A look at developments in the financial markets over the last week or so.
Apple announces record profits, earnings, and iPhone sales
This week, Apple posted the largest quarterly profits in history – $18 billion profit from $74.6 billion revenue. This article explains how. Here’s another look.
Some interesting stats:
- The conversion rate from iPhone 5 to iPhone 6 over the period was in the low teens, leaving room for further iPhone 6 sales.
- Apple Pay accounts for $2 of every $3 spent via contactless payments on Visa , MasterCard or American Express.
- Revenue in greater China grew 70% year-on-year to $16.1 billion.
- iPad sales continue to decline, down 18% to 21.4 million units over the quarter.
- The Apple Watch will go on sale in April, starting at $349.
- The company has $178 billion in cash, an amount larger than the market cap of all but 17 S&P 500 companies.
The law of big numbers has been raised as an obstacle to Apple’s continued growth, but there are a number of areas that offer potential for growth:
- Growing demand in “new” markets like China, where the company is doing very well despite a number of new, low-end, local competitors.
- The recently launched iPhone 6 & 6+ proved many critics wrong and drove record profits. There are other products in the pipeline, including the Apple Watch.
- The release of new services like Apple Pay and a rumoured music streaming service will create further ecosystem lock-in and generate new, stable cashflows.
- Partnerships with other companies looking for growth – IBM for example.
In terms of corporate finance, all that excess cash could be deployed into dividends, buybacks or acquisitions. Or R&D for that next big thing.
Declining iPad sales have been flagged as a point of concern, and an example of Apple failing. In reality, neither are true. The tablet market as a whole is experiencing declining sales, meaning Apple is not losing market share to competitors at the top end of the market. The issue is incorrect forecasting for a new product. Initially the market assumed that tablets would have the same ~2 year replacement cycle as cellphones. This turned out to be too optimistic – consumers are holding onto their tablets for longer than their phones, mainly because they do not feel the need to upgrade a product they do not carry around and use on a daily basis. Apple will continue to sell iPads and, as with iPhones, consumers will likely upgrade to new Apple products when the time comes. In the meantime, the iPad further locks users into Apple’s ecosystem:
- If you have an iPad, are you more or less likely to continue upgrading your iPhone? – driving hardware sales.
- If you have an iPad, are you more or less likely to purchase content from Apple? – driving record App Store revenue.
Alibaba Profit Surges, but a Revenue Gain of 40% Still Misses Forecasts
Most companies and investors would kill for 40% revenue growth. However, Alibaba shares fell 8.8 percent on the day it announced its numbers. One of the reasons for this is the expectations built into the share price – investors were looking for closer to 50%. This is a good reminder that share prices don’t rise because they rise, and that eventually they catch up to their fundamentals – up or down.
“Just a day after a surprisingly blunt exchange with a Chinese regulator that unnerved investors, the e-commerce giant Alibaba Group on Thursday reported a 40 percent revenue increase in its final quarter of 2014, though the total was weaker than expected.”
Tim Hortons Inc confirms scores of head office layoffs
Last year, Burger King announced its $12.5 billion takeover of Tim Hortons, the Canadian coffee shop chain. The deal caused some controversy in the US when Burger King announced it would move its headquarters to Canada, partially for tax considerations.
The Brazilian investment firm behind Burger King, 3G Capital, has a reputation for streamlining businesses and boosting profits through cost cutting and efficiencies. Tim Hortons recently announced that such measures had begun with the laying off of staff at the company’s headquarters. This has caused additional controversy and calls for boycotts, despite being in line with promises made to the federal government. A matter of national identity it seems.
DR Horton Delivers a Dose of Housing Optimism
DR Horton announced a 35% increase in net sales orders and a 29% increase in the number of houses closed in Q1 2015. Homebuilders have been warning of reduced margins on the back of rising costs and greater incentive offered to buyers. However, DR Horton’s results highlight the continued strength of the US housing market, especially given that “about 40% of its volume [come] from first-time home buyers.”
Barry Ritholtz: Masters in Business: Bill Gross
“An interview with famous bond investor Bill Gross, formerly of Pimco, now with Janus Capital.”
Exclusive: Obama 2016 budget urges U.S. states to cut emissions faster
There will likely be many arguments against this kind of spending given current low oil and coal prices, but countries are not run for the short-term. Conventional energy prices will almost certainly rise in the future, so it follows that countries and companies that continue to focus on clean energy during this period of low energy costs will create an advantage for themselves in the future compared to those that do not take similar actions.
“President Barack Obama’s fiscal 2016 budget proposes $7.4 billion to fund clean energy technologies and a $4 billion fund to encourage U.S. states to make faster and deeper cuts to emissions from power plants, officials told Reuters.”
Why Almost Nobody Wants to Pay for the ‘Netflix of Magazines’
Next Issue, a start-up looking to become the Netflix of magazine content, just raised $50 million from private equity firm KKR. Can they succeed where others have so far failed?
“The idea of banding together into a Netflix of magazines isn’t untested, just unpopular… Even under the most optimistic assessment, the project has so far only been a decent proof of concept.”
The Shake Shack Economy
Story of changing tastes and the rise of “fast-casual” restaurants.
“The rise of Chipotle and its peers isn’t just a business story. It’s a story about income distribution, changes in taste, and advances in technology.”
Open letter to the German readers: That which you were never told about Greece
An open letter from the new Greek prime minister to the people of Germany on the topic of national debt. It’s not going to be that easy though.
The AI Revolution: The Road to Superintelligence
“We are on the edge of change comparable to the rise of human life on Earth.” — Vernor Vinge