Announcement on 25 July, 2024
A reflection on Apple’s expansion into emerging markets
Apple's Q2 2024 earnings highlighted called back to the company’s efforts to expand in emerging markets, particularly India. Although the earnings call doesn’t explicitly state the country-specific revenue in these emerging markets, sources seem to indicate that Apple’s revenues grew 33% to around $8 Billion in India. This is a solid improvement and shouldn’t be overlooked, seeing as it’s early days, but “early days” also goes a long way to explaining why the growth rate is so high. Apple's market share in the country remains very low, around 2-3% of total sales. It’s hard to draw any definite conclusions from this latest update. Tim Cook noted, "We achieved double-digit growth in emerging markets such as India, Indonesia, and Turkey." which seems to show that Apple is experiencing some success with their push into emerging markets, but I still think there’s a very substantial concern that the high cost of Apple products in these markets and the significant economic disparity will seriously hamper long-term consistent growth in these markets. I still firmly believe that the ceiling in these markets is much lower, and so Apple’s ability to ‘wring out’ these countries to prop up their revenue growth figures won’t last too long. With specific regard to India, there was a minor question raised about how attributable was the market growth there to Apple’s strategy. Tim Cook’s answered seemed to dance around without giving any weight to specific factors. “You have to build there to sell there” and “there's a rapidly growing base of developers there” seem to allude to me that their strategy is a bit undefined. There’s always been a large group of developers in India, and many Western companies already outsource their development requirements to India. This does not indicate that there’s a huge untapped opportunity. The developers of the apps I use can be from anywhere in the world, having them local to me is not a sales driver.
Impacts of a shift in manufacturing region yet to show
Apple's move to shift some of its chip production from TSMC's Taiwan facilities to the Arizona plant was primarily a risk mitigation step against geopolitical tensions in Asia. My narrative went on to suppose that while this move addresses sovereign risks, the financial implications will be significant, given the higher costs associated with U.S. manufacturing. Seeing as the TSMC Arizona plant is still being built, this part of my narrative has not yet played out, but it's clear from Apple's extensive discussion on supply chain strategies that managing costs remains a priority. I will maintain my expectations here, and I will monitor it closely once production ramps up at the Arizona factory.
Apple’s Services remain a point of strength for the company
Apple's Services segment showed strength despite an overall decline in company-wide revenues, reporting a record $23.9 billion in revenue, up 14% year-over-year. As Luca Maestri stated, "We set an all-time revenue record in Services during the March quarter."
My catalysts on the services side focused on the possible fragility of the non-compete deal with Google and an expected decline in licensing revenues due to shifting to a universal standard port (USB-C). None of these factors received any attention in the earnings call.
I think in the long-run, my concerns about licensing revenue will most likely be overstated, and Apple will be able to offset any potential loss with a more favourable mix within the Services segment. I still think the erosion of this non-compete deal with Google is a risk, and so I won’t change my narrative with respect to that, but I believe I will taper my expectations of a noteworthy decline in licensing revenues.
Risky Bets on new technologies may not be paying off
This year, Apple sparked a ton of interest in the market with the introduction of Apple Vision Pro. Talking on the reception of the Apple Vision Pro, Tim Cook mentioned, “We are excited about the strong interest in Vision Pro from enterprise customers, particularly among Fortune 100 companies”. These comments are great at a surface level, but considering the earnings call did not provide concrete sales figures or projections for the Apple Vision Pro, it’s hard to draw any solid conclusions about the success of Apple’s latest innovation.
While the company themselves are being quite tight-lipped about the latest sales of the Vision Pro, Apple analyst Ming-Chi Kuo suggests that supply chain data hints at Apple almost halving its forecasted Vision pro shipments. Initially, the company expected to sell over 800,000 units this year. Now, they’re predicting sales of around 400,000 to 450,000 units. This latest info seems to be perfectly aligned with my narrative, which assumed that consumer adoption will be low, despite notable enterprise applications for the technology.
Assumptions
iPhone
The iPhone segment reported $46 billion in revenue, down 10% year-over-year. Figures suggest that there were 231.8 million iPhones shipped in 2023, up from the prior year as per my narrative, but lower than the spike I anticipated. I now don’t think the changes in demand will be so sudden, and I do think expansion into emerging markets will provide a minor uptick.
