Deep Dive on Apple [AAPL]

Would you pay $100 per month for an “everything Apple” subscription? iPhone, Apple TV+, Apple Music, AppleCare+, and more. We think many would. And that would be a transformative change for Apple's business model.

It's All About the Services
Apple has finally signaled that it is ready to fully embrace the transition to becoming a services company.
In its recent September launch event, the company effectively cut prices on its iPhones. At first blush, many viewed this as a negative (“no more pricing power?”). We view it differently.
We see it as the start of a new paradigm for Apple: a shift in strategic thinking to becoming a services business.
Why Now?
In a world of finite humans, there is a ceiling to how many smartphones can be sold each year. Apple has approached that ceiling in most developed markets.
Many investors now ask: how can a trillion-dollar smartphone company grow its intrinsic value much further if it has saturated its addressable market?
We believe the answer is not the smartphone, but rather the services it enables.
What the Skeptics Are Saying
Apple is a commodity hardware manufacturer that will see its profit margins erode. It has reached saturation with its core product: the iPhone. Slower sales and falling could get ugly.
While its Services business (e.g., AppleCare, Apple TV+) may be fast-growing and high-margin, it’s tiny compared to the iPhone. And fewer iPhones sold means fewer upgrades to iPhone-driven Services...
What the Bulls Are Saying
Apple is a consumer brand which is the reason it has achieved high profit margins to begin with. Its iPhone margins may compress as it reduces prices to expand its addressable market in places like India, but Services should offset that given juicy software margins.
What Services may lack in size compared to the iPhone today, it more than makes up for in its recurring nature and stickiness. Giving up short-term product revenue for long-term subscription revenue is a smart trade off.
Our View
More phones sold, no matter their price point, means more ways that people can use their phone to spend money (“Services”).
Services is where the best economics reside, and Apple is poised to capture meaningfully more recurring revenue and margin expansion by embracing that piece of its business.
With that profit opportunity now squarely in Apple’s focus, we believe the stock has tremendous long-term potential from here.
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Oct. 1st, 2019
As of this writing, AAPL was a portfolio holding of Titan Invest. This security may cease to be a portfolio holding at some point in the future.
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