Hard as it may be to believe, Apple is just a few weeks away from the sixth anniversary of Tim Cook taking over as CEO of the company. Often criticized as lacking vision or being responsible for some shortcoming in Apple 's technology and strategy, the Cook era instead looks to be on its way to the stuff of business legend. During Cook's tenure, Apple stock has nearly tripled in value and the company's market cap stands at $819 billion -- $170 billion more than second-place Alphabet and about that far from the $1 trillion mark. But the most impressive thing about Apple's position under Cook isn't a particular financial milestone; instead, it's that the company is basically winning in every segment it competes in.
Short list
Apple makes nearly all its revenue from four product categories: iPhone, Mac, iPad, and the fast growing services segment. The rest is made up of a hodgepodge, including Apple Watch, Apple TV, and Beats products. It can reasonably be argued that every segment has done astoundingly well in the Cook era and that many are showing the kind of growth that implies continued dominance. Let's break them down to understand.
iPhone: Never the market share leader, but always the profit dominator
With a market share that bounces around in the teens, Apple's iPhone has always carved up a small slice of the mobile pie in units. But after a rough patch where sales slipped, iPhone has returned to growth with a 2% gain in the number sold. That's noteworthy given three months ago Cook was worried that buyers were delaying purchases in anticipation of the next iPhone, which he didn't call out by name in acknowledging that rumors about it were running rampant.
Apple has now sold more than 1.2 billion iPhones over the 10 years of the product. In a bit over a year, iPhone cumulative sales will exceed $1 trillion in revenue. This is the most successful product ever and under Cook, Apple has gobbled most of the total profit in the mobile industry too, taking a greater than 80% share over the past three years. This gives the company about 5x as much profit share as unit share. Cook, for what it's worth, believes Apple's market share will grow over time. If he's right, the rest of the industry will be fighting over smaller and smaller scraps of profit in years to come.
Comparison: To gain perspective on just how astounding iPhone remains though, consider that Apple earned $24.8 billion in revenues from iPhone this past quarter. That is more than all of Microsoft at $23.3 billion. In fairness, Microsoft's gross margin remains strong at 63% while overall Apple sits below 39% (iPhone itself is likely somewhat higher). When we look at this again in January, the Microsoft numbers will be very similar though while iPhone revenues will be double what they are in this seasonally slower period. If you sum this up, Apple's iPhone alone is about 40% larger than all of Microsoft and yields about $10 billion less in gross margin. Microsoft, meanwhile, is worth 2/3 as much as Apple which suggests investors remain skeptical of Apple as a recurring revenue business.
Services: The growth engine
This column has been beating the drum on Apple's service business for some time and the 22% uptick for the quarter, to $7.3 billion just highlights how important it has become. Apple wants the segment to grow to $50 billion by 2020, which could make it bigger than Mac and iPad combined -- and at higher margins to boot.
Apple is arguably still scratching the surface of what's possible here. While it has a strong presence in music, it sells very little in the way of video. And while apps continue to drive sales here, subscriptions sold via the App Store are growing rapidly. That segment totaled 185 million (across all services so only about 1/4 of iPhones are subscribed to anything) but was up by 20 million just in the last quarter. It's not hard to imagine Apple selling billions of subscriptions down the road, especially after it made third parties pay just 15% in the second year (they still pay 30% initially like app developers).
Further, Apple is mostly unique in its ability to sell consumers storage upgrades. While that might not seem like a lot at 99 cents a month for 50GB or $2.99 for 200GB it starts to add up across the vast iPhone user base. And, again, the longer you are in Apple's world and the more devices you own, your ever-growing picture library and document collection needs more space.
Comparison: Apple had hoped to get services into a hypothetical slot on the Fortune 100 by next quarter. It's already there now thanks to recent growth. The services business at Apple is about the size of Time Warner today. In five years, it could easily be bigger than Disney. Margins here are generally strong, too. Until or unless iPhone sales start to decline or people stop buying apps, Apple has a lot of runway to grow. The idea it could become Microsoft-sized is not completely far-fetched.
iPad: At last, a bottom? / Mac: Trends continue
Horace Dediu, the pro behind Asymco, notes that Apple has an uncanny knack for keeping pricing constant across its products. It does this by creating a combination of lower and high priced products as a line proliferates such that the sales mix yields the desired result. For iPhone, that average price is anchored around $650 while for iPad it's about $200 less.
