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Apple (AAPL) Stock | NASDAQ: AAPL

Covered by Stratosphere

The iEcosystem

Apple designs a wide variety of consumer electronic devices, including smartphones (iPhone), tablets (iPad), PCs (Mac), smartwatches (Apple Watch), and TV boxes (Apple TV), among others.

The iPhone makes up the majority of Apple's revenue. Apple also offers its customers a variety of services such as Apple Music, iCloud, Apple Care, Apple TV+, Apple Arcade, Apple Card, and Apple Pay, and others.

Apple's products run internally developed software and semiconductors, and the firm is well-known for its integration of hardware, software, and services. Apple's products are distributed online as well as through company-owned stores and third-party retailers.

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Balance Sheet


Investment Thesis

  1. One of the truly great businesses of today, Apple has created an ecosystem of elegant technology products and services that consumers around the globe love.

  2. Apple has created a powerful ecosystem of products and services that work together providing additional utility the more devices and services consumers purchase.

  3. The business flexes pricing power year after year for products that customers cannot imagine their life without. These products demand premium prices for Apple’s commitment to excellence in product design. Everything just works.

  4. Apple owns both sides of the tech ecosystem, hardware and software. Apple has created a monopoly-like market when it comes to services operating on their hardware, like the App Store which Apple charges a large take-rate of publishers on the store.

  5. The Apple Ecosystem has created a network effect and high switching costs allowing them to print free cash flow at never seen before figures. The cash flow can be used to fund optionality in the ecosystem and reward shareholders by continuing dividend increases and share buybacks.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

The Apple Ecosystem

Since the iPhone's introduction in 2007, Apple’s total revenue has skyrocketed. What's more is that its customers appear to take their collective loyalty to a new level with every additional product or service Apple comes out with. What is allowing this company to maintain such high dominance in a world with tons of other choices? The Apple Ecosystem.

This ecosystem allows any recent Apple product to communicate with one another and connect seamlessly with any of Apple's services. It gives the consumer a convenient and efficient experience with enhanced capabilities when using products and services within the Apple family.

Apple Devices TogetherSource: BuisnessInsider

Apple's strategy is to get as many users into its ecosystem and hold as many of their personal assets (i.e., photos, videos, content, music, streaming services, messaging, and other services) within the Apple ecosystem. As a user gets acclimated to the ecosystem, they will generally ramp up usage of Apple's main products and services, as well as any other ancillary services.

Users find that the Apple Ecosystem allows for an increase of marginal utility as the more products one owns, the more add-on features one can access. This is why the ecosystem is incredibly sticky and Apple product users are extremely loyal to the brand. The more you own, the less likely you are to switch to its competitors, who do not benefit from the same effects (i.e., switching from one Android phone to another is generally easy and does not impair experience).

We can see the effects of this stickiness in our daily lives. For example, users can access all of their photos in a single place, regardless of the Apple device they use, through iCloud.

Another interesting feature is the level of integration between an Apple Watch and MacBooks. If a user owns an Apple Watch and a MacBook, the Watch can unlock the MacBook if they are under the same Apple ID and are in close vicinity of one another.

Apple's ability to utilize exercise optionality, by encouraging users to buy more of their products, ensures consumers continue to use Apple products while also buying more of them.

Today, there are now over 1 billion iPhone users. While the growth rate has been slowing, Apple has captured 1/7th of the world on its ecosystem through iPhones alone. The number is obviously higher when considering the number of Mac, iPad, and other Apple product users.

Apple is an exceptional hardware and software company with numbers that show for it. We think Apple provides a highly compelling ecosystem that grows in utility. The longer users stay on it, the more difficult it is for existing users to cut ties with Apple for competing products and services. The ecosystem is the main reason (next to high quality of products) behind Apple's pricing power that is its ability to charge premium and rising prices with each new model.

Vertical Integration

Unlike other hardware manufacturers, Apple is vertically integrated to an extent that others simply are not. Apple owns each aspect of its ecosystem — hardware, software, services, and sales.

Not only does Apple have near-full control over its entire product and service stack, it also opens up opportunities like economies of scale, non-conflicted sales (i.e., Apple only sells Apple at its stores), and highly optimized software and services for its products.

No other company can compete with Apple's level of vertical integration. Although there are other great products out there, they are not as optimized, seamless, and integrated within an ecosystem to the extent Apple products are. With that, we think Apple's vertical integration has been, and will continue to be a key to success.


"Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it's worth it in the end because once you get there, you can move mountains."

Steve Jobs loved simplicity and his legacy has lived on. Apple prides itself on its attractive aesthetic design and embedded product / service simplicity. These intangible traits have also contributed to Apple's strong brand and loyal user base.

