Apple Inc. (NASDAQ:AAPL) released its earnings numbers for the three months through March on Monday afternoon, and the market was taken by surprise. The firm beat analyst estimates on almost every single number, and shares have hit all time highs as a result.
iPhone sales stayed high as did the average selling price of the smartphone, iPad sales came in a little lower, as did the Mac business. All of this added up to one thing. The iPhone brought in 69% of the entire revenue accumulated by Apple in the first quarter. The device is a cash-flow machine, and it’s still coming into its own.
iPhone sales dominate Apple Inc.
With the iPhone bringing in such a disproportionate amount of Apple Inc. business, it’s clear that the company is no longer a consumer electronics company, it’s simply an iPhone company.
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When making the argument for her predictions of Apple Watch sales, Katy Huberty of Morgan Stanley invoked the “halo effect” of Apple products. The “halo effect” is the increased likelihood of a person buying another Apple product if they already own one. Analysts more or less agree that this affect exists, but disagree on its strength.
Realistically, the entire “halo effect” coming from the Apple iPhone, because it is bar far the most widely owned Apple device. The iPad sold a little over 12 million units in the second quarter while the Mac sold to the tune of just 4.6 million. A conservative estimate might decide that 30% of the purchasers of Mac and iPads came directly out of the quality of the iPhone.
Looking at revenue from other segments, such as the App store, we find that most of Apple business relies directly on the iPhone meaning that the revenue attributable to the device is much higher than the 69% received from direct sales. The iPhone is worth at least 85% of Apple business.
Apple weighs the iPhone
The iPhone accounts for the overwhelming majority of Apple business, that much is clear. iTunes and Software and Services was a $5 billion business in Q2, but the majority of it is attributable to the iPhone App Store. Accessory sales are also in the billions, and they’re almost all replacement cables of the iPhone.
That’s the reality of Apple Inc. business in the first quarter of the year. The firm is just like the other tech giants, completely concentrated on a single major product. Microsoft has Windows, Google has Search and Facebook has Facebook.
Apple has the iPhone, and its control over the smartphone market is becoming almost, if not more, intense than Google’s control over search or Microsoft’s control over the desktop market.
Apple has become a one-trick pony and as long as that trick keeps working, the company’s investors are sure to be rewarded with lavish $200 billion meal tickets. There is a reason that Apple trades at such a low multiple, however.
Apple iPhone can’t last forever
It’s generally agreed that the iPhone can’t last forever, at least not in its current form. The phone has, however, outlasted many previous predictions of its downfall, most notably the 2013 panic surrounding gross margins and iPhone profitability. The iPhone is destined to die, however, whether it’s in ten years or ten months.
Once the smart phone begins to slip Apple better be prepared. Right now the company absolutely isn’t ready. 69% of the company’s revenue comes directly from the iPhone and at least 85% comes indirectly from the device. That risk is priced in, and keeps the multiple enjoyed by the company lower than its peers.