- Original Assumption: 215 million units sold at an ARPU of $980 resulting in $210.7 Billion in revenue.
- Updated Assumption: 240 million units sold at an ARPU of $980 resulting in $235.2 Billion in revenue.
iPad
In iPad, revenue for the March quarter was $5.6 billion, 17% lower year-over-year. Quarterly revenue for the iPad segment continues to fall, and shipment volumes seem to be following suit. Although the newest 7th Gen iPad Pro was recently announced, I can’t see this bucking the trend and I anticipate that iPad revenues will continue to falter.
- Original Assumption: 2% per annum growth through 2028, resulting in $33.43 billion in 2028
- Updated Assumption: $25 Billion in revenue in 2028
Mac
Mac revenue increased by 4% year-over-year, driven by the new MacBook Air with M3 chip. Apple’s Mac lineup continues to surprise, leading global PC growth with a 21% shipment increase in Q2. I’m comfortable keeping my relatively bullish assumptions for the Mac segment as is for the time being.
- Original Assumption: Annual revenue growth rate of 8%, resulting in total net sales of approximately $63.75 billion in 2028.
Wearables, Home, and Accessories
The segment reported $7.9 billion in revenue, down 10% year-over-year, mostly due to a difficult comparison with a previous launch cycle of the Apple Watch and AirPods. My assumptions for this segment noted that the lack of differentiation between new product launches in the segment could be a cause for a slowdown in sales. It’s hard to say if this is a definitive reason behind the relatively lower revenue, but I’ll say its impact is non-negligible. I’m going to slightly revise my assumptions downwards.
- Original Assumption: 5% per annum growth through 2028, resulting in $55.26 billion in revenue in 2028
- Updated Assumption: $40 Billion in revenue in 2028
Services
The Services segment’s strong performance can’t be ignored, with a record $23.9 billion in revenue, up 14% year-over-year. My assumptions discussed things like the EU’s adoption of the Right-To-Repair Directive, however, this seemingly didn’t have the kind of impact I anticipated. Additionally, a fall in licensing revenue due to shifting to a universal standard charging port in the latest iPhones hasn’t seemed to have play out in a material manner. The potential impact of Apple losing its deal with Google was not discussed in the earnings call, however I didn’t expect this to be the case due to the apparent confidentiality of the agreement. Nevertheless, I’m going to slightly up my assumption for 2028.
- Original Assumption: 9% per annum growth through 2028, resulting in $113.3 billion in revenue in 2028
- Updated Assumption: $130 Billion in revenue in 2028
Full Business
- Total 2028 Revenues: $493.95 Billion @ 5.10% growth
- To express this in a new 5-year window seeing as my narrative is now 1 year old, I shall carry this growth rate forward by 1 year to $519.14 Billion. From the most recent LTM revenues of $381.6 Billion in revenue, this is actually indicative of a 6.35% annual growth in revenues.
- Net Profit Margin: 21.5%
- PE Ratio: 32x
- Discount Rate: 7.72% in line with the latest discount rate calculated by Simply Wall St
Key Takeaways
- Over-reliance on new market penetration could prove to be unfruitful, while the world continues to grapple with cost-of-living pressures.
- Poor emerging market strategy could lead to failure in India and South America due to prohibitive costs.
- Compliance with new EU regulations will impact sales margins and top-line growth due to increased R&D expenditure.
- Risky bets on new technologies could hurt Apple’s reputation for innovation and be a costly financial exercise
Catalysts
Company Catalysts
Impacts of Supply Chain Decisions and Regulatory Compliance
Apple's move to buy chips from TSMC's Arizona factory is a proactive step towards trying to reduce soverign risk through supply chain diversification. Currently Taiwan has a strangehold on global semi-conductor manufacturing, but increasing political tension with China means that Taiwan has a target on its back. If China wanted to deliver a blow to western competitors, Taiwan would be where they do it. However, this shift could come with financial implications, as manufacturing costs in the United States tend to be higher than in countries like Taiwan where Apple previously sourced a most of its components. Higher production costs could squeeze Apple's profit margins unless the company decides to pass on these additional costs to consumers, which could impact top line growth if cost-conscious consumers opt for cheaper alternatives.
