The Case for Apple as a Sustainable Business

Apple isn't priced as if its business is sustainable. But what if the market is wrong? What if Apple possesses a monstrous economic moat?

Feb 12, 2014 at 2:45PM

Apple Store Tmf

Apple's (NASDAQ:AAPL) gross profit margins have been a hot topic during the last several years. Like a rollercoaster, they soared to levels unheard of in electronics hardware, and then plummeted downward. What's most surprising, however, is the level at which they have stabilized. It only takes two charts to illustrate Apple's intriguing gross profit margin story.

The first chart is the rise, fall, and then stabilization of Apple's gross profit margins.

AAPL Gross Profit Margin (Quarterly) Chart

AAPL Gross Profit Margin (Quarterly) data by YCharts

The entire ride has been emotional. The levels Apple reached when its gross profit margin was at its best were surreal. The decline was sudden. And now, the stabilization is happening at astonishingly high levels.

The second chart illustrates the improving year-over-year comparisons in Apple's gross profit margins.

Gm Stabilization

Source: SEC filings for quarters shown.

Clearly, Apple's gross profit margins have stabilized. In fact, Apple's midpoint in its gross profit margin guidance for Q2 is flat with the year-ago quarter, making the stabilization official.

How can Apple stabilize gross profit margins at these remarkable levels?

The facile explanation fails to do Apple justice
Basic business school concepts would suggest that Apple's monstrous gross profit margins around 38% are not sustainable. The rationale goes like this: In a market economy, competitors will vie for Apple's hefty profit margins until they finally get a slice of the scrumptious pie.

To the credit of basic business school concepts, however, professors would be quick to argue that a competitive advantage may do the trick in keeping competitors at bay. Warren Buffett refers to this concept as an economic moat. Imagine a moat around a castle -- the wider and deeper the moat, the better. Common sources of moats include network effects, intangible assets, cost advantages, switching costs, and efficient scale. While Apple certainly possesses advantages from several of these camps, its greatest advantage isn't articulated so simply.

Apple's greatest advantage is found at the overlap of its hardware, software, services, and networks. Its greatest advantage is found in Apple's "inter-dependent network of assets," as Asymco's Horace Dediu has said. When Apple's comprehensive and unique assets are combined, they create a valuable and sustainable system that is incredibly difficult for competitors to imitate.

Dediu sums it up best:

The iTunes stores, Apple's services and Apple Retail are easily ignored because they are not "profit centers" but I believe they are a key component to the sustainment of these margins. ...In other words, the iPhone and iPad enjoy margins not just because they are new and well designed. But also because they form part of a ecosystem. The key word is 'system'. The user buys into a system not just what the device embodies.

Naming competitors that have potential to compete effectively with Apple in one or two given areas of its business isn't difficult, but naming a competitor who can rival Apple's entire ecosystem of inter-dependent assets is incredibly hard.

Apple's margins are monstrous because its moat is monstrous.

But this poses a dilemma: If Apple's hefty gross profit margins are, indeed, sustainable, then why isn't the stock priced as if this is the case? Is Apple a buy?

Could this be 2014's best stock?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers