Apple

The trendsetter from Cupertino

Well, last week I introduced Microsoft. So it's only natural that this week we take a closer look at my beloved Apple. Attentive readers know that I use quite a few products from the Californian tech giant and that, luckily, I also bought into Apple stock a few years ago, in March 2016 to be exact. I remember that things weren't exactly going smoothly at Apple back then. I read a lot of negative press about the iPhone maker. In the end I took the chance to get in cheaply. Today my position is up more than 150 percent. Just as a side note: if you had bought into Apple when the Macintosh Plus (see picture) launched in 1986, you could have made around 42,100% profit by today. An investment of just €2,500 would have turned into over €1 million - and that's without dividends, mind you!

How did this mega success come about? And much more importantly: where will things go from here? Is it even still worth getting in?

The history and business model of Apple Inc.

On February 24, 1955, Abdul Latif Jandali was born in San Francisco. Now you're probably wondering who on earth that's supposed to be?! He's the son of Syrian political science student Abdulfattah Jandali and American speech therapy student Joanne Schieble. Since Joanne's father didn't approve of a marriage, however, she had to give her child up for adoption. Paul and Clara Jobs now had a little son, whom they named Steve. He grew up in Silicon Valley and was interested in the up-and-coming electronics industry from an early age. Later he attended Reed College in Portland to study physics and literature. After just one semester he dropped out, but still secretly sat in on some lectures. In 1974 he worked at the game developer Atari, where, among other things, he was supposed to develop the game Breakout. Jobs got help from his friend Steve Wozniak, who finished programming the game in just 4 days. Wozniak was a natural talent when it came to technology. Jobs recognized his potential and, together with him and Ron Wayne, another friend, founded the Apple Computer Company out of his garage in April 1976. Shortly afterwards they released their first home computer - the Apple I.

Since setting up and using this first computer still required quite a bit of know-how, the Apple I sold mainly to computer nerds. Jobs, on the other hand, wanted to offer a computer to the masses, so they developed the Apple II, which hit the market just a year later and became an absolute bestseller. When competitor IBM also released a home computer, sales shrank rapidly. At that time IBM was already far more established than the young company Apple. Jobs brought John Sculley, the top manager from PepsiCo, on board. Together they worked on the Macintosh project, which once again was a smash hit. However, a new competitor emerged - Microsoft. Apple again lost a huge amount of market share and Jobs had to leave his own company in 1985.

Steve Jobs then founded the company NeXT Computer in 1986. Ten years later business at Apple was going so miserably that they brought their founder back. They also bought his company NeXT and used its technologies in the iMac, released in 1998. Apple was finally back in the black. The visionary Jobs didn't take a break and soon ushered in a new era. In 2001 the iPod was released along with the associated iTunes software. In 2007 came the really big breakthrough with the iPhone. MacBooks, iPads, Apple Watches, AirPods and much more still flush enormous amounts of money into the tech giant's coffers today. Steve Jobs died in 2011 and Tim Cook took his place.

Where is Apple headed from here?

Apple has developed and perfected its own ecosystem. Its products are always well made, always capture the zeitgeist and regularly set new standards in both design and technology. Accordingly, its products are usually also more expensive than comparable ones from the competition. But since customer satisfaction (according to the company itself) is around 98%, customers are happy to pay more. On top of that, they don't leave this ecosystem that quickly. All the devices work together perfectly - once you have a MacBook or an iPad, you're not going to buy a smartphone from another manufacturer. And of course you'll then also use Apple's AirPods or the popular Beats headphones. By the way, Apple bought the company Beats Electronics in 2014 for $3 billion.

Speaking of music: since 2015 Apple has offered a streaming subscription with Apple Music, which has been growing steadily ever since. However, it hasn't overtaken its rival Spotify yet. You probably know the app Shazam, which lets you quickly identify songs that are playing using the built-in microphone. Apple snapped that up last year too - I think they want to benefit from all the data collected when people use the app. Which songs or artists are being played a lot right now? You can spot trends earlier and respond accordingly with precisely targeted marketing.

Apart from music, Apple now also wants to get into the video streaming business. It secured a number of licenses to produce its own content for Apple TV+. With its still fairly limited content it definitely can't compete with Netflix, Amazon Prime or Disney+, but the first step in this segment has been taken. Without going into it further, Apple has also recently started offering a gaming subscription with Apple Arcade and a magazine subscription with Apple News+. With these various subscriptions the company generates a steady cash flow that is much more predictable and lucrative than large one-time payments.

Since 2018 Apple has also launched its payment service Apple Pay in Germany. Since then you can conveniently pay with your phone in stores. By now most retailers have upgraded their terminals, so in everyday life you can pay with it pretty much everywhere. Of course Apple gets a certain percentage of the amount on every transaction - I think there's still a lot of untapped potential in this area too. Just take a look at the financials of the big credit card companies Mastercard or Visa. Together with Goldman Sachs, Apple even launched its own credit card in the US. Whether or when the card will also be available in Germany remains to be seen. Fact is, Apple keeps diversifying its business areas and pushing into lucrative new industries.

One topic Apple has been tinkering with for quite a while now is its own car. There are constantly all kinds of rumors in the media that Apple could take over electric car maker Tesla or even build a completely in-house iCar. I can't really picture that yet, though - I rather think they're working on "autonomous driving" and might at some point offer a complete package in that direction. What exactly is coming our way is still written in the stars, though ...

So how's the dividend doing?

Tech companies are known for taking their time before paying a dividend to their shareholders. Apple even took 9 years longer than Microsoft. It paid its first dividend in 2012. Since then, though, it has been raised diligently, with an average dividend growth rate of 11 percent over the last 5 years. At 1.2%, the dividend yield isn't particularly high, but with a payout ratio of 25% there's still plenty of room to grow. I fully expect Apple to keep paying the dividend over the next few years and to raise it as well.

Conclusion:
Apple was founded by a visionary, and you can still feel exactly that spirit in the company today. In my eyes Apple is far from reaching the end of the road and will surely keep rising over the long term. Even though it still generates around 50% of its revenue from the iPhone alone, it has become very broadly diversified by now. No ifs, ands or buts, I remain a big fan of Apple!