Apple (NASDAQ:AAPL) is definitely one of the stocks that receives coverage from many analysts and investment professionals, and if you read my profile page carefully, you’d be wondering why I continue to invest in, and write about Apple. Despite the massive coverage it receives, I believe there is still a mis-match between the market price and the intrinsic value of Apple, and as highlighted in a previous article, I believe Apple has great plans for the future.
Such great plans are only a piece of the story why I continue to embrace Apple as a great investment opportunity, and there are several reasons why I believe Apple would be able to grow as a company for many years to come.
Apple has certainly shifted to a business strategy in which they focus on existing customers to achieve overall growth, and as such, I believe investors should focus on identifying whether such a growth strategy is viable, and assess whether this strategy is something that Apple as a company can rely on to deliver robust growth.
Is the move to focus on existing customers a good one for Apple?
Apple has relied on its flagship iPhone product line to achieve growth over the last decade, but the global smartphone market is expected to shrink over the next several years. However, Apple is now in a situation where the management needs to re-think this strategy, as worldwide smartphone shipments are beginning to decline and showing little promise of improvement over the next several years.
(Source – Statista)
Apple’s business strategy to focus on iPhone sales over the last decade delivered robust growth for the company, but this strategy might not be the best way to move forward in the future. It makes sense for Apple to look for alternative business strategies and opportunities to ensure the sustainability of profits in future periods.
Not surprisingly, Apple decided to scrap reporting unit sales as well, sparking concerns over Apple’s ability to grow revenues from the iPhone segment. Nonetheless, Apple revenues have spiked even as unit sales declined, thankfully to higher average selling prices.
(Source – Statista)
If we further analyze publicly available data, it becomes crystal clear that Apple is finding it hard to deliver growth based on iPhone sales, and the situation is not expected to improve for many years to come. For example, Apple failed to grow its revenue meaningfully during the last holiday season, and the all-important Greater China region was a disaster from Apple’s perspective.
(Source – Statista)
This is not a phenomenon unique to Apple and its products, but rather a dilemma faced by the global smartphone industry as a whole.
A major reason behind the expected decline in smartphone shipments is the longevity of newly released mobile devices. Tom Kang, Director at Counterpoint Research pointed out in last November that the replacement cycle is becoming substantially longer, driven by high-quality, high-priced devices that last long. On the other hand, spending upward of $1,000 for a handheld device makes users to stick to this high-priced device for a longer period of time.
An expected slowdown in global economic growth is another reason for lower expectations for growth prospects of the smartphone industry. A slowdown in China is expected to deliver a punch in the gut for the smartphone industry, as China represents the largest smartphone market in the world.
Under these circumstances, it is inevitable for Apple to divert from a strategy that worked so well for them in the last decade, and focus on other ways to bring billions of dollars into the company. Not surprisingly, Apple has chosen a strategy in which they focus more on monetizing the existing customer base, and I believe this is the right decision for a several reasons.
Apple provides an experience, not just a product, and customers are likely to remain loyal for a long period of time
Even though Apple is synonymous with high-quality products, one of Apple’s less talked about but very important aspects is the experience proposition of its devices that adds value to end-users. Apple has built an ecosystem around its products and iOS, which has become a switching cost in its own right, and is certainly providing a degree of competitive advantage over its peers.
Through various types of devices, Apple provides options for customers to not only stay connected to the world, but also to stay alert of their health, control electronics at home, and to even do many of these great things from a simple device that can be worn on the wrist! Many of these features are embedded in iOS, and investors need to remind themselves that users would not be able to access iOS outside Apple products, and the ecosystem built around iOS helps keep customers loyal to Apple products.
Apple is still enforcing rigid standards to developers on the App Store in order to bring high-quality, value-adding apps to Apple users, which is a compelling reason for Apple customers to stick to the brand. On the other hand, Apple users are more likely to spend on paid apps, and this incentivize talented and large-scale app developers to make the App Store the marketplace of choice.
Features such as Apple Pay has also gained traction of late, and this gives another reason for Apple customers to remain loyal to Apple. Time and time again, Apple has proven its ability to retain its customer base, which provides them with a reason to focus on this existing, loyal customer base to drive company earnings in future periods.
The rise of data-driven tech and personalization
Data has become the most important resource for a company, and this development puts Apple in the driving seat, as Apple has more than 1.2 billion active devices at present. The availability of user data opens many doors for Apple, as the company can now focus on many new avenues to generate revenue. Apple is already focusing on tapping the billion dollar content streaming market and healthcare industry, and Apple will continue to monetize its user base by searching for more opportunities to use the massive amount of data available to them.
Personalized services have gained traction tremendously over the last couple of years, and Apple certainly has what it takes to become a personalized services provider.
Apple’s ability to release innovative products to keep its customer base engaged
Apple has always been able to keep its user base engaged with its devices, and this has been one of the major drivers of customer loyalty for Apple products. Apple Watch and AirPods are just two of the most recent products that have not only helped Apple earn billions of dollars as additional revenue, but has also helped Apple keep its user base engaged and satisfied.
Market share of wearables unit shipments
(Source – Statista)
I believe Apple will continue to release such innovative products to keep Apple users engaged, and this will help retain the massive user base which Apple can target to monetize.
Apple is forced to look for alternative revenue avenues as the global smartphone shipments are shrinking, and is expected to shrink further in the next several years. Apple has chosen to focus on its existing customer base to drive company growth in the next few years, which I believe is the correct move for a few reasons. Apple has a strong balance sheet as well, which should help the company navigate the tough times. I believe investors should not make this strategic business move a reason to let fear overcome their investments, and rather should look for openings to invest in Apple more.