Apple’s quest for trillion dollar domination

That growth trajectory was demonstrated by recent third-quarter results for 2016-17. Apple reported a 7 per cent increase in revenues in the three months to the end of June as iPhone sales (55 per cent of the group total) ticked up 3 per cent year on year and iPads (11 per cent overall) returned to annual growth for the first time since early 2014. Revenue from services, such as the App Store and Apple Music, rose 22 per cent to $7.6bn (£5.9bn) – a figure that would comfortably give the division a place in the Fortune 100 list of companies. With this highly profitable services revenue now the second-largest contributor to Apple’s sales, gross profit margins widened to 38.5 per cent.

Following the strong third-quarter performance, management now thinks that revenue in the fourth quarter will be in a range of $49bn to $52bn, a rise of between 5 and 11 per cent year on year, which was ahead of Wall Street’s forecasts. Upgrades may therefore soon provide a catalyst for the share price. In the longer term, analysts are looking to the new iPhone to help the group close in on the target of $300bn in annual revenue. The tenth version of the world’s favourite smartphone is due to be launched in the autumn and analysts at investment bank UBS have described it as having “pig in the python” upgrade potential.

However, many experts are sceptical that this new phone will be able to help galvanise growth in China where sales fell by a tenth in recent numbers. 

But elsewhere the smartphone market is thriving due to the rise in global mobile connectivity, putting Apple in an enviable position. The group has carved out a niche in the premium end of the sector where competition is low. The iPhone has become an icon that combines mass market revenue with ferocious customer loyalty that is unmatched anywhere else in consumer electronics. And it’s not just in phones where demand is impressive. Apple is obtaining higher revenue per user by selling more products and services to its current customers. This is likely to reduce churn and drive higher profits.

Despite this, we would argue that the group’s growth potential is still not fully recognised in Apple’s share price. Strip out the astonishing pile of cash and short-term investments and the shares trade on just 13 times full-year forecast earnings and nine times forecasts for 2017-18. This is a substantial discount to tech peers that display similar growth characteristics such as Amazon, Alphabet and Facebook.  

Not only that, Apple is a quality operator that sidesteps the risks that normally come alongside high growth rates. In the year to September 2016, return on capital employed reached 25 per cent. Since 2007 – when the first iPhone was launched – the group has reported compound annual revenue growth rate of 28 per cent. And in the first nine months of 2016-17 it generated $48bn of cash, the same amount as its operating profit.  

It is that cash-generating ability that could yet prove a catalyst for the shares. In order to avoid the 35 per cent US corporate tax rate, management has not repatriated the cash made overseas, which runs at about 40 per cent of the amount generated. Recently, politicians on both side of the political divide have been discussing a one-off tax holiday that would allow the group to bring its overseas stash back into the US. A sudden influx of cash could well spark the payment of a substantial one-off dividend. 

But even without repatriating all the cash it has earned overseas, Apple has been able to afford a steadily increasing dividend and substantial share buyback programme.