Apple: Still Largely a Luxury Brand
On October 14, 2013, Apple (NASDAQ:AAPL) issued a press release stating that it had handpicked Angela Ahrendts, former Burberry CEO, and awarded her with a newly created position. As a Senior Vice President, Ahrendts has been granted discretion to manage the operation of Apple retail and online stores. Prior to serving as Burberry chief, Ahrendts also put in time as an executive at both Liz Claiborne [now Fifth & Pacific] and Donna Karan International, a subsidiary of Louis Vuitton Moet Hennessy.
On resume, Ahrendts will be tasked with making the seemingly awkward transition out of the world of haute couture fashion and into the Silicon Valley sphere of nuts and bolts geekdom, Moore’s Law physics, and fan boy product launches. In reality, however, Angela Ahrendts will immediately fit right in: Apple is actually a luxury brand.
Technology Vs. Luxury Profitability
Tiffany (NYSE:TIF), as a jeweler, represents the epitome of a luxury brand. Charm bracelets, diamond rings, and assorted baubles are but mere ornaments that are of little to no industrial use for consumers. Several Tiffany diamond rings price out for above $50,000.00. At the low end, a classic Tiffany sterling silver heart tag charm bracelet begins at $275.00.
The typical Tiffany client may remain somewhat insulated from the day-to-day economic realities of gasoline prices and job layoffs. If anything, Tiffany business results would be more so correlated to stock and high-end real estate market performance, which often times diverge away from the economic landscape facing the common man. Still, in comparison to Big Tech, Tiffany’s five-year average margins, return on equity, and growth rate statistics may appear somewhat pedestrian.
Nominal statistics may support a superficial case that Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Intel (NASDAQ:INTC), and Apple are all luxury brands that defy standard laws of price elasticity, where price and sales volume are negatively correlated. Beneath the surface, however, Microsoft, Google, and Intel have each leveraged their dominance above one specific sector to maintain fat profit margins.
Research firm Net Market Share estimated that Microsoft Windows software operated more than 90 percent of existing desktop computers through November 2013. Meanwhile, comScore also reported that Google controlled 66.9 percent of the 2013 Fall Quarter search engine market. As literal one-trick ponies, the personal computer and search markets have historically accounted for roughly two-thirds of sales and nearly all of the operating profits at Microsoft, Intel, and Google.
European regulators, of course, would argue that Microsoft, Intel, and Google profitability metrics are more so indicative of the exploitation of monopoly power, rather than the reflection of real luxury brand goodwill. Over the course of the past five years, Microsoft, Intel, and Google, have all been slammed with antitrust lawsuits out of the European Union that may ultimately conclude with settlements ranging $730 million and $5 billion.
Apple and The Mobile Market
Apple, of course, is the rare technology company with the ability to maintain strong pricing power across a diversified product line. Apple has actually defined its separate operating segments largely according to the individual iPhone, iPad, Mac, iPod, and iTunes wings within its grander ecosystem. The Apple iPad tablet and iPhone product lines are of particular interest, in regards to support of our ongoing luxury thesis. Apple generated $37.0 billion in net income off $170.9 billion in total net sales, through its latest fiscal 2013 ended September 28.
Of this amount, the iPad and iPhone combined for $123.3 billion, or 72.1 percent, of Apple 2013 total net sales. Apple did not specifically break down profits according to operating segments. In any event, luxury brand Apple has been able to preserve impressive profit margins despite a dynamic five-year shift within its sales mix away from the Mac and towards mobile.
Microsoft, Intel, and Google have combined to bank $43.7 billion in net income and $180.9 billion in revenue through the close of their latest respective fiscal years. Microsoft, Intel, and Google have folded mobile operations within their respective Entertainment and Devices, Other Intel Architecture, and Motorola Mobile operating segments. Be advised that the Microsoft Entertainment and Devices division also included the popular Xbox gaming console.
