Apples Business Strategy - Essay Example

Apple’s Business Strategy Company Background Apple, Inc. (hereafter referred to as Apple) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players. It sells a broad range of related software, services, peripherals, networking solutions, and third-party digital content and applications. The more popular among Apple’s products are the iPhone, iPad, Mac, iPod, Apple TV, the iOS and OS X operating systems, iCloud, digital content and applications via iTunes Store, App Store, iBookstore and Mac App Store. Apple’s products and services are available worldwide through retail and online stores, by direct sales force, and by third party cellular network carriers, wholesalers, retailers, and value-added resellers. Customers include end-consumers, small and medium-scale businesses, and institutions including education, enterprises and the government (Apple Form 10-K 2012). Business Strategy Apple’s business strategy is to leverage its ability to innovate and develop its own operating systems, hardware, applications software, and services, and to integrate these into a seamless portfolio of new products and solutions. It continually invests in research and development, marketing and advertising. However, its main strategic advantage is the integration of its various hardware and software products, allowing customers to discover and download applications and books through either Mac or Windows-based computers or iOS mobile devices, allowing for ease of access and thus more frequent sales. Apple offers strong support for third-party hardware and software products and digital content that complement its offerings, thereby broadening its customer base and enhancing brand loyalty (Annual Report 2012). Company versus Industry Performance Table 1 is the Apple competitor and industry profile provided by Yahoo Finance for investors in the stock market. Apple dominates the PC Industry in market capitalization, revenues, earnings before interest, taxes, depreciation and amortizations, operating margin, net income, and earnings per share. It has an advantage over Google in its price to earnings ratio, being only half as expensive for every dollar of earnings (11.33 times for Apple compared to 22.08 times for Google). Apple’s stock price has some upward leeway, because its earnings per share growth rate is high compared to its price, yielding a low price to earnings growth ratio (PEG). An investor would therefore be interested in Apple for its stock value appreciation. Table 1: Competitor and industry performance Source: Yahoo Finance Financial Analysis The foregoing competitor comparison was included to situate the performance of Apple as an industry player and as a stock. The following ratio analyses, conducted as time series during the last 5 year interval (6 years inclusive) should give an idea of how the firm performed as a business. Table 2 below presents the leverage ratios for the past 6 years. Table 2: Leverage ratios The debt ratio indicates the company’s capital structure, that is, how much of its capital is borrowed. The debt-to-equity ratio is the proportion of borrowings to shareholders’ capital, while interest coverage shows the degree to which earnings before interest and tax covers the interest payments. These are all measures of debt risk and financial leverage. The debt ratio shows a steady growth in Apple’s long-term borrowings but even then maintaining a relatively low debt-to-equity ratio. This shows low risk of defaulting on payments, while at the same time enabling the company to realize higher earnings for shareholders through the prudent use of borrowings. Interest coverage shows that although the firm is increasingly availing of borrowings through the years, its earnings grow much faster than the interest, thus there is an increasingly lower risk that the firm would default on its interest payments. Apple therefore has a healthy leverage position. Table 3 following shows the firm’s liquidity ratios. The current ratio is the commonly used indicator of a firm’s liquidity position based on its current assets, while the quick or acid test ratio indicates liquidity on the basis of its cash and near-cash resources. Apple has a strong position in each case, with comfortably close to $1.50 of current assets for each dollar of current liquidity, and $1.20 of cash or near-cash assets for the same. Admittedly, Apple is in a slightly tighter liquidity position now than it had been in the past years, but given its low level of borrowings there is little doubt that Apple could use its short-term borrowings, should they be needed, to cover any maturing obligations. Apparently, this is not even necessary at this point, since there is sufficient cash or near-cash to pay for obligations maturing in the near future. Sales-to-total-assets indicates the ease with which total resources are able to generate revenues. The past six years show that the ratio has been steady at about 0.90, meaning that Apple is performing according to status quo. Table 3: Liquidity ratios Table 4 following shows the firm’s operational performance. There was a jump in inventory turnover for 2012, indicating that inventory is getting converted to revenues more quickly. The trend has picked up since 2010 when the financial crisis was determined to have ended, and has risen significantly compared to pre-crisis levels. Apple has managed to generate more sales with a lower level of inventory, meaning that it is operating more efficiently, since lower inventory means lower carrying costs and obsolescence. Days in inventory likewise indicates a growing improvement from 2010, that the company is holding a lower level of inventory which it is able to dispose in a shorter period of time. On the other hand, accounts receivable days and accounts payable days are not remarkably different from the past six years’ levels, meaning that Apple is able to collect its accounts receivable and pay its accounts payable from its daily sales/ daily cost of goods sold in comparably the same number of days. That its accounts payable is settled in a longer period of time – almost twice – than that of the settlement of accounts receivable, provided that Apple incurs no penalties or surcharges for overdue settlement, is advantageous for Apple. It indicates that the cash cycle is in its favor, and Apple is able to generate cash from its operating cycle faster than it has to dispense of cash. Apple is able to enhance its liquidity from its operations alone without resorting to short-term borrowings to respond to cash shortages. Table 4: Activity or efficiency ratios Table 5 following shows the financial information that would interest investors. Table 5: Profitability ratios The net profit margin indicates the proportion of sales that is left over after all expenses have been deducted, to constitute the net profit of the fiscal period. Apple is showing a steady increase in its net profit margin, indicating advantageous price levels compared to the company’s cost of revenues and operating expenses. Whereas in 2007, Apple’s profits constituted only 14.2% of revenues, now it is able to retain 26.7%, or more than one out of every four dollars in revenues. Similarly, return on assets and return on equity are similarly improving, meaning that for every dollar of resources invested in assets, and for every dollar invested by shareholders, there are higher levels of earning generated. The payout ratio shows that Apple has paid its first dividend in six years. The slow payout would not matter much to investors who aim for capital appreciation in their portfolios rather than cash yields. Table 6: Market to value ratios The last table above shows the performance of the Apple stock in the equities market, and would be important to shareholders and creditors as an indication of value perception. As earlier mentioned, dividend yield is not a matter of concern for shareholders who do not rely on payout. The price-to-earnings ratio shows that the market looks forward to a fast growth rate and therefore has bought up the stock to 15 times, but as earlier mentioned, compared to its competitors Apple has not yet been overvalued by the market, and its price to earnings growth ratio still shows some upside to the stock price. The market-to-book-value ratio appears to have been holding steady at its historical level of 5 times, therefore there still appears to be no overvaluing at the stock market. This means that as the price of the stock climbs, as it has been climbing, then the chance is slim that the stock price will experience any sudden sell-downs (i.e., there is no bubble expected on this stock). Conclusion The foregoing concise analysis of the financial and business performance of Apple, Inc. points to a well-run business and sound investment. The distinctive competence of Apple lies in its ability to innovate and create products well-received in the market, indicating that its strong profits and value growth appear sustainable in the near future. While the concern has been expressed that the change in leadership, brought about by the death of Steve Jobs, will bring about a reduction in this competence, there appears to be no indication of it given the present information. It therefore remains to be seen if Apple will continue to rise in value in the more remote future. References: AAPL Historical Prices. 2013 ‘Yahoo Finance’ Retrieved 15 January 2013 from http://www.sec.gov/Archives/edgar/data/320193/000119312512444068/d411355d10k.htm Apple Inc. Annual Report 2012. Retrieved from company website. Apple Inc. Form 10-K 2012. Retrieved 15 January 2013 from http://www.sec.gov/Archives/edgar/data/320193/000119312512444068/d411355d10k.htm Read More