One of the most under appreciated things about Apple (NASDAQ: AAPL ) is how sticky its product ecosystem has become. Once you buy an iPhone, you have incentive to buy an iPad, then a Mac, an Apple TV, and eventually maybe an iWatch. Maybe more importantly, once you're in the ecosystem with any of these devices, it's difficult to leave.
That dynamic creates a great opportunity for investors who can count on cash flow for years to come.
How Apple keeps customers buying devices
I just witnessed first hand the power of Apple's ecosystem and why I won't leave for the foreseeable future. My iPhone was recently stolen and within a minute or two I was able to wipe it and protect my data. When I got a new iPhone the next day it was quick to restore old settings and purchases.
The ability to remote wipe and restore backed up data isn't unique to Apple, in fact Microsoft and Google operating systems can do the same. But these abilities keep people in their existing ecosystem and for Apple it keeps millions of users from defecting to competitors when it's time to upgrade devices .
This is key for Apple because over the past two years the company has sold 307.1 million iPhones and 140.8 million iPads. As those products are refreshed there's a huge incentive to stay with Apple for your next generation devices.
Besides just the backup capability, there have been well over $20 billion of apps sold and 35 billion songs sold through iTunes. Apps, movies, and TV shows in particular would be difficult or impossible to transfer to a non-Apple device so each download is an incentive for a customer to stay with Apple.
A draw for the next generation of devices
This installed base and ecosystem draw is equally important as Apple looks at new devices. As new products are introduced -- like a long rumored Apple TV update and iWatch -- they'll no doubt be folded into the Apple ecosystem seamlessly the way iPads, iPhones, and Macs are now.
Just imagine if Apple TV allows third party developers to develop apps and games that can use iPhones and iPads as controllers. It'll be next to impossible for owners of those devices to leave and give more incentive to buy new devices. The stickiness of the ecosystem would only get stronger.
Why this is a key for shareholders
The reason the ecosystem and stickiness of devices is key for shareholders goes far beyond just the fact that people will continue to buy Apple products. It has everything to do with the fact that they'll pay more to stay with Apple than saving money to buy products running Google's Android or Microsoft's Windows 8.
You can see that from market share and profit data from Apple's competitors. According to Strategy Analytics, Apple's market share in smartphones dropped from 19.4% in 2012 to 15.5% a year ago as competitors pursued lower cost devices. But, Apple's revenue, margins, net income, and cash flow all remained relatively stable because Apple maintained high margin customers.
By comparison, Samsung recently reported that second quarter revenue fell nearly 10% and profits were down 25% amid price competition, particularly in Asia. Samsung is the largest maker of Android smartphones and therefore doesn't control the ecosystem in the same way. Even Samsung SmartTVs rely on outside apps to purchase videos and other streaming content.
Then consider that this business that leads to customers returning year after year for high margin products is trading for just 16 times trailing earnings even before taking out some $164 billion of cash and investment.
It's taken Apple more than a decade to build the business model it has today, and with a suite of products in computers, tablets, and smartphones combined with an ecosystem of apps, music, movies, and TV shows, customers are kept in the Apple family like a spider web. That's a powerful competitive advantage and provides investors with consistent cash flows long-term. Even with the stock hitting all-time highs I think there's plenty of room for Apple to go higher.
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