But Apple has seen declining iPad sales for years until a recent set of changes: there are now more high-priced iPad Pros to offset the fact the least expensive big iPad ever is now $329. That low price led to the 15% bump in iPad sales over the last quarter even though revenue ticked up just 2%. For a product line that had been in a long-running decline, this formula couldn't be more perfect.
Apple gets more users -- in Japan and China half the iPads sold were to first-time buyers -- and doesn't sacrifice revenues to do it. Cook has long noted the more Apple devices someone owns, the more they are likely to buy. It's also harder to switch from Apple's ecosystem if you're heavily invested in it. iPad isn't without problems but it reached a four-year high in tablet market share thanks to the lower price point.
The venerable Mac computer line was a bit of a mirror image of iPad: revenues up 7%, but units up just 1%. PC sales are down 26% from their peak in 2011 and seem unlikely to ever recover. But Apple now has about a 7% slice of the PC sales pie vs. below 5% when Cook took over. That may not seem like an amazing result but it's been built on Apple taking share nearly every quarter since.
Comparison: The Mac + iPad business is $10.5 billion in the most recent quarter, larger than the $9.3 billion taken in at Facebook. No question the social-networking giant has the higher margins here, not to mention faster growth. But these are arguably Apple's third and fourth most important products and together are now growing in revenue and units.
Watch and listen: The next frontier?
Again, critics like to question whether the one major product solely from the Cook era -- the Apple Watch -- is even a success. And it's fair to note that (1) the amount of rework needed on the user interface from its intro two years ago till now has been tremendous (2) average selling prices have fallen, suggesting an imperfect price point at first. But with that, sales were up 50% in the past quarter and analysts like Jan Dawson suggest sales were similar to (but likely a bit below) Fitbit's 3.4 million for the quarter.
At this point, Apple has more than 30 million Watch wearers, perhaps nearing 4% of all iPhone users. That may not sound like much but the Watch averages more than $1 billion per quarter -- significantly more around the holidays. Apples new AirPods are likely to reach similar magnitude within the next year. While these are small numbers compared to even iPad or Mac, they are critical in increasing the stickiness of Apple for users.
Further, it's apparent at this point that Apple is atop the heap in smartwatches and wireless headphones too. The Watch seems likely to "suffer the fate" of iPad, leading a segment that has somewhat finite appeal. But that's hardly a curse. Nothing is the smartphone and it's probable nothing ever will be again. Apple's approach to smartwatches and tablets is fundamentally similar to how its treats computers and smartphones: make all the profits, no matter how much of the total volume you sell. It just turns out that slice is bigger in the first two.
Wireless headphones, on the other hand, could eventually sell to half of smartphone buyers -- especially if Apple can upgrade the AirPods over time with battery and functionality improvements. If eventually it is moving 50+ million AirPods and Beats headphones per year -- not to mention the new HomePod speaker -- Apple's audio segment could exceed $10 billion annually.
Comparison: Even today, "other products" are almost the same size as Netflix, $2.7 billion vs. $2.8 for the video streaming giant. Netflix did grow 32% there against just 23% for Apple, but there's significant room to sell more Watches, AirPods, and HomePods in the year ahead.
Long?
This column doesn't do stock advice, but Apple has rarely been so dominant in so many arenas at the same time. Of course, the hard work that remains suggests it might not remain there forever. It's easy to be bullish on iPhone, with the rumored redesigned iPhone 8 likely to sell like gangbusters. The gains in Macs and iPads, however, are more likely to remain small as the aggregate number of PCs and tablets sold continues to be under pressure. Services and wearable technology are growing like small businesses, even though they are already big ones, opening up growth opportunities for Apple even if just on the margins.
Apple has added $45 billion in market cap since the last look at this three months ago. If it could do that just four more times, it will become the first trillion-dollar baby. But that would still require a more than 20% gain in the share price, which in turn would likely need double-digit increases in profits. Cook has delivered hundreds of billions in shareholder value thus far; betting he won't get Apple there no longer seems to be a good place to put one's money.