Making things simple is almost always a great business. Apple's focus on usability, design, seamless integration, and flexible functionality captivate new customers and keep existing ones within the ecosystem. "[Apple's] devices just work", as Steve Jobs had famously said.

Opportunities Ahead

  • Apple seems to reinvent itself time and again while continuing to advance the iEcosystem (our own term) forward. Apple today is clearly a different Apple than it was in the 2000s. Many new products and services exist today that many users cannot imagine living without generate billions of dollars for Apple. A prime example of this is Apple's AirPods. AirPods now generate as much revenue as entire companies, like Netflix. They also generate more revenue than uber large companies like Adobe, Nvidia, AMD, Spotify, and many others. Aiding Apple is its users' near-inelastic demand (users are willing to pay higher prices for Apple products merely because they are Apple products) for its products. As it innovates and makes seemingly minor tweaks to products we know well, they tend to take off in popularity and occasionally become a fashion or status statement (think AirPods vs. other wireless in-ear headphones). Apple's customers' immense brand loyalty enables Apple to enter any technology market or create any product and be successful. We think Apple products and services are highly compelling offerings to existing and non-Apple technology users. As long as Apple continues to draw users and expand its ecosystem with highly sticky secondary products, features, and services that draw on network effects, we think Apple will continue creating highly profitable product lines that we could not have imagined. This is what optionality is, and it is extremely difficult to model in a DCF (i.e., discounted cash flow) model.

  • Androids are still the most commonly used smartphones around the world. This is an opportunity for Apple, not a threat. Apple holds less than 20% of market share worldwide, but it has an ecosystem that is unmatched by any other technology provider. While Apple devices are expensive, objectively speaking, it may be years before many countries, especially emerging ones, to adopt Apple devices on a mass scale. Until then, Apple can continue expanding on the iEcosystem and increasing the value proposition. We believe Apple's market share will continue expanding and the network effects inherent in its ecosystem will spur growth over the long run.


The Double-Edged Sword

Apple is heavily reliant on China for two things — a large portion of its revenue base (about 1/5) and manufacturing.

Geopolitical tensions between the US and China could escalate at any time and create supply chain disruptions as well as a revenue headwind.

We cannot predict the probability, extent, or magnitude of such tensions or the potential source for them. That said, we believe investors should "price in" some level of risk with the US-China relations before making an investment in Apple.

Can the Reign be Sustained?

There are concerns around Apple's ability to continue its momentum going forward.

Will Apple’s iEcosystem prevail? Will users be willing to give up Apple for competitors? Will the iPhone continue to dominate? These are questions investors should continue to ask as they look at the long-term goals of this company.

We continue to think Apple will foster an impenetrable ecosystem for years to come. Its highly sticky and superior products, strong network effects, and consistent innovation provide value to existing and potential users despite the high price point(s) for many products.

We are, however, concerned about Apple's tendency to raise prices. While we believe prices have generally been raised commensurate to the quality of product offered, there could be a tipping point after which users begin to switch for competing products. We are watching the installed base of products closely for signs that users are switching. Fortunately, there are no such signs yet.

The Risk of Leakers

A near-term risk is Apple’s upcoming releases. As this company is at the core of all things technology, Apple is frequently in the news. Many individuals dedicate time and effort to uncover Apple’s new products and to see what the company has in store for its next release. This information is always released to the public to stir some excitement and discussion.

The issue with these leaks is they oftentimes attract too much attention. This could be potentially destructive if articles and news release inaccurate information. Consumers might anchor themselves to a higher or currently unattainable expectation of the product or service. Apple may then disappoint the collective Apple community if it were to omit features in the final design of the product that were perceived by customers to be a certainty. Customer frustration or fatigue could lead to poor sales while competing products gain customers.

Legal Implications and Regulatory Scrutiny

Apple's "bottleneck effect" has essentially created a monopoly around app monetization. This has unfortunately stirred many issues with large companies like Epic Games and Facebook.

Companies believe Apple's 30% cut of in-app transaction fees while also having sole control over what can be sold on the platform are restrictive and a potential abuse of power. There is no other alternative for Apple users, which represents a group of over a billion people.

Although Epic Games lost its case against Apple recently, we believe these sorts of cases will continue to arise as other companies attempt to scale through the App Store. These cases could eventually lead to rate cuts and other amendments that impair Apple's ability to monetize the App Store as well as it has been doing.

Apple Against Epic GamesSource:

Privacy and War with Zuck

Apple’s new software update gives users more freedom in who is allowed to access their data. Facebook, being an extensive data collector, is troubled by this as it affects the business heavily.

In the last few years, Apple has been under legal scrutiny by the Department of Justice for its practices in monopolizing the software market. If large companies are hurt by Apple's moves, this may attract a lot of attention from regulators that could once again impair Apple's ability to monetize the App Store as effectively.

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