Apple (AAPL) released second quarter results on Monday, and the numbers were impressive: the company posted a quarterly profit of $13.6 billion, or roughly $150 million a day; a decade ago, it would take them six months to make that kind of money. Even relative to more recent periods, the results are off the charts: the earnings for the second quarter nearly matched the company’s entire pull for fiscal 2010 (the year the iPad was introduced).
Let’s go back to that year (2010): while the introduction of the iPad helped the top line (added ~$5 billion in incremental revenues), it was actually a secondary driver: what really moved the needle was a near doubling in iPhone sales, with revenues crossing $25 billion for the year – a pretty astounding absolute number and growth rate for a product first released three years earlier.
Now consider where we are today: the iPhone has reported more than $90 billion in sales – nearly four times higher than the total for the entirety of fiscal 2010 – in the past six months. That’s half a billion dollars in iPhone sales every single day; that’s more than Walmart (WMT), the largest grocer in the United States, reported in domestic grocery sales over the same period.
In 2014, the iPhone crossed $100 billion in sales. As a standalone company, that’s enough to put the iPhone in a fight for a top twenty spot in the Fortune 500; at the rate of gain reported for the first six months of Apple’s fiscal year, the company is on pace to crack the top ten in 2015.
The financial success of the iPhone is impossible to overstate. Consider Apple’s first post-PC success after the return of Steve Jobs: the iPod. It peaked in fiscal 2008 at $8.1 billion in sales – not too bad for a product that only crossed $1 billion in annual sales four years earlier.
Yet, despite Apple’s success in dominating the portable music player business, the iPod reported roughly $65 billion in cumulative sales in the ten year period through fiscal 2014 –less than the iPhone has in the past 180 days.
To me, how far Apple has come in the past few years is simply mind-blowing.
This doesn’t stop on the income statement: the balance sheet is immaculate, with the company generating more cash than they know what to do with. At the end of the second quarter, Apple had $33 billion in cash & equivalents and marketable securities, as well as another $160 billion in long-term marketable securities; the company has more than $150 billion in net cash on its balance sheet, despite spending more than $55 billion on dividends and repurchases in 2014.
Apple could buy IBM (IBM), a company that generates more than $10 billion a year in free cash flow, and wouldn’t need to borrow a penny to do so.
Of course, the company’s immense scale makes moving the needle increasingly difficult. The tablet market, in which the iPad is clearly a successful player, is a $30 billion annual business for Apple. That’s nothing to scoff at: it’s more than the annual sales for Microsoft’s (MSFT) entire Office franchise; despite this, the iPad accounted for roughly 15% of Apple’s revenues in 2014.
As it relates to the Apple Watch, I’ve seen a few analyst estimates for an average selling price of ~$500 per unit; that would require selling 60 million watches a year – not too far from the 65 million units the iPad has reported on average over the past three years (with the most recent years tally putting them at 25% – 30% market share on shipment volumes). Said differently, being a strong – or even dominant – competitor isn’t necessarily enough; Apple needs to find the biggest markets as well if they want to keep growing.
There’s one thing that’s clear: they’ve found one of those in smartphones.
Time will tell how successful Apple will be with their new device(s). I’ve never looked too closely at the company, and don’t have much of an opinion on the stock one way or the other.
I’m simply amazed by the massive scale of the numbers.
With that, let me add a quick note: I’ll be in Omaha this year for Berkshire’s (BRK.B) annual meeting. If you’ll be out there this weekend as well and would like to meet up with a fellow value investor for a few minutes on Saturday, let me know.
About the author:
I’m a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves (potentially over a period of years). As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don’t have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question – which if I’ve done my job properly, should be very attractive over many years.