Please ensure Javascript is enabled for purposes of website accessibility

Why Apple Inc. Is So Profitable

By Ashraf Eassa - Mar 23, 2017 at 9:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Scale and efficiency drive Apple's industry-leading profitability.

Apple (AAPL 2.45%) is one of the world's most profitable companies and certainly the most profitable smartphone maker. Per Strategy Analytics (by way of MacRumors), Apple captured 79% of all smartphone industry profits in 2016, while rival Samsung (NASDAQOTH: SSNLF) took in 14.6% (leaving very little for the many remaining industry players).

What isn't often talked about -- even in the financial media -- is why Apple's iPhone franchise (and, indeed, Apple itself) is so incredibly profitable.

Apple's iPhone 7 Plus in Jet Black.

Image source: Apple.

I think this is an important topic for investors, and even simply individuals interested in the smartphone business, to understand. To that end, I'd like to explain.

How are profits calculated?

There are several types of profit, or income, that you should be aware of. There's gross profit, operating profit, and net profit.

Gross profit refers to the amount of money that the company gets to keep from the sale of each product after cost of goods sold -- think of that as the per unit production cost -- is subtracted from the selling price of the product.

A concrete example: if I sell a smartphone for $150 that costs me $100 to make, then my gross profit is $50. My gross profit margin percentage in this case is the ratio of gross profit ($50) to selling price ($150), or 33%.

You'll notice that while gross profit is an interesting metric, it doesn't consider another critical financial factor: operating expenses. A company like Apple must constantly invest in research and development to bring new products into the world and there are other expenses such as product marketing, administrative functions, and so on.

Operating profit, then, can be thought of as gross profit less operating expenses.

Finally, there's net profit. You can think of this as operating profit with some other factors baked in including tax liabilities, losses/gains from investments, one-time accounting charges, and so on.

With that background in mind, we can now understand why Apple is so profitable.

High revenue, solid gross profit margins, and relatively low operating expenses

In its last fiscal year, Apple reported net revenue of $215.64 billion -- a substantial sum. On that revenue, it generated gross profit of $84.26 billion. Its operating expenses, split between research and development (R&D) and sales, general, and administrative (SG&A), totaled $24.24 billion.

As a simple calculation shows, Apple generated $60 billion in operating income and, less taxes and including in "other income," its net income worked out to $45.69 billion.

From these numbers, the key to Apple's profitability is clear: extremely high revenues, a robust gross profit margin percentage on that revenue, and relatively low operating expenses as a percentage of revenue (enabled in no small part by the fact that its revenue base is so huge).

What's particularly impressive is that the company is able to move north of $200 billion in product with an SG&A budget of just shy of $14.2 billion.

In contrast, Apple rival Samsung (NASDAQOTH: SSNLF) generated roughly $179 billion in total revenues last year (it's worth noting that Samsung's business is more diversified than Apple's) but it needed to spend roughly $47 billion in SG&A to get to that level of revenue.

In other words, Apple's sales and marketing organization is effective and its brand so powerful that Apple can spend a fraction of what its fiercest competitor does and still generate more revenue.

Apple's a well-run business

One thing is crystal clear: Apple is a phenomenally run business that gets a lot of mileage from its operating expenses. Its ability to build desirable products and effectively market them in such an efficient manner is highly impressive and, should Apple keep it up, could serve to generate additional shareholder value in the future.


 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (2.45%) $3.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.