Apple is Strong to the Core - But the Competition is Taking a Bite

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) has the largest market value of any public company in history and perhaps the most followed equity in the world. Let’s give you a SWOT to help you understand/evaluate the company better.

Strengths (almost too many to mention)

  • Brand Name- the most valuable brand name in the world.
  • Ingenuity- the iPhone and iPad were revolutionary products that set the tech bar higher, and had every other company in the world scrambling to play catch-up.
  • Ultra loyal consumers- the cult of Apple has devoted fans that will buy anything with an Apple insignia on it.
  • CASH- $111 billion in cash and short term investments ($82 of which is held overseas.) The company has the ability to make any acquisition they might desire, distribute a greater dividend to shareholders, put a ton into R&D, etc. They have great flexibility.
  • iTunes- formerly a near monopoly in legally downloadable music and movies is still dominant. Very high margins.
  • Tremendously profitable with unheard of margins in hardware.
  • Pays out a dividend of about 2%, higher than any money market account.
  • Very strong customer satisfaction scores.
  • More sales per square foot than any other retailer in the world.
  • Retina display has earned high marks with consumers.
  • Long seen as the only way to go in the artistic community (which are usually the trend setters) and no one else has come close to breaking this bond.
  • Unlike many companies, they are willing to cannibalize sales of existing products to make way for newer ones.
  • Low valuation at 12.7 times earnings and with all that cash in the bank the enterprise value is even lower.
  • No debt.

Weaknesses

  • Apple Maps has not been well received, with many iPhone users re-installing Google Maps.
  • Does not get high marks for treatment of foreign workers which may affect sales to a small degree.
  • Have not come out with a revolutionary product in several years.
  • Recently struggled to keep up with demand for the iPhone 5 causing month long delays for pre-ordered phones.
  • Higher prices and thus margins means lower market share. There's a reason the Android platform has the greatest market share out there - price. (it’s free)

Opportunities

  • Apple TV- we've all heard the rumors, when is it coming out? Jobs was bragging about it for some time.
  • China Mobile, and its 645 million subscribers are likely to receive the iPhone in 2013. This could obviously lead to a massive increase in sales.
  • If Apple ever got Siri right it could become a good revenue source in mobile search, which is the direction consumers are heading in anyways.
  • Apple continues to gain market share from Microsoft in the PC world. The release of Windows 8 might temporarily stem the tide, but Mac sales, despite their higher price, have been rising.

Threats

  • Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) are now leveraging their massive amounts of traffic and competing with iTunes to sell downloadable movies, shows, and music.
  • Amazon and Google both came out with a 7-inch tablet before Apple released theirs.
  • On the high-end, the recently released Microsoft Surface is in direct competition with the larger iPad.
  • Nokia (NYSE: NOK) and Microsoft (NASDAQ: MSFT) have received positive reviews for their phones, but have yet to challenge Apple in sales. We'll have to wait and see if they catch on, because Microsoft will go a long ways to protect its Windows franchise and get consumers into their ecosystem.
  • Android - far greater (and growing) market share, free OS continues to pressure iPhone price point.
  • Continued problems with workers at the Foxconn plant, which manufactures the iPhone, will eventually result in higher wages and thus pressure Apple's earnings.
  • The biggest threat facing Apple is that their unheard of profit margins attract massive competition, and competitors have largely closed the gap in terms of quality. Apple's brand name has been largely built on having the most innovative, best quality product, and if Apple doesn't come out with some mind blowing invention soon, their ultra-high margins and cool factor will be eaten away by the cheaper prices and increased quality of their adversaries’ products.

Bottom Line

Apple under Steve Jobs was a super innovative company; whether that can be reproduced under the leadership of Tim Cook remains to be seen. If you believe that Apple has a couple tricks up its sleeve, then it is a buy, especially when you factor in its low valuation and cash in the bank. If you think that Apple post Jobs will not be replicating past successes in innovation then you can be darn sure margins and thus profitability will be coming down.

Thoughts? Something I missed? Feel free to add polite and constructive comments below so that all readers at fool.com will benefit.


margiecfl has long positions in Apple, Google, and Microsoft. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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