Still, the Entertainment and Devices segment turned a mere $888 million in operating profits off $10.2 billion in 2013 total net sales for Microsoft. The mobile divisions at Intel, Google, and Nokia have featured similar profiles. Other Intel Architecture, as an umbrella category above mobile chip sales, has already racked up $1.8 billion in operating losses upon $3.0 billion in segment revenue through the first nine months of this year.
Apple takes the majority of profits within the mobile space, with nary any real concern for building out market share on the cheap. Apple iPhone revenue per unit sold has remained above $600 over the past five years, despite desperate attempts out of Google, Samsung (SSNLF.PK), Microsoft, Nokia, and Intel to build out their own competitive Android and Windows ecosystems. True luxury brands remain above the fray of debilitating price wars.
Apple iPhone revenue per unit sold did decline by 3.6 percent between fiscal years 2012 and 2013 from $629.60 to $607.45. Apple, within its latest annual report, already suggested that this slight drop in revenue was largely attributable to consumers purchasing older iPhone handsets, instead of opting out of the ecosystem, altogether. A recent teardown by iSuppli estimated a mere $218.30 in total costs to manufacture the 64GB iPhone 5S that Apple turns around and sells for top dollar at $849.00. The top of the line iPhone is indeed a luxury item.
The Bottom Line
While grizzled Wall Street analysts busy themselves poring over return on equity, intangible asset, and goodwill statistics, Main Street consumers may simply describe Apple as “cool.” Legendary investor Warren Buffett might also alluded to Apple goodwill as a “moat” protecting shareholder interests. Apple production has emerged as eerily similar to Nike (NYSE:NKE) Air Jordans, where see and be seen hipster types wait out long lines for the câché of laying their hands upon the latest upgrades.
Over the long-term, Apple branding can help this stock outperform the S&P 500 Index. Bears, or haters, should recognize that the typical Apple customer might be generally less inclined to debate arcane technical specifications. Angela Ahrendst, newly anointed VP of Retail, can help Apple solidify its prominence as a high-end fashion accessory.
In 2012, The Wall Street Journal cited an extensive study out of Forrester Research that estimated an average household income of $98,560 for Mac owners. For the sake of comparison, Windows users came in at a mere $74,452 in average household income. At that same junction in time, research out of travel booking website Orbitz also indicated that Apple diehards were most likely to splurge upon five-star hotel accommodations. In effect, Apple is part of a larger lap of luxury package deal.
Apple closed out its latest 2013 fiscal year with $14.3 billion in cash, $26.3 billion in short-term investments, and $106.2 billion in long-term marketable securities on the books. In all, Apple transitioned into fiscal 2014 with $146.8 billion in cash and investments above $83.5 billion in total liabilities on the balance sheet. The Apple balance sheet did include $10 billion in deferred revenue that will ultimately fall off the liability side of the ledger and shift over to the income statement.
Apple has also taken on $17 billion in long-term debt, as part of an ambitious plan to return $100 billion back to shareholders through buybacks and dividends by the end of 2015. Apple’s healthy balance sheet is largely the result of $53.7 billion in 2013 cash flow generated from operations.
Billionaire investor Carl Icahn has been adamant about the idea that Apple financial managers operate with the luxury of simply buying back stock to improve shareholder value. Apple stock changed hands at $554.52 per share — at the end of the December 30, 2013 trading session. A relatively small and immediate $10 billion buy back may lower the Apple shares issued count to 720.6 million from 899.2 million.
This move would also have the effect of automatically taking the reported current $40.03 in 2013 Apple earnings per share above an estimated $50.00 in current EPS. Activist investors, such as Icahn, may claim that Apple shares are now priced to accommodate at least 25 percent in near-term capital appreciation. Carl Icahn has already set a three-year price target at $1,250.00 per share for Apple. At that time, Apple shareholders may then consider cashing out and splurging upon a Tiffany gift set in Midtown Manhattan. For now, Apple stock appears to be a compelling buy for those investors who operate with the luxury of time.