Home/Blog/Trading Ideas/For Apple, Nothing Beats the iPhone

For Apple, Nothing Beats the iPhone

30 May 2014 in Trading Ideas

Apple made an uncharacteristic splash this week with its not-so-secret announcement on Wednesday that it would purchase music accessory and service company Beats for $3 billion.

Many pundits have been scratching their heads as to what the acquisition does for Apple that’s exactly worth that amount of money, with the general consensus that it is the Beats music-streaming service that was the apple of, well, Apple’s eye.

With this move, suggests Andressen Horowitz analyst Benedict Evans, it’s now abundantly clear that Apple’s rule of digital music has indeed ended. “Streaming and YouTube ended that,” Evans wrote on his blog this week.1

As a result, the company’s iPod business is “pretty much over,” according to Evans. The company has sold 392 million iPods for around $66.6 billion (plus the revenue from selling music), but as Evans put it, “there’s not much more to come.”

 

But then, it’s actually the iPad tablet that is carrying Apple’s hopes and dreams anyway these days, right? Not exactly — in its latest quarter, iPad revenue was $7.6 billion, or just 17% of Apple’s revenue.2

Even more importantly, the iPad’s performance was not particularly stellar: Unit sales were down 16% year over year, while revenue was down 13%.

This sluggishness wasn’t a complete surprise, however. In last year’s fourth quarter, global tablet shipments rose 28% from a year earlier, well below 87% growth in the fourth quarter of 2012.3

What’s going on there? According to IDC, the US market is already approaching saturation – those who want a tablet, have a tablet. While emerging markets have shown strong growth, it hasn’t been enough to sustain the dramatic worldwide growth of years past, IDC said.

All of which brings us to Apple’s real growth engine, the one it has had for seven year now – the iPhone.

The device generated $26 billion last quarter, representing 59% of Apple’s global revenue. As goes the iPhone, so goes Apple. (One contextual note: Evans pointed out that Apple’s iPhone revenue last quarter was significantly more than the recorded music industry’s $17 billion in revenue for all of 2013).

And it was the strong performance of the iPhone last quarter that led to investors embracing Apple’s earnings report last month – which in turn has helped lift shares of Apple nearly 19% since then.

Apple’s jump has also lent a hand to other investments that benefit from iPhone outperformance. The Mobile Internet Tsunami motif, which comprises a 20.2% weighting in Apple’s stock, is up 6.4% in 2014. During that same time, the S&P 500 has gained 5.1%.

In the past month, the motif is up 3.5%; the S&P 500 has increased 2.4%.

As Jay Yarow pointed out for Business Insider, what seemed to drive iPhone sales performance last quarter (to the tune of unit growth of 17% and sales growth of 14%), was strong sales of the iPhone 4S, which is the company’s cheapest phone.

Yarow noted that Apple’s chief financial officer said that about half of last quarter’s decline in the average selling price of the iPhone was due to the company’s success with the 4S in emerging markets.

Selling cheaper smartphones by cutting prices has been in direct conflict with Apple’s stated vision, but the company’s most recent quarter suggests that many more people will buy its most important product if they can afford it. And higher iPhone sales appear to be a positive for Apple and other smartphone-related stocks.

1Benedict Evans, “Beats – content is king?”, May 28, 2014, http://ben-evans.com/benedictevans/2014/5/28/beats-content-is-king.

2Jay Yarow, “Apple Made One Thing Clear This Week – The iPhone Is The Only thing That Matters,” businessinsider.com, April 26, 2014, http://www.businessinsider.com/apple-is-the-iphone-company-2014-4, (accessed May 28, 2014).

3Nick Turner, “Apple Facing Slowing Tablet Growth as US Market Gets Saturated,” Bloomberg.com, Jan. 29, 2014, http://www.bloomberg.com/news/2014-01-29/apple-facing-slowing-tablet-growth-as-u-s-market-gets-saturated.html, (accessed Jan. 29, 2014).

*