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Managerial Economics for Apple Inc.
The document is a comprehensive analysis of Apple Inc., detailing its market position, growth potential, and competitive landscape in the consumer electronics industry. It highlights a recommendation to buy shares based on current valuations and growth prospects, while also outlining various risks and operational challenges the company faces. Key statistics, company history, product lines, and future product potential, such as the iTV and iGame console, are also discussed.
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Managerial Economics for Apple Inc.
- 1. Submitted to: Prof. SivaKumar SubmittedBy:- • Amit Kadam (15) • M Sridhar Srinivas (21) • Sharma Anubhav (39) • Narendra Shere (40) • Sybil Philip (43) • Kumod Shirkande (47) MIM 2012-2015 K. J. Somaiya Institute of Management Studies & Research Company ProfileCompany Profile
- 2. Investment HighlightsInvestment Highlights •Foreseeable Growth: potential high growth until 2016 with current product lines. Although the total size of the company is huge, in the three major segments it operates, it either has a small market share in the biggest and growing markets ( smart phones ), small market share in a big market (PC), or high market share in a growing market (tablets). The growth potential in all three segments are still high. • Innovation: There might be next big thing like iTV. The next big thing is not priced in our valuation model, it would be a bonus if it materialize. • As of March 28, 2013 around 5:00 p.m. the market stock price is around $455, and we believe its fair value is around $700. • Considering its potential growth in next 5 years, continuous growth from innovation in the long term, and rich free cash it has accumulated and continue to generate, it is still very cheap with a 10- PE. • AAPL has been a very volatile stock for the last five years and will continue to be. The combination of its risk and return offers great opportunity for patient investors who buy growth at value price. • Recommendation: BUY • Disclaimer: This is an example of stock analysis for educational purposes.
- 4. The OutlineThe Outline •Industry Analysis • Company Description • Does company provides Unique Service / has Competition ? • Domestic / International / Global • Legal / Regulatory hurdles faced by organization • Impediments / Obstacles / Weakness How is government policy and liberalizing • Effects of government policies on business of organization • Homogenous / Heterogeneous product • Market Type : Monopoly / Oligopoly / Perfect Competition / Monopolistic competition • Markup on cost / price • Profitability : Is it growing / Stagnant / Declining? • If declining then why? State the reasons.
- 5. Industry AnalysisIndustry Analysis •Consumer Electronics Industry is very competitive • Products can be looked at as a luxury and not a necessity. • Demand is driven by the “desire” of the product not the “need” • Demand for Apple products is expected to continue to grow rapidly • Not one company in the Technology industry competes with Apple in all business segments. • We took the market capitalization of all the industries of Apple’s competitors and compared Apple’s Market Cap. It seems that Apple clearly dominates. • Will have to get permission because it will exceed the limit of 2.5% of initial position.
- 6. Company OverviewCompany Overview •Apple Inc. was founded by Steve Jobs and Steve Wozniak in 1976. • Apple Computer, Inc., is an American multinational corporation with a focus on designing and manufacturing consumer electronics and closely related software products • As of September 2007, the company operates 194 retail stores in the United States, and more in the United Kingdom, Japan, Canada, and Italy • For a variety of reasons, ranging from its philosophy of comprehensive aesthetic design to their advertising campaigns, Apple has engendered a distinct reputation in the consumer electronics industry and has cultivated a customer base that is unusually devoted to the company and its brand, particularly in the United States.
- 7. Key StatisticsKey Statistics •Current Price $552.00 • Market Capitalization 514.67 Billion • P/E 15.71 • EPS 35.14 • P.E.G. 0.66 • R.O.A 24.01% • R.O.E 45.58% • 5 yr. Annualized HPR 137% • Average 5 year Gross Margin of 40% Source: Yahoo! Finance
- 8. Apple BiographyApple Biography AppleComputer INC. was co- founded in 1976 by the CEO of Apple Steve P. Jobs, and it was incorporated in California On January 3, 1977. 2006 1975
- 9. Apple Computer,Inc. since January 3, 1977 (founded on April 1, 1976) & now Apple Inc. since January 9, 2007 is an American multinational corporation that designs and markets consumer electronics, computer software, and personal computers. The company's best-known products include the Macintosh line of computers, the iPod, the iPhone and the iPad. Its software includes the OS X & iOS operating system; the iTunes media browser; the iLife & iWork creativity and production suites. Fortune magazine named Apple the most admired company in the United States in 2008, and in the world from 2008 to 2012.
