If Apple (NASDAQ: AAPL) can execute, the next decade could be even better

By
Michael Paige
Published
December 15, 2020
NasdaqGS:AAPL

Apple Inc (NASDAQ:AAPL) has created generational wealth for those who’ve held it long enough. As a result, some investors say its best days are behind it, while others think it still has plenty of room to grow. The question is, who will be right in 10 years’ time?

Apple: The technology giant with a loyal fan base

It’s well known that the 1 billion iPhone users are Apple’s bread and butter. 

What’s interesting is that many of these 1 billion customers are loyal Apple users. According to surveys, roughly 90% of iPhone users expect to upgrade to another iPhone when they replace their existing device. What’s more, the average upgrade cycle of these users for a new iPhone is about 4 years. So going forward, you effectively have 900 million users, and on average, 25% of them (roughly 225 million people) will be upgrading their phones in any particular year. To put that in perspective, iPhone sales in FY2020 were around 200m units. Since the first 5G iPhones have just been released, it's plausible that this figure will increase since many users have been waiting for the 5G iPhone variant to justify an upgrade. 

As long as Apple is able to maintain its brand and continue to meet its customer’s expectations with its products, users will continue to upgrade their phones with Apple, which can help set our expectations for future revenue. 

Some investors view Apple’s reliance on iPhone sales as a risk (50% of revenue in FY2020), while others view it as a first step into the Apple ecosystem. Once users are acquired, they find that Apple can provide them with an array of products and services to meet many of their needs. 

Check out the company’s earnings and revenue history below, or our full analysis in our company report.

NASDAQGS:AAPL - Earnings and Revenue History to September 26 2020

That’s where Apple’s strategy for the future starts to look interesting, and we can already see some evidence of the company’s plans in its reports.

Provide more value to those fans

Apple’s suite of products and services stretches far beyond the iPhone. While the company also sells Macs and iPads (10% and 9% of revenue, respectively), they aren’t alone. Apple has been expanding its offering into 2 other lines: Wearables, Home and Accessories which contributed 11% to revenue in FY 2020, and Services, which contributed around 20%. 

These wearables refer to items like the Airpods and the Apple watch, while Services refer to the items like the App Store, iCloud, digital content, and payment services. 

The Airpods and Apple Watch have been successful endeavors in their own rights. Launched in 2016 and 2015 respectively, Apple has sold tens of millions of these products per year, which has contributed billions of dollars to the company’s total revenue. Not only that but the more Apple products each user has, the more likely they are to remain in the Apple ecosystem. 

Source: Counterpoint Technology Market Research

In regards to Services, that’s a somewhat new field that can propel Apple’s earnings power. Apple’s gross margins from products were 31% in FY2020, while those from services were 66% (which is up from 60% in 2018). Given the services business has grown from 8% of total revenue in 2015 to 20% this year, it’s encouraging to see that this higher-margin offering is increasing its contribution to overall revenue. 

Growth in its services business will likely do a few things: Solidify users into the Apple ecosystem, generate more predictable and recurring revenue, decrease its reliance on new product sales, and increase overall net margins. 

The analysts seem to think so too because their forecasts for earnings and revenue show an improvement in net margins by the year 2025.

So what will Apple look like in 10 years?

Apple has built a reputable brand with a loyal customer base. For the decade ahead, it needs to continue following the core brand principles that made these users loyal fans in the first place, while creating incremental innovations to its products and services. As it increases its services business, Apple’s economics will likely become even more favorable than they already are, as revenue could be less volatile and net margins could be even better. 

So if Apple is able to execute on the above, its future looks quite bright. If you’d like to look at a list of other stocks that have bright futures, we’ve collated a list of US stocks with forecasts for high growth potential.

Simply Wall St analyst Michael Paige holds a position in AAPL. Simply Wall St does not hold any position in AAPL. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Promoted
If you're looking to trade Apple, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.


Simply Wall St character - Warren

Simply Wall St

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.