A sample to showcase equity analysis and report writing skills

1. APPLE’S DECLINING PROFIT MARGIN: SHOULD INVESTORS BE
CONCERNED?
A cash rich company like Apple (18% of the stock price is contribution of cash) is heavily
dependent on the revenue generated through its revolutionary product – iPhone (54% of the
stock price). iPad contributes 12.49% to the stocks and shows a promising growth of 120
million users by 2015 as per trafis forecast.
DECLINING PROFIT MARGIN
The profit margin for iPhone saw a decline from 55% in 2011 to 52.5% in 2012. Trafis analysis
shows that the profit margin is estimated to decline further to 47.9% by the end of 2019.
Similarly for iPad, the sales grew from 40.5 million to 64.8 million in 2011-2012 but the profit
margin the product declined from 27.1% to 26.1%. It is forecasted to decline further. Should
this be a matter of concern to the stock holders? Will this decline in profit margin of these two
products (which contribute 66.5% to the company’s stock) have an impact on the ROE of the
company?
Trefis estimates that the revenue growth of the company will be only 79% from 2012 to 2015 as
compared to a 220% in 2008 to 2012 - an impact of decreasing profit margin.
STRATEGIC ANALYSIS AND THE FUTURE
INCREASE IN SALE
The profit margin contribution of iPhone and iPad has been declining due to the pricing strategy
of these products. The management is looking at bringing the price of the products down to beat
its competitors and increase Apple’s market share. The sales of iPhone alone will grow from
1.18 billion now to 2.04 billion in 2015(Trefis). This is a very conservative estimate which does
not reflect the implication of declining price of iPhone and iPad. The sales will be incremental
rather than linear – increasing the number of customers.
CONTRIBUTION OF OTHER PRODUCTS AND SERVICES
With people warming up to the casual gaming and mobile apps, it is forecasted that the mobile
app market will grow to $25 billion by 2015 - up from $6.8 billion in 2010 (market research
report by marketandmarket). Currently iPhone apps make 2.3% of the stocks and it is
forecasted to see a growth from $3.18 billion in 2012 to $9.66 billion in 2015.
The decrease in prices will increase the number of customers significantly and there will be a
significant increase in apple app downloads. Currently trafis estimates that by 2015 the number
of iPhone and iPad downloads will rise to 34 billion world-wide. We also realise that an increase
in downloads by 1 billion will increase the share price by $1(use trafis dynamic tool). Simply put
if every user downloads 1 application the stock prices will increase by $2 (1.81 Billion iPhone
customers & 64.8 million iPad customers) – which is a significant contribution.
CONCLUSION
The investors will reap better than forecasted returns from Apple. Apple will look at increasing
the contribution of its other product and services to its stock price. Because of a very capable
management at the helm, investors will see growth through strategic innovation.