- 10. As ofMarch 2013, the company operates 394 retail stores in 13 countries, and an online store where hardware and software products are sold. It is the largest publicly-traded corporation in the world by market capitalization, with an estimated value of US$800 billion as of February 2013. It is furthermore the largest technology company in the world by revenue and profit, earning more than Google and Microsoft combined. Source: "Apple's $46 billion sales set new tech record". CNN. January 24, 2012. “We’re armed with the strongest product line in our history, the most talented employees and the best customers in our industry & $25 billion of cash safely in the bank with zero debt.” - Sir Steve Jobs
- 11. J. P.Morgan’s chief economist Mr. Michael Feroli US GDP rate will increase by 0.5%. It is based on probability of demand for iPhone 5. Current GDP is 2.0 %, which is likely to be upto 2.5%. Yearly sell revenue of iPhone 5 is considered as 12.8 billions $. Hence GDP will increase by 0.33% due to iPhone 5. When estimation was done for iPhone4, sell was extremely high than expected. iPhone 5’s Finance Magic Selling Price 600/Unit Quarterly Sell 80 billions units Selling Revenue 4.8 billions $ GDP Increment 3.2 billions $ Apple iPhone5’s effect on U.S.A.’s EconomyApple iPhone5’s effect on U.S.A.’s Economy
- 12. • Personal computersPersonalcomputers • MobileMobile communicationcommunication devicesdevices • Portable digitalPortable digital music playermusic player • SoftwareSoftware • Networking solutionsNetworking solutions • Tablets The company designs, manufactures & marketsThe company designs, manufactures & markets
- 13. PRODUCTSPRODUCTS • iPhone • iPad •Mac Hardware Products o Desktop computers: iMac, Mac Pro and Mac mini o Portable computers: MacBook Pro and MacBook Air • iPod o Touch; Nano; Shuffle; Classic • iTunes + iTunes Store • Mac App Store • Software Products and Computer Technologies • iCloud • Upcoming: o iTV o iGame Counsel Source: Apple 10-K (2011)
- 14. LegalRegulatory HurdlesLegalRegulatory Hurdles •Patents, Copyrights, or Governmental Approvals and Licenses? • Apple currently has 3.5 Billion Intangible Assets o Typically are patents and copyrights • Very active in filing patents on new products o Literally everything they make • They also peruse legal action • Apple is very secretive and protects its products Source: Apple 10-K (2011)
- 15. New Products???New Products??? •Apple Television o “display monitor or screen” would be more fitting. • Apple Game Counsel o Epic Games, CEO Mike Capps spoke of the possibility of a Bluetooth controller being developed for the iPad. With a hypothetical controller combined with AirPlay and an Apple TV, he believes Apple could challenge Microsoft's Xbox and Sony's PlayStation platforms for the home console gaming market. Source: AppleInsider.com
- 16. Key Risk FactorsKeyRisk Factors • Global Economic Conditions • Highly competitive global market subject to rapid technological change o “Wide Moat” • Must successfully manage frequent product introductions and transitions • Operating results depend on Apple’s ability to obtain components in sufficient quantity • Depend on outsourcing, many outside the U.S. • Relies on third-party intellectual property and digital content • Apple outsources all of its production o Because it can get it at a very low cost overseas.
