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Get to Know the Business Well

Apple Inc will not be in existence today if not for the rejection of both Wozniak (HP) and Jobs (Atari) employers with regards to the first Apple prototype. Spurned by both employers, they decided to go it alone scraping all the money, with Jobs selling his red and white Volkswagen and Wozniak his HP 65 programmable calculator. The name Apple was thought of by Jobs on one of his trips to All-One Farm in Oregon. They persuaded Ronald Gerald Wayne of Atari to join in with ten percent of the company. In 1st April Fools’ Day 1976 Apple Computer Company was born (Linzmayer, 2004, pp. 4-6). Apple Computer Company had grown over the decades and are now known as Apple Inc. with listing in Nasdaq under the symbol of AAPL. Apple (ticker symbol: AAPL) is one of the world’s leading consumer electronics and personal computer companies. The Cupertino, California-based company was established in 1977 as Apple Computer Inc. It dropped the “Computer” from its name in early 2007 (Nasdaq, 2013). The information on Apple Inc is best summarized below (Brain, 2012):

The Adoption graph below gives the information that in order to succeed innovation must be perpetual and even at the expense of killing one’s product for instance Apple killed the iPod mini by releasing the iPad. Yet, it wasn’t the case recently. Volatility and uncertainty kicked in (Dillet, 2013).

The analysis begins with Apple Inc. profits by products. As can be seen, Apple Inc. relied heavily on the iPhone, it is predicted that Apple Inc. profits will be high correlated to that of iPhone sales and margins (Blodget, 2012).

As seen from Table 2, Iphone revenues formed the largest component of Apple Inc. revenue. We will analyze the US market of Iphone first in details. As can be seen from Table 3 – Top Smartphone Brands, Apple had 36.3% of the market share as at Dec 2012 which increased to 39.0% of the market as at Mar 2013. Samsung has a 21.0% which increased by 0.7% at Mar 2013. The two rivals occupied more than 60% of the Smartphone market share (Flosi, 2013).

For the Smartphone Worldwide market, when viewed year to year Table 4 shows Android gaining share from 28.8% to 32.7% while Apple has lost share from 23.0% to 17.3%. LG, Huawei and ZTE have market shares ranging from 4.2% to 4.8%. Ipad is the third largest revenue grosser but with the fastest growth. The Smart Tablet market was arguably formed by Apple singlehandedly with the launch of Ipad. Though various tablets existed before Ipad, it is the emergence of Ipad that created the Smart Tablet market as it is today.

Worldwide sales of Smartphones shows that Samsung has the fastest and largest growing share growing at 60.7% with Apple Iphone growing at the least at 6.6% (Jones, 2013). Apple Inc. third largest revenue grosser is that of the Ipad, but it is also the segment that grows the fastest estimated 50% growth year to year from 2011 to 2012. Although tablets had been in existence for quite some time, it could be said that Apple singlehandedly founded the industry with the launch of its Ipad. The market that Apple started shows no signs of slowly down. Worldwide tablet shipments continue to surge, growing 142.4% year over year in the first quarter of 2013 (1Q13), according to preliminary data from the International Data Corporation. However it can be seen that Apple’s share is dropping slightly with Samsung and Amazon Inc. eating into Apple’s pie as in Figure 2 (Tom Mainelli, 2013).

Apple Computer Company as Apple Inc. had originated from focused on Personal Computers as the name had suggested. Apple Inc. second largest revenue earner is Mac and other revenue which constitute 38% of the Gross Profit and Gross Profit margins of 28% higher than that of Ipad’s 28%. Why is this so? Apple currently has eight business segments consisting of Desktops, Portables, iPod, iPhone, iPad, “Other music related products and services”, “peripherals and other hardware”, and “software, service, and other sales”. The desktop and portables segment which make up the Mac segment, Apple’s line of desktop computers, mini computers and laptops account for 15% of the total revenue. The iPod MP3 player from which iPhone and iPad evolved had seen negative growth rates and generated about 4% of the revenue. The rest are generated by the remaining segments such as App Store, iTunes Stores and iBook store as well as peripherals and other hardware (Group, 2012).

