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Education Series: Single-