President Donald J. Trump, joined by Secretary of the Treasury Steven Mnuchin and Advisor to the President Ivanka Trump, tours the Apple Manufacturing Plant with Apple CEO Tim Cook Wednesday, Nov. 20, 2019, at Flextronics International LTD-Austin Product Introduction Center. (Official White House Photo by Shealah Craighead)
For all practical purposes, Apple is the world’s biggest stock. (Saudi Aramco is technically larger, but the float is small).
Since year-end 2015, Apple’s sales have increased at a compounded annual rate of about 3.5%. Net income has increased at a compounded annual rate of about 1.5%. Massive stock buybacks have inflated the annual growth rate in per-share earnings to 7.9%.
How has Apple’s share price performed since year-end 2015?
The shares have risen at an unimaginable compounded annual rate of 31% per year. Unimaginable for a large company whose sales and earnings have grown at low single-digit rates over the same time period.
How did Apple manage gains over 30% during the last four and a half years with middling fundamental growth in the business?
They changed the narrative. Apple told Wall Street the future of the company is in services and the big brokerage analysts bought it hook line and sinker. Services have higher margins and more sustainable revenue streams. The services narrative has helped Apple’s earnings multiple rise from 11X at year-end 2015 to 28X today. The inflation in the price to earnings multiple along with the boost to earnings per share from regular stock buybacks is responsible for over 90% of the returns in Apple shares over the last four and half years.
Why do we bring this up?
The services business may not be the sustainable cash cow Apple makes it out to be. The App Store is under fire from regulators in the EU and the U.S. for anti-competitive behavior. Apple takes a big slice of the pie and won’t allow apps on its platform that aren’t sold through the App Store.
Bloomberg has more on the EU’s investigation below. The takeaway here is that if the services business doesn’t turn out to be all that it’s cracked up to be, what is to stop that 28X P/E multiple from becoming an 11X multiple once again? Bloomberg reports:
Apple’s developer guidelines say apps can’t “include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.”
Europe’s regulators are particularly concerned that Apple forces developers to use its App Store payment service, which takes a cut of most app subscriptions and in-app purchases. Authorities are less concerned about the size of the revenue share — whether Apple charges 30% or 15%.
“Apple’s competitors have either decided to disable the in-app subscription possibility altogether or have raised their subscription prices in the app and passed on Apple’s fee to consumers,” the European Commission wrote in a Tuesday statement. “In both cases, they were not allowed to inform users about alternative subscription possibilities outside of the app.”
There’s been a backlash against app stores run by Apple and Google in recent years, with a growing number of developers saying the tech giants are collecting too high a tax for access to consumers’ mobile devices.
The European Commission is the first major regulator to launch a formal investigation into this issue. Apple is the target because Google’s Android app store offers more choice on payment methods.
“The most likely outcome is a ruling that limits Apple’s ability to restrict information about other purchasing options,” Amit Daryanani, an analyst at Evercore ISI, wrote in a note to investors on Tuesday.
Read more here.