Over-reliance on New Growth Markets with Different Demographics
Apple's market share in the smartphone market has grown significantly over the years to the point where they’re now trading blows with Samsung for absolute leadership in the space, with both companies occupying 20-24% of the global smartphone market depending on the quarter. Now this may come as a surprise depending on where you come from. In the US, you may think this number is lower than you expected, given Apple has a 57% share of the smartphone market in the US. However, if you’re from a country like India, this could be equally as surprising that the figure is so high, considering Apple’s market share in India is just shy of 4%.
Apple has identified the gap in its presence in developing markets and has launched an aggressive push into India as a significant growth opportunity with the opening of the first two Apple stores in India. This move underscores a pivotal shift in their business strategy, yet it's riddled with substantial challenges due to marked differences in consumer demographics compared to the Western nations where the company typically thrives. India's drastically lower average income, at just $2,150 annually, stands in stark contrast to the U.S.'s $70,930, highlighting a severe economic disparity. The high cost of iPhones, which can reach up to INR 80,000 ($980), almost half of India's average annual income, can be an insurmountable barrier for many potential consumers in this region.
Despite a notable revenue increase of nearly 50% to $6 billion in India, Apple's market share languishes at a meager 3.7%. The company grapples with fierce competition from rivals offering superior value propositions that include a wider range of apps, superior after-sales service, and significantly lower price points. Additionally, the prevalent language barrier, as many digital services and apps are primarily in English, further hampers internet adoption in rural India and restricts the potential growth of Apple's products and services. Thus, the company's overreliance on markets like India for future growth could indeed represent a major risk.
Even if India’s growing middle class gives Apple access to a greater market opportunity, Apple will need to up their services and software support for the Indian market, as Apple Maps and Apple’s Siri Voice Assistant have both been criticized for the lack of coverage in India and difficulty in interpreting Indian accents.
Vulnerability of Services Revenue and Regulatory Compliance Issues
Apple's Services revenue, a fundamental pillar of its growth strategy, is considerably dependent on a $15 billion per year non-compete deal with Google. If antitrust regulators decide to intervene, this agreement, representing about 20% of Apple’s total service revenue as of the 2022 Financial year, could be in jeopardy. This potential loss would leave a considerable income void for Apple, thereby posing a significant challenge to their Services segment. Apple might explore avenues like the creation of a rival search engine or forming a partnership with a different search engine, but both ventures could prove costly and particularly if antitrust regulators are being overbearing, the latter might not be an option. While there may be natural growth in other areas of service revenue Like Apple’s iCloud, Apple TV+, Apple Music, it is uncertain if any could sufficiently fill the revenue void left by the potential discontinuation of the Google deal. This vulnerability of service revenue introduces a degree of risk to Apple's overall growth trajectory.
Furthermore, the European Union's 2022 legislation requiring all new phones to be sold with USB-C charging capabilities by December 2024 could significantly impact Apple's licensing revenue. Apple earns a licensing fee on every Lightning-equipped accessory sold and this revenue stream is also included under the Services segment. Apple having to play by the rules of EU regulators looks like it could harm an otherwise impenetrable revenue stream. Rumours have pointed to the likelihood that Apple’s next iPhone 15 will be the first to have USB-C, but the notion has also been thrown around that Apple could limit the capabilities of the new USB-C connection in protest. If they retaliate by throttling the speed of charging and data transfer through the USB-C port, they risk regulatory backlash, further financial implications, and potential damage to their reputation among consumers.
Risky Bets on New Technology
Apple's foray into the mixed reality market with its recently announced Apple Vision Pro, priced at an eye-watering $3,500, represents a high-stakes gamble on emerging technology. The headset, scheduled for a 2024 launch, is entering a market where consumers have shown hesitation due to the high cost of such products and the controversial nature of wearable technology that merges reality with the digital world. While there could be notable enterprise applications for this technology, initial consumer adoption rates are anticipated to be low, factoring in both the high price point and the likely slow pace of developers to populate this new platform with apps. Forecasts estimate that even if the Apple Vision Pro generates revenue, it would likely contribute no more than $6 billion by 2028, a minor contribution compared to Apple's other product lines. If the product fails to resonate with the market, the financial implications could be significant, and the brand's reputation for innovation could take a hit. This risky venture into new technology adds another layer of uncertainty to Apple's future performance.
