Laura Martin: The Street doesn’t get Apple

Excerpted from a note to clients last week by Needham analyst Laura Martin.

We believe the market’s obsessive focus on quarterly unit sales misses the key value driver for APPL, which is its ecosystem. The bundling of content (its app store and Services segment) lowers device churn and drives AAPL’s profit margins to be higher than Disney’s despite far lower valuations. We view AAPL’s annual September iPhone introductions as equivalent to sequels in a successful film franchise, so we are not troubled by sales variability of specific models…

Fundamentally, we think the right way to think about AAPL’s barriers to entry, pricing power, and competitive advantage period is through the lens of its ecosystem dominance of the wealthiest 15% of smartphone owners in the world. We note that Berkshire Hathaway has been steadily adding shares of AAPL over the past year, and as of 9/30/16, they owned 15.7mm shares, worth $1.7B.

Reiterates strong buy. Price target: $150. 

4 Comments

  1. John Kirk said:

    “We believe the market’s obsessive focus on quarterly unit sales misses the key value driver for APPL, which is its ecosystem…”

    Wow, what a great insight. Of course, it’s something that should be obvious to all, but sometimes the greatest insights come from pointing out the obvious that all are failing to observe.

    A couple of days ago PED posted an article that directed upcoming sales based on China, component availability, monetary fluctuations, etc. My initial reaction was that it was so short-sighted, so focused on short-term items and not looking at overall trends. I am grateful to Laura Martin for translating my thoughts into a comprehensible narrative.

    It’s very true that the Smartphone is not the future. But they are the present. Smartphones are the most dominant tech — and non-tech — product of this age. And Apple dominates that dominant product. Not only does Apple dominate profit share, they are also the fountainhead for development of future smartphone innovations. Where Apple goes, others follow…if they’re able.

    4
    December 18, 2016
  2. Robert Paul Leitao said:

    I view Apple not as a device maker but as the provider of digital lifestyle solutions and really as a “customer relationship continuum.”

    Although the Street obsesses incessantly over quarterly iPhone unit sales, those unit sales are actually a derivative outcome of growth in the number of customers and Apple eco-system participants. These customers, by and large, will eventually upgrade their Apple-branded devices and do so on a timetable of their own choosing.

    Quarterly unit sales are less of a concern than Apple’s ability to continue to attract new eco-system participants – both enterprises and consumers. More than unit sales of iPhones, which have highly cyclical and seasonal sales trends, growth in Services revenue is emerging as a better and more consistent proxy for gauging the company’s growth.

    Each of Apple’s regional revenue segments have unique cycles of growth. As long as Apple continues to attract new eco-system participants, device sales will continue to rise as a constituent outcome of having the best eco-system of tightly integrated devices, apps, content and services on the planet.

    1
    December 18, 2016

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