NYSE: BB) and Eastman Kodak (NYSE: KODK). BlackBerry multiplied their sales of handheld devices by seven times from 2 million units in 2007 to 14 million units in 2010.

From then onwards, BlackBerry went into a downward spiral and almost went bankrupt. From 2017, BlackBerry’s once iconic handheld devices were no longer in production.

Apple is nowhere close to BlackBerry’s situation. While BlackBerry’s rise was nascent and was based on corporate non-emotional, non-loyal customers, Apple has established itself firmly as the leader in sales of smartphones (in value terms), has established consumer loyalty and awe, and has established loyalty-assuring services with iTunes, iCloud, Apple Pay, etc.

Yet, Apple (and its investors) need to be constantly looking over their shoulders. Apple is not a monopoly like other FANG compatriots Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and recurring income from selling electronic equipment is not as predictable as advertising and subscriptions. Formidable competition is stiff

Samsung ( OTC:SSNLF) remains the largest seller of smartphones in terms of number of devices. It sold 317 million devices in 2017, almost 50% more than the iPhone. However, Apple remains the leader in value terms. Samsung’s mobile devices sales of USD 100 billion in 2017 and operating margin of 11% are both less than half the comparative figures of Apple’s – given Samsung’s focus on the cheaper mass market segment, combined with premium products that compete with the iPhone.

Huawei came third in volume sales with 150 million devices – 50% less than the iPhone. Chinese companies Xiaomi (BATS: XI) and OPPO came fourth and fifth. Overall, Apple commands around 15% market share in unit shipments – not exactly a dominant position.

In terms of the market share of operating systems, back in 2012, Apple’s iOS was the market leader in the US, with a 51% market share, followed by Android with 43%. By March 2018, that has been reversed; iOS dropped to 39% and Android was the clear leader with 59.1%. In China, Android is dominant with a 77.4% market share, iOS is a distant second with 22.1%. Globally, Android has a dominant 86% market share versus iOS’s 14%. Market is tailing off…

The biggest driver of the 2017 downturn was China, which saw its smartphone market decline 5% year over year. China represents 30% of the global smartphone market, so when it sneezes in smartphone consumption, the rest of the world catches a cold. Tough times are expected to continue in 2018 as "IDC" forecasts consumption in China to decline another 7% before flattening out in 2019.

The biggest upside in Asia/Pacific continues to be India with volumes expected to grow 14% and 16% in 2018 and 2019. But this is not an Apple opportunity. Chinese competitors are the ones expected to grab this growth by continuing their strategy of selling large volumes of low-end devices by shifting their focus from China to India. So far, most Chinese players have been able to get around the recently introduced India import tariffs by doing final device assembly at local India manufacturing plants. As for components, almost everything is still being sourced from China.

Looking further out, "IDC" expects the global market to grow roughly 3% annually from 2019 onwards with worldwide shipment volume reaching 1.654 billion in 2022 and a five-year compound annual growth rate of 2.5%. The lifesaver for growth is expected to come from 5G.

Unit sales of iPhone have peaked in 2015 with 231 million units shipped that year. In 2016, iPhone unit and value sales dropped by 8% and 12%, respectively. In 2017, unit sales reached 216 million units – still 6% lower than the peak two years earlier. Sales are expected to recover in 2018, given a solid Q1 on the back of the strong showing of the iPhone X. But that is unlikely to alter the trend of saturation in the global smartphone, including the specific iPhone, market.

iPad unit and value sales have been decreasing constantly since 2013 when they reached a peak of 71 million units and USD 32 million. In 2017, Apple sold 44 million units – almost 40% less than 5 years earlier. Value sales of USD 19 billion were also matching the volume decrease of 40%. Sales of the Mac have been volatile over the past 5 years, but overall, they have been faring better than the iPad; both unit and value sales were around 20% higher in 2017 than in 2013.

Importantly, sales in China have also been on a downward trend since 2015. They dropped by more than 30% between 2015 and 2017, and dropped as a percentage of total sales from 25% to 20%. This trend is likely to continue with the strong competition from formidable Chinese players who are the third, fourth and fifth players globally.

Services have been the only category growing at a constant basis – doubling between 2013 and 2017. They still though represent only a 15% share of Apple’s total sales, and are closely linked to sales of the iPhones. Whether Apple will manage to increase service revenues, and profit margins, fast enough to compensate for the iPhone’s inevitable slowdown is the trillion-dollar question. This will be the real determinant on whether Apple returns to being a rising star, a cash cow, or a declining mortal.