With shares up by almost 700% over the last decade, Apple (AAPL +2.05%) richly rewarded its long-term investors. But with core drivers like the iPhone reaching their peak, the company will have to work harder to keep its shareholders happy. Let's explore how the company's strategy could evolve over the next 10 years.
What is special about Apple?
In 2018, Apple became the first company to reach a market cap of $1 trillion. And this didn't happen by accident. The tech giant is unique because of its track record of repackaging existing technologies in innovative new ways. First, its iPod revolutionized the mp3 market in 2001 before the iPhone did the same for mobile phones in 2007. But now it is 2023, and Apple is still primarily an iPhone company, with sales of the mobile devices usually making up around half of its total revenue.
NASDAQ: AAPL
Key Data Points
The problem is that smartphones are a mature tech platform no longer capable of wowing customers with massive improvements. At the same time, slowing volume growth has encouraged Apple to raise prices. The first iPhone debuted at $499 before falling to just $199 for the iPhone 3G released the next year. This is quite low compared to $799 for the base model of the most recent iPhone 15.
While inflation explains some of the difference, hardware platforms usually drop in price over time through manufacturing economies of scale, technological improvements, and competition.
While Apple's strong brand and ecosystem (Apple products tend to work best with other Apple products) help it keep demand high, it is unclear how much longer this strategy will work. As prices rise and phone improvements become more incremental, the consumer culture of upgrading a phone every couple of years could become outdated. While the iPhone will remain a consistent and profitable revenue stream for Apple, it is far from a growth driver. The good news is that the company's services segment enjoys far better trends.
Services remain a bright spot
Over the long-term investors can expect strength in Apple's services to offset the slowdown in hardware. This segment includes offerings such as the Apple Store, iTunes, and Apple Pay, the company's mobile payment service. In the third quarter, total services revenue jumped 8.2% year over year to $21.2 billion. And it boasts a gross margin of 70.5% which is almost double the margin for Apple's hardware products.
Apple's services have a strong competitive moat because of the company's huge base of over 2 billion devices, which often come with its services pre-installed. The company can drive continued success by expanding through new services such as Apple Business Essentials, an IT management package for small businesses that synergizes with their Apple hardware.
Artificial intelligence could become a key growth driver
Over the next 10 years, Apple will need to monetize its ecosystem in new ways, and artificial intelligence (AI) could be a big part of this story. So far the company has focused on surface-level things like improving the iPhone's spell-check and better subject recognition on its photos app. These efforts seem subdued compared to those of other large tech companies like Amazon or Microsoft, which are integrating AI technology into their enterprise-facing cloud computing platforms.
But while rivals will probably benefit more from AI in the near term, Apple's consumer-focused luxury brand and ecosystem of products could become a long-term advantage.
Image source: Getty Images.
According to Bloomberg, the tech giant plans to debut a partially self-driving car by 2026. While this product isn't expected to feature full-self driving (a challenge no automaker has managed to crack), it will use AI tech such as machine learning and computer vision to augment the user experience. More importantly, it could readily integrate with Apple's existing ecosystem, giving it an economic moat for consumers who already own other Apple products such as an iPhone, Air Pods, or Mac.
Alternatively, Apple could create third-party software for self-driving cars, giving it exposure to the industry without going into manufacturing.
Is the stock a buy?
With a forward price-to-earnings (P/E) multiple of 26, Apple's valuation is in line with the S&P 500's average of 25. And this is arguably a big price to pay for such a large company in a mature industry like smartphones. While Apple deserves a premium because of its industry-leading brand and ecosystem of products, I would like to see it take advantage of new opportunities (possibly in AI and car manufacturing) before buying shares.