Apple Inc. production model are more focused upon the design and creative aspects of the product and have no factories or production lines as well as distribution channels. Production and distribution are outsourced. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas. In 2011, Apple Inc. employed 43,000 people in the United States and 20,000 overseas earning over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google as a result of such outsourcing to cheaper countries and suppliers. An additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products overseas in factories of Apple Inc. contractors (Duhigg & Bradsher, 2012). Apple Inc. holds a “central conviction” that overseas production facilities offer scale, flexibility, diligence and skilled workers that U.S. factories are no longer able to match. Apple Inc. manufacturing partner, Foxconn has risen to become a giant in the industry. The company is estimated to assemble 40 percent of the world’s consumer electronics (Ong, 2012). Apple Inc. main suppliers’ list is secretive until recently due to pressures from Labor rights groups, journalists and academics. The list consists of 156 companies, accounting for 97 percent of what Apple says it pays to its suppliers. Apple’s tally of its suppliers includes many big-name companies like Intel and Nvidia, both makers of chips for Apple’s Macintosh computers, along with other parts makers like Samsung Electronics, Toshiba and Panasonic. The list also includes less recognized companies like Zeniya Aluminum Engineering, Jin Li Mould Manufacturing and Unisteel Technology (Wingfield & Duhigg, 2012).

Apple Operating System allows seamless communications between all Apple products giving them a special niche in the market which other companies and products will find a barrier to entry. Citing the strength of iTunes and the App Store, the president of PC maker Acer said his company does not have plans to launch a touchscreen tablet to compete with the Apple iPad (Marsal, 2010). Apple iTunes allows for distribution of apps and multimedia to its products effortlessly increasing the barrier of entry for competitors, giving themselves a complete ecosystem to develop new products and protect existing products from direct competition.

Wealth Creation

For wealth creation, according to the Chief Executive’s third annual ranking of 338 US. CEOs, the late Steve Jobs came in fourth in wealth creation, only Priceline’s Jeffrey Boyd, Aflac’s Daniel Amos and Federated Investors’ Christopher Donahue did better (Elmer-DeWitt, 2010). Jobs came in fifth in the 2011 Wealth Creation Index (Donlon, 2011). Tim Cook took over the helm at Apple Inc. in 24 August 2011 but he was ineligible to be considered as the rules of the Index require 3 years on the job.

Firstly we will do a margin analysis of Apple. For margin analysis, we need to be familiar with the structure of revenues of Apple. Apple Inc. is a company that focused on organic growth through innovative and disruptive technologies. The sales are accelerated every time such disruptive technological items are launched. Production is not part and parcel of Apple Inc. as such functions are outsourced. Therefore while looking at gross profits we need to analyze only the material costing which may affect outsourced companies prices to Apple Inc.

Asymco’s Horace Dediu found that Apple’s margins are more or less directly tied to the sales performance of its popular iPhone. iPhone being a uniquely profitable product with gross margins of more than 50%. Any changes in iPhone gross margins will cause Apple Inc. margins to change as well. iPhone average selling price has been constant at around $600 while iPad’s has fallen from $531 to $449. This is due to the increase in prices of iPhone components by about 29% over the last year cutting iPhone gross margin to 48% from a high of 58%. This was one of the reasons cited by Apple Inc. on the reduced margins (Reed, 2013). The structure of Apple Inc. revenues are such that iPhone and iPad takes up 81% of the gross profit (From Table 2). Any changes in the margins of the two products will have a dramatic effect on Apple Inc. revenue and margins.

Scissor effect is what takes place when revenues and costs move in diverging directions. It accounts for trends in profits and margins. From Figure 3, it can be seen that the gross margins posted strong growth which exceeds that of operating margins on what is known as the scale effect. However it is noted that there are some convergence of the gross margin and operating margin. This is due to the increase in prices of components of iPhones (Schwarz, 2013). Breakeven effect isn’t visible as the gross margins are a healthy level away from the operating margin.