- 17. Business Analysis-Macro EconomyBusinessAnalysis-Macro Economy • The state of global economy & the state of the overall stock market. • Sales could significantly slow down after 2016 without new revolutionary products. • Sales growth is already slowing and we might see first quarter of significant EPS decline for March 2013. • The impact of slowing economy on AAPL o products • Products sold at premium price would suffer • Some purchases will be postponed, but not discarded • Innovative products at its early life cycle will still grow o Financial strength • A strong balance sheet with enough cash is an important competitive advantage
- 18. Business Analysis-The ProductsBusinessAnalysis-The Products • Overview: Segments, size, market share and growth. o Mac (hardware and software): 14M units ,4% PC share; 30+% growth, 3 times industry average. Down to single digits during recession. Rebounded to 32% growth in 2010. o iPod (also iTune, and accessories): 50M units, 70% US market, negative growth. Down 7% June09 Q , first decline since introduction. Will decline at 10% rate o iPhone: 10M + units 2008, 20M 2009, 40M 2010. huge growth potential, might reach 100M in 2013, and 150M 2015. The King of the iEmpire. o iPad: 10M first year of introduction, 20M 2011, 50M 2015. The addressable market is big in absolute size 150million users, 3.2 Million sold in June Q, Pending demand is high as Production cannot meet demand
- 19. Business Analysis-iPhoneBusiness Analysis-iPhone •The iPhone-competition o Competition: Is the “Storm” coming? Is it time for “Dream”? o New Entry: • Traditional phone makers • Smart phone only makers • New comers: Samsung, Sony, HTC, Motorola, Nokia • PC guys: Dell, HP, Lenovo, Acer o Create and continue dominance like iPod? Or fade away like Mac before o Possible outcomes of smart phone industry • Co-existence of several major brands, hardware and platforms • A dominant player (winner takes all) • A universal operating platform ( Google, WinMobile) o Strategic Strength o Software and applications: smart phones will be software centered o Hardware: a fashion statement o PC expertise: the phone feature is less important, and the computer features are the differentiator o The App store and iTune o The brand o The customer loyalty: the highest among competitors, always
- 25. Since the year2000 Apple has shown strong results
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- 27. TheThe RiskRisk • Competition:AAPL is not Microsoft at any fronts it competes. o Enemies: • Enemy number 1: Google. Competes with AAPL on mobile OS, Tablets, internet TV, and possibly music. • Enemy number 2: Microsoft • Smart phone family: HTC, Samsung, Sony, RIMM, Motorola, Nokia. o Price and margin pressure • Leadership o Tim is a great operator, coordinator, manager, but not a “product person”, not a “marketing genius”, not a visionary o Power struggle within and Apple might lose talent o Lack of ultimate authority to do the “right” but unpopular thing • Disruptive technology: Web-based app and html5 • Double Recession: slower growth of high end products • Regulation: not a big concern as Software or interest, but a growing concern
- 28. • Quality issue,product failure o iPhone5 Map gate o Antenna gate for iPhone4. • Labor issues: Apple face negative publicity for the unfriendly working conditions and low pay of its supply chains. Labor cost will rise sharply and might lower gross margin. • Relations with carrier and subsidies. Once carriers decide to cut subsidy significantly, Apple might lose volume, ASP and margin same time, cause a decline of profit • Tax: Tax of cash parked in foreign subsidiary when they are repatriated to US ultimately. Apple might not only need to pay US tax on these cash, but its effective tax rate on future earnings would eventually rise to 30% + level, lowering its earning power significantly. • Too big: AAPL has a market cap higher than Soft, and the only direction from top is going down. • Valuation: Current valuation is still high, compared with Soft and Intc. • Android: Competition like Android is catching up • Margin: Margin might collapse because of competition • Growth: Growth will slow down. Rule of big numbers. • Lawsuit: patent lawsuit banned it from delivering smart phones. • Brand : The brand might be diluted when Apple lower prices and go TheThe RiskRisk Continues…Continues…
- 29. Top Three CompetitorsTopThree Competitors In PC & OS segment • Microsoft o Controls about 94% of Operating Systems o Makes products that last a long time, although not “hip” o OS is compatible with everything • Hewlett-Packard o Top competitor in PC sales o Controls large segment of business market o Does not offer other products other than PCs and accessories • Dell o Weakest competitor of top 3 o Provides computers for businesses, schools o Behind HP in PC sales o Does not offer other products other than PCs and accessories
- 30. Graham-GreenblattGraham-Greenblatt • 1 yearEarnings Growth = 35.17% • Graham o 7-10 year growth 347% • Greenblatt o APPL=353.7% o GOOG=46.37% o RIMM=148.26% o HPQ=81.81% o DELL=42.19%
- 31. Competitor’s Graham-GreenblattCompetitor’s Graham-Greenblatt Company1 yr. EPS Growth Graham Greenblatt AAPL 35.17% 347% 353.3% GOOG 66.67% 6.21% 46.37% HPQ 55.58% .21% 81.81% RIMM 32.11% 2.65% 148.26% DELL 15.95% .26% 42.19% Source: Yahoo! Finance
- 32. RecommendationRecommendation • BUY 100shares at the market. • Will have to get permission because it will exceed the limit of 2.5% of initial position.
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