Consider the current market narrative. Apple (AAPL) is no longer just the iPhone. Apple beats estimates over and over. Apple is on a roll. Services. Wearables. 5G megacycle.
Consider the share price. Apple stock is up roughly 4.6x during the last five years
Now consider all those bears. They have been extremely wrong on Apple. They know nothing. I, myself, have written many articles highlighting Apple’s risks (mostly regarding the iPhone) – though most were not straight bearish and indeed most were tagged “long ideas.” I know nothing. The market has spoken and it did so very loudly.
All of the above are certainly popular opinions these days. Those who bought Apple were handsomely rewarded. This article will just try to figure out something. Were the bulls all that far sighted when it came to Apple’s actual profitability progression over the last five years?
Let’s see what actually happened.
Apple’s EBIT, EBITDA and Net Profit From 2015 To The Present Day
I’ll take a shortcut here and use a single chart to cover all these profitability metrics:
So what do we have here?
Since 2015, neither EBIT nor EBITDA are up at Apple. Net profits are up mostly because of lower taxes. Revenues (not shown), however, are up (though not strongly). EPS also is up both because net profits went up slightly, and because of the ongoing buyback.
All in all, we’ve seen Apple’s absolute operating profitability and operating margins deteriorate visibly.
Another thing that’s down since then is, of course, the iPhone weight on Apple’s revenues.
This puts into question the thesis that the iPhone has been successfully replaced by other products. It hasn’t. Its decline impacted margins visibly.
It should however be said that a large part of this decline was due to a true iPhone implosion in China. Consider the following:
Source: CAICI monthly reports
As we can see, during the last five years (to 2019), Apple has seen a collapse in Chinese iPhone sales and market share.
When we see news of iPhone growth in China, this needs to be put in context. Even 100% growth wouldn’t take the iPhone back to its Chinese peak. Never mind things like July 2020 showing a 29% drop in sales (the worst in recent times).
We can take several conclusions from this exercise:
- It’s a myth that Apple has been doing well, at least when it comes to profitability. In terms of operating profitability measures, Apple is sitting right now at or below where it stood five years ago. No growth.
- All of the Apple story thus has to be entirely about the future, unproven, profitability growth. Although segments like services and wearables continue to grow well, growth already is flagging. Also, arguably the iPhone is the base to sell everything else. Finally, there’s no evidence of a 5G upgrade cycle lifting smartphone sales in China – quite the contrary. 5G phones already are up to two-thirds of new smartphones sold, yet overall sales are down significantly year-over-year.
- It’s also a myth that new segments have higher margins than the struggling iPhone. Over time, as the iPhone struggled, profit margins went down.
Overall, Apple has seen operating profitability and profitability margins decline during the last five years. It’s not clear that this trend will stop, and the growth catalysts aren’t clear either. Surely Apple gained from work-from-home tailwinds (iPad, Mac), but those effects are temporary.
In face of this, what Apple experienced was a tremendous increase in valuation multiples, granted, from depressed levels. Apple did not enjoy any growth breakthrough (at least not one that favored absolute or relative profitability).
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.