Apple showing plenty of juice still in tank - Milford Asset
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Apple showing plenty of juice still in tank

Four of the world’s most exciting and high-profile companies – Apple, Amazon, Facebook and Google – released quarterly results in the past 10 days.

These announcements have generated a huge amount of commentary, analysis and sharemarket activity.

For example, US$15.7 billion ($20.7 billion) worth of Apple shares traded on April 28, the day after the company’s profit announcement. This was three times Apple’s average market turnover for the previous few weeks and is the equivalent of nearly two-thirds of the total value of all shares traded on the New Zealand sharemarket over the past 12 months.

Amazon, Facebook and Google’s share trading value shot up to US$7.6 billion, US$6.2 billion and US$2.8 billion respectively on the day following their profit announcements, around three times the normal daily average.

These figures clearly indicate that sharemarket activity benefits from quarterly profit announcements rather than the six-monthly reporting requirements in New Zealand and most other countries.

Apple, which has a sharemarket value of US$721 billion, announced sales revenue of US$58 billion for the March quarter, a 27 per cent increase over the same period in the previous year.

The iPhone, which represented 69 per cent of Apple’s revenue in the latest quarter, remains the company’s most important product. iPhone sales have soared from 18.6 million units in the March 2011 quarter to 43.7 million units in the March 2014 quarter and 61.2 million units in the latest three-month period.

The iPhone’s average selling price has increased from US$596 to US$659 per unit over the last 12 months. This reflects the launch of iPhone 6 in September last year.

The other development is that Apple’s Chinese sales soared to US$16.8 billion in the latest quarter compared with US$9.8 billion for the same period last year.

Apple is second to Samsung in terms of smartphone sales – 61.2 million units compared with Samsung’s 83.2 million units in the March 2015 quarter – but Samsung’s Android smartphone prices are falling and are nearly a third of the price of the iPhone.

As a consequence Samsung’s net earnings for the March quarter were down 39 per cent compared with the same quarter in 2014, while Apple’s earnings increased by 33 per cent, to US$13.6 billion, year-on-year.

One of Apple’s main strengths is the integration of its hardware (iPhones), software (iOS platform) and app store (iTunes). This enables the company to realise higher prices for its hardware and discourages customers from switching to Android devices.

However, the smartphone and tablet markets are incredibly competitive and Apple will have to sustain its innovation in order to maintain its premium price position. The continuing development of its app store will be particularly important in this regard.

Amazon reported net sales of US$22.7 billion for the March quarter, a 15 per cent increase over the same period in the previous year.

Quarterly results; Plenty to talk about

 

Apple

Amazon

Facebook

Google

Share price (US$)

125.15

422.35

78.00

537.34

Market value (US$b)

750

199

225

374

 

 

 

 

 

Revenue (US$b)

58.0

22.7

3.5

17.3

 

 

 

 

 

Pre-tax profit

18.6

0.0

0.9

4.6

Tax

(5.0)

(0.1)

(0.4)

(1.0)

Net earnings

13.6

(0.1)

0.5

3.6

 

The company has changed its segmentation reporting into three new divisions – North America, which represents 59 per cent of sales, International 34 per cent and Amazon Web services (AWS), which accounts for 7 per cent of revenue.

The first two represent the company’s traditional online retail operations while AWS is essentially an on-demand, pay-as-you-go cloud storage and IT resources offering.

Amazon reported a small loss for the March quarter, as it did for the full December 2014 year, but most commentators take a positive view of the company for a number of reasons including:

• It has 278 million active customers.
• Amazon is leading the move from brick-and-mortar retailing to online retailing.
• It is a low cost operator, particularly compared with brick-and-mortar retailers, and is also a major disruptive force in digital media and cloud computing.

Amazon is an incredibly ambitious and innovative company with 165,000 employees, a 32,400 increase over the past 12 months. Founder and chief executive Jeff Bezos won’t rest easy until he has completely dominated a number of the traditional retailing sectors.

Facebook reported revenue of US$3.5 billion for the March quarter, a 42 per cent increase over the same period last year. The company has a sharemarket value to revenue ratio of 16.4 times based on the last 12 months’ revenue of US$13.5 billion and a market value of US$221 billion.

One of Facebook’s main attractions is its 936 million daily active users compared with 802 million 12 months ago. There were major concerns a number of years ago that Facebook didn’t have effective apps for mobile devices but 798 million of the 936 million daily active users now gain access through mobile devices.

Facebook has 1.4 billion monthly active users representing nearly 20 per cent of the world’s population, a remarkable statistic.

This massive user base gives Facebook enormous advertising opportunities because individuals post a huge amount of personal information that is highly valuable to advertisers on an anonymous basis. Facebook also has a relatively captive audience because it is difficult for users to leave once they have posted a large amount of personal information and have developed a widespread network of online friends.

Facebook can confidently claim that it dominates the social media sector but it is a volatile area as Rupert Murdoch discovered with MySpace. Facebook faces competitive pressure, regulatory risks, privacy issues and the possibility of lower than expected support from advertisers.

Google reported revenue of US$17.3 billion for the March quarter, a 12 per cent increase year-on-year. Google is clearly the world’s largest search engine followed by Bing and Yahoo, which are a third of Google’s size.

Bing is owned by Microsoft while Yahoo, which has a share market value of US$40 billion, reported revenue of US$1.2 billion for the March quarter.

Google’s main assets are its search facilities and YouTube which generate 68 per cent of group revenue. Google’s search facility has an estimated 1.1 billion unique monthly visitors, more than all the other search engines combined, while YouTube has over one billion users with 300 hours of new video uploaded every minute.

Google also has a wide range of other offerings to attract and keep customers, including Gmail, Google Maps and the Chrome browser, although Google Glass appears to be a commercial failure at this stage.

A number of industry commentators are picking that Apple Watch will also be a commercial failure but this won’t have a major impact on Apple because of the success of the iPhone.

Google reported net earnings of US$3.6 billion from continuing operations for the March quarter, slightly below the March 2014 quarter figure.

However, the share valuations of Google and Facebook are based on their huge audience reach, and the massive advertising revenue potential this offers, rather than their current profitability. Amazon’s allure is based on its proven ability to disrupt and replace brick-and-mortar retailers.

Apple’s position is quite different. There is a narrowly held view that the company has already achieved its full potential in terms of new products, revenue and profitability and it will be extremely difficult to maintain this momentum in the longer term. However, given the company’s recent performance, it would take a brave person to bet on this outlook.

There is no doubt that Apple, Amazon, Facebook and Google continue to have enormous potential and their progress, and share price performances, will be fascinating to watch in the years ahead.

 

Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management holds shares in Apple, Facebook and Google on behalf of clients.

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to a Financial Adviser. Past performance is not a guarantee of future performance.

For more information on getting advice at Milford, please visit: https://milfordasset.com/getting-advice

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