Industry Catalysts
EU Regulations impacting the tech industry
Ecodesign regulations that are attempting to cut back on wastage from discarded electronics are imposing heavily on smartphone manufacturers to improve components like battery life over the course of the phone’s usage to phase out early planned obsolescence. If these rules come into play, smartphone manufacturers are faced with the options to pull out of the respective markets or dedicate R&D costs to improving the longevity of these components. This could harm future smartphone sales as people will feel less inclined to upgrade on a regular basis.
Assumptions
iPhone
In my review of Apple's iPhone sales, I observe that 2022 revenue reached $205,489,000,000, up 6% from 2021. About 225.30 million units were sold in 2022, which marks a 3.7% decline compared to the previous year, with an average revenue per unit of $912. While these numbers might seem encouraging, I've identified some areas of concern.
Looking ahead to 2028, I'm cautiously optimistic. I believe the potential adoption of USB-C ports in the next iPhone could bring a noticeable sales uptick. This change could lure in Android users and owners of older iPhone models, as they've been awaiting a port update for improved future compatibility. This could result in immediate sales spiking to 250 million units. However, I expect these numbers to decline quickly as the early adopters are accounted for.
In the longer term, I anticipate iPhone sales to dip further due to market saturation and Apple's continued struggle to establish a strong foothold in emerging markets. I foresee an increase in the average price of iPhones, driven by rising R&D costs tied to the new port hardware and elevated manufacturing costs due to the use of US-sourced semiconductors.
Despite my conviction that Apple can effectively charge a premium over other brands and maintain relatively inelastic demand in its core US market, I expect this price increase to negatively affect sales in Asia, South America, and parts of Europe.
Furthermore, I assume that the iPhone is nearing a point of diminishing returns. The current level of camera software and hardware integration rivals compact cameras, meaning the allure of more megapixels is dwindling. The recent iOS 17 reveal lacked standout features to attract new users to the iPhone ecosystem.
Taking all these factors into account, I forecast iPhone sales in 2028 to reach 215 million units at an average revenue per unit of $980 (accounting for increased unit cost). This implies a total net sales for the iPhone segment of $210,700,000,000 by 2028.
iPad
I predict that the iPad segment will continue to struggle in the coming years. While the iPad Pro initially served as a premium entry into the tablet market, the line between a premium tablet and a limited laptop has become increasingly blurred. The cost factor is also a potential deterrent, especially with the larger 13 inch screen in the iPad Pro 2. The latest iPad Pro 12 inch starts at $1099, the same starting price as the more capable latest M2 Macbook Air 13 inch.
I expect the iPad Air and iPad lineups to perform somewhat better, but they remain in an odd position for several reasons. Firstly, as phones become more capable and accessible, they are most people's go-to device for light web/app browsing. Secondly, the iPad has struggled to carve a definitive niche for itself. While it has positioned itself as a tool for creatives, it faces stiff competition from Microsoft's Surface, Samsung's Galaxy tablets, and even Apple's own Mac lineup.
This competition means the iPad will continue to fill an awkward corner of the Apple ecosystem. Furthermore, the iPad is likely to struggle significantly in developing markets like India, where people's needs are met by more affordable and accessible smartphones and Windows laptops. Given these factors, I realistically see the iPad segment's revenue growing at a rate of 2% per annum through 2028, which would bring the segment's total net sales to approximately $33.43 billion in 2028.
Mac
Despite a sharp drop in Mac shipments in the first quarter of 2023, I remain optimistic about the future performance of the Mac lineup. The introduction of Apple's own M1 Silicon has been a significant turning point for the Mac segment, providing a substantial boost in speed and energy efficiency that has given Macs a competitive edge over Intel processors.
I believe this, coupled with the growing appeal of the Apple ecosystem, bodes well for sustained growth in Mac sales. While the high-cost Mac Pro may struggle somewhat in challenging economic conditions, I anticipate that the Macbook will continue to excel, particularly in North America, Europe, and Australia. Apple's move to develop its own System on a Chip (SoC) may initially increase R&D costs, but I anticipate that these costs can be recouped through the higher prices consumers are willing to pay for the benefits of longer battery life and greater efficiency. Given these factors, I'm forecasting an annual growth rate of 8% for the Mac segment, which would imply total net sales of approximately $63.75 billion in 2028.
