Source: Apple
Apple (AAPL 0.73%) investors have a lot to celebrate as of late, and for good reason. After a fantastic fourth fiscal quarter, the company now finds its stock trading near all-time highs. The company has been on a fantastic run in 2014, climbing over 30% on the back of a 7-1 stock split, the announcement of its first post-Jobs product, and the acquisition of Beats headphones.
While all those things are important, they obscure a rather evident fact: The company is highly dependent upon its iPhone product for revenue. The chart below will provide context:
Source: Apple's 10Qs. Revenue figures in millions
Over the last eight quarters the iPhone has provided over 50% of Apple's total revenue haul. In addition, it appears the company is becoming more dependent upon its star product. Each quarter in fiscal year 2014 has a higher percentage of revenue attributed to Apple's iPhone than its corresponding 2013 quarter. As a company becomes wedded to one product, there are risks to the company as an investment.
Developed markets are slowing and Apple's selective in developing markets
The obvious risk to Apple as an investment is if its tentpole product experiences declining demand, whether that be from a maturing market, iPhone saturation, or competition. Addressing the first two concerns, IDC's worldwide smartphone forecast finds that from 2014-2018 the developed and maturing smartphone markets will grow less than 4% annually whereas they estimate the emerging market to grow 16%.
Developed markets are where Apple makes its revenue, last quarter nearly 80% of its revenue ex-retail came from the mostly developed regions of Japan, the Americas, and Europe. The other two regions it reports, China and Greater Asia, provided the other 20%. And while China is slated to come online in a major way, Apple fights an uphill battle to address the third concern (competition) there. Not only does Apple have to compete against arch-nemesis Samsung, but now they have a homegrown competitor in young upstart Xiaomi that's now the biggest smartphone maker in China .
There are benefits, however
There are benefits with Apple's reliance on its iPhone. Due to the fact that this is considered Apple's highest-margin product from a gross margin standpoint, a larger percentage of revenue falls down the income statement to shareholder earnings. Not to mention, having your highest-margin product being your best-selling one is a "problem" that many companies would love to have.
In addition, many investors actually prefer companies that have a single product or are led by a single product. The theory is as a company becomes more of a "pure play" company, the individual investor is able to take targeted bets on one product rather than invest in unrelated products that may or may not be in favor. In fact, this follows the same logic as the conglomerate discount where investors assign lower valuation multiples to companies with unrelated business lines.
Whether investors can allocate their money better than a conglomerate is highly situational (Warren Buffett's Berkshire Hathaway points to no; General Electric's GE Capital pre-financial crisis points to possibly so). But considering Apple currently trades at earnings multiples less than the overall market despite its record of earnings growth, it can't hurt for the company to be defined by its iconic product.
Final thoughts
There is a risk associated with any company becoming wedded to just one product, including Apple. However, Apple has upcoming revenue drivers that should lessen its dependence on the iPhone. The company's mobile payment system, Apple Pay, is now available and should show up on the income statement soon. The company also has the Apple Watch release in early 2015.
But even if those products don't contribute to Apple's top or bottom line in a meaningful way, Apple investors shouldn't fear. Since its first iteration in 2007, Apple's sold more than 650 million iPhones with each iteration selling more than the one before. Look for Apple to continue to innovate and enrich shareholders for years to come.
