Daily Management Review

Apple’s market cap nearly reaches $ 1 trillion. What is the secret?


Apple increased its capitalization to a record $ 990 billion. The results of the last quarter brought Apple closer to a trillion-dollar capitalization. After the results were published, the company’s shares jumped by 6% on Wednesday, despite the fact that Apple lost to Huawei second place in the world among smart phone vendors. Will the company be able to maintain growth rates amid the fierce trade war with China?

In the third quarter, which ended June 30, Apple reported revenue growth of 17% to $ 53.3 billion. Net profit grew at an even faster pace, up 32% to $ 11.5 billion. The company's CEO Tim Cook noted that the revenue growth has been showing double digits for the fourth consecutive quarter.

The key driver of sales growth was the US market. There, Apple's revenue grew by 20% and amounted to almost half of the total. Apple's revenue in the US is rising against the background of the overall growth of the country's economy. In addition, the financial results were affected by a reduction in the corporate tax rate on income to 21%, adopted from January 1, 2018. Sales were growing slightly slower in Europe (14%), Japan (7%) and Asia-Pacific (16%).

Another key factor was sales in China, where Apple increased its revenue by 19% to $ 9.6 billion. Apparently, the company's sales have not yet been affected by devaluation of the yuan as a result of the trade war between the US and China. However, in the long term, the aggravation of economic relations with China can affect Apple's finances not only in terms of reducing the purchasing power of Chinese users.

As Tim Cook noted during the conference call on the results of the quarter, Apple is studying potential consequences of the introduction of US duties on Chinese goods. According to him, Apple risks facing higher prices from suppliers and partners in China and, as a result, higher production costs. "We believe that tariffs can affect end customers, cause a slowdown in economic growth and sometimes lead to significant risks from undesirable consequences," he said.

Another negative factor in Asia is stagnation of the Chinese smart phone market, according to IHS Markit analysts quoted by the Financial Times. There, Apple can compete with Android manufacturers for customers who change old models to new ones, but overall device shipments do not look impressive.

According to IDC analytical company’s report, the volume of smartphone shipments to the global market in April-June decreased by 1.8% compared to the previous year. At the same time, the Chinese vendor Huawei was able to increase shipments by 41% and for the first time drive Apple out from the second place among smart phone suppliers. The analysts say the company was helped by successful sales of the Honor line in the middle price segment, the steady demand for models Huawei P20 and P20 Pro in the $ 600-800 segment and creation of a reputation in markets where the brand was previously unknown.

The share of another Chinese manufacturer Xiaomi is also growing actively. Having increased supply by almost 49%, the company confidently occupies the fourth place. The brand offers smart phones at prices slightly lower than the top three. This allowed Xiaomi to outstrip the global leader Samsung in the Indian market. By the way, Samsung reduced shipments to the world market by 10.4% compared to last year, but still significantly outperforms competitors, including Apple. Thus, Chinese manufacturers are now the most serious competitors of Apple.  

Devices vs. services

iPhone still accounted for the lion's share in Apple’s revenue. structure of Apple's on the revenues - more than 56%. "The performance of the third quarter was secured by confident sales of iPhone and wearable devices, as well as revenue from services," Cook said.

Revenues from iPhone sales increased by 20% in the quarter. It is noteworthy that the average selling price of the iPhone increased by 19% compared to the previous year, to $ 724, which was significantly higher than the market's expectations. 

Revenues in the smart phone segment grew, primarily due to the increase in the average price. In quantitative terms, iPhone sales climbed by only 1%. This means that Apple has tested a new formula for success: instead of selling more devices, you only need to convince consumers to buy them at a higher price.

Despite the risks that Apple faces in China, and the stagnation of the main source of revenue for the smart phone market, investors were optimistic about the company's stock prospects.

After the announcement of the financial account and on the basis of trading on Wednesday, August 1, the price of Apple’s shares increased by 5.9%, to $ 201.5 per share. This makes it possible to assess capitalization of the company at $ 988.4 billion. It is possible that the positive mood of investors was affected by the news that Apple spent about $ 20 billion to buy back shares, and taking into account the dividend payment, the company returned almost $ 25 billion to shareholders.

If the shares keep the dynamics, we can see the first trillion-worth company already in the current quarter. However, in order to maintain this position, Apple has to show how it plans to overcome adverse external factors - above all those that affect the sale of the iPhone.

source: forbes.com