Wearables, Home and Accessories
My expectation for the Wearables, Home and Accessories segment's future performance is one of moderated growth. Even though this division has experienced commendable expansion in recent years, largely driven by the success of the Apple Watch and AirPods, I predict the growth rate will decelerate significantly.
The recent iterations of both the watch and earbud technologies have largely been unimpressive in terms of added features. For instance, while the latest Apple Watch 8 offers new capabilities such as crash detection, temperature sensing, and advanced heart monitoring, I am doubtful these enhancements alone can entice users of even the discontinued Apple Watch 3, let alone owners of more recent models, to upgrade.
Similarly, the differentiating features of newer AirPod generations, such as wireless and Magsafe charging, may not be sufficient to incentivize existing users to upgrade. The lack of significant innovation in recent times and an anticipated continuation of this trend means that the Wearables, Home, and Accessories segment may miss out on the regular upgrade revenue observed in the iPhone division. Therefore, I am projecting a 5% annual growth rate for this segment up to 2028. So, I estimate that the revenue for the Wearables, Home and Accessories segment could be approximately $55.26 billion in 2028, given this growth prediction
Services
Navigating through a complex ecosystem of challenges and opportunities, Apple's Services segment will face significant transformations in the years to come. According Bernstein analysts pointed out, Apple's lucrative non-compete deal with Google, which contributes approximately $15 billion per year to its revenue, could be up for renewal. While many are discussing the possibility that Microsoft could swoop in and cut a deal, I am certain that this won't happen irrespective of the money offered by Microsoft because Apple relies heavily on the quality brought by Google's Search to ensure a better user experience. I believe one more 3 year deal will be agreed to at around $15 Billion a year but I think this exclusivity deal will come to an end in 2026
Complicating matters further, the impending 'Right-to-repair' legislation introduced by EU regulators poses another significant challenge. Apple may either witness a decrease in their AppleCare repair service revenue as more customers undertake their own device repairs, or alternatively, they may incur increased R&D costs as they strive to improve battery longevity to circumvent this issue.
An additional factor poised to impact Apple's Service revenue is the anticipated transition from their proprietary Lightning connection to USB-C. This move, while offering interoperability benefits, may result in a decrease in licensing income as the proprietary technology becomes obsolete.
However, it's not all gloomy for Apple's Services segment. I anticipate growth opportunities emerging from in-app purchases and Apple TV+, which could provide a buffer against these negative factors. Considering this intricate web of challenges and opportunities, I project an annual growth rate of 9% for the Services segment, culminating in approximately $113.3 billion in revenue by 2028. This figure takes into account the growth while omitting the $15 Billion Google deal post-2026.
Shareholder Assumptions
In the most recent quarter, Apple’s outstanding shares decreased by 0.7%. Apple also recently announced a new $90 Billion share buyback program. I am going to assume that this trend continues linearly with an estimate of 0.7% in shares bought back per quarter over the next 10 years, leading to a shares outstanding figure of 15.29 Billion in 10 years time.
Over the coming years, with the advent of new products like the Apple Vision Pro, new chips being sourced from the US and the costs of abiding by new EU regulations, I’m assuming Apple’s free cash flow margins takes a dip to 16%, before slowly increasing over the next few years to 25% in 2028. This is quite a large range but I think Apple’s silicon investments will become quite a fruitful thing for the business and lead to improved long-term profitability.
Risks
Risks to my narrative
The Apple Vision Pro redefined the AR space
You’ll notice that my narrative pays very little credence to the Apple Vision Pro, forecasting a nominal sum of $6 Billion for the device’s sales in 2028, 4 years after the likely release of the headset. There’s a good reason for this, as a user of other mixed reality headsets before and an owner of a virtual reality headset, I simply don’t think this is a good play by Apple. I stated earlier it was a risky bet but one of the key risks to my narrative would be this bet actually paying off. In typical Apple fashion, they aren’t first to the party, but they’re often the ‘best dressed’, hitting the commercial market with some of the most polished, useable and desirable products in their respective segments.
There is a possibility that Apple actually delivers a remarkable product that causes doubters of mixed reality technology to rethink their position and leads to a drastic uptake in the product. If this were to eventuate, it would be a major risk to my narrative as I would essentially be overlooking a huge revenue opportunity for Apple.
How well do narratives help inform your perspective?