Apple Inc. shares have been dropping from a high of more than $700 to the current $400 plus per share. This is not due to Apple Inc. not making money nor is it due to the ROI. If you are looking at the perspective of ROI, Apple Inc. is one of the cheapest companies you can get. With the dividends of Apple Inc. on an increasing trend, it is a very attractive buy. Problem with Apple Inc. is the perception investors have of the Company and also the secrecy culture of the company. It does not really engage its shareholders who are also stakeholders of the company. The current CEO Tim Cook is doing a good job of mending ties but he also needs to manage the expectations of the shareholders. The company has grown from a disruptive technology company to that of a high valued added company. There are competitions in all areas of its markets on both the high end and low end segments. It is difficult for a company to keep producing disruptive products that has astronomical profits but we expect Apple Inc. to be at the forefront of consumer markets with its highly valued branding and as well a great ecosystem in Itunes and its MacOS that protect it well from price wars.

Bibliography

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Dillet, R., 2013. With Earnings Around The Corner, Apple’s Growth Prospects Are Gloomy. [Online] Available at: http://techcrunch.com/2013/04/23/with-earnings-around-the-corner-apples-growth-prospects-are-gloomy/ [Accessed 9 June 2013].

Donlon, J., 2011. 2011 Wealth Creation Index. [Online] Available at: http://www.greatnumbers.com/Chief_Executive_2011_S_P_500_CEO_Wealth_Creation_Index.pdf [Accessed 11 June 2013].

Duhigg, C. & Bradsher, K., 2012. How the U.S. Lost Out on iPhone Work. [Online] Available at: http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html [Accessed 12 June 2013].

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Flosi, S., 2013. comScore Reports March 2013 U.S. Smartphone Subscriber Market Share. [Online] Available at: http://www.comscore.com/Insights/Press_Releases/2013/5/comScore_Reports_March_2013_U.S._Smartphone_Subscriber_Market_Share [Accessed 10 June 2013].

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Jones, C., 2013. March Quarter Smartphone Results: Google/Samsung And Apple Continue To Dominate. [Online] Available at: http://www.forbes.com/sites/chuckjones/2013/05/06/march-quarter-smartphone-results-googlesamsung-and-apple-continue-to-dominate/2/ [Accessed 10 June 2013].

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Marsal, K., 2010. Apple’s iTunes advantage keeps Acer from building iPad challenger. [Online] Available at: http://appleinsider.com/articles/10/02/01/apples_itunes_advantage_keeps_acer_from_building_ipad_challenger [Accessed 10 June 2013].

Nasdaq, 2013. Apple Inc. Stock Quote & Summary Data. [Online] Available at: http://www.nasdaq.com/symbol/aapl [Accessed 9 June 2013].

Ong, J., 2012. Apple’s overseas manufacturing operations offer flexibility, not just savings – report. [Online] Available at: http://appleinsider.com/articles/12/01/22/apples_overseas_manufacturing_operations_offer_much_needed_flexibility_not_just_savings [Accessed 12 June 2013].

Reed, B., 2013. Why are Apple’s margins shrinking? It’s all about the iPhone. [Online] Available at: http://bgr.com/2013/04/25/apple-gross-margins-analysis-iphone-465184/ [Accessed 11 June 2013].

Schwarz, F., 2013. Bare Figures – Apple Quarterly Results Visualized. [Online] Available at: http://barefigur.es/ [Accessed 11 June 2013].

Tom Mainelli, R. R. M. S., 2013. Worldwide Tablet Market Surges Ahead on Strong First Quarter Sales, Says IDC. [Online] Available at: http://www.idc.com/getdoc.jsp?containerId=prUS24093213 [Accessed 10 June 2013].

Wingfield, N. & Duhigg, C., 2012. Apple Lists Its Suppliers for 1st Time. [Online] Available at: http://www.nytimes.com/2012/01/14/technology/apple-releases-list-of-its-suppliers-for-the-first-time.html [Accessed 12 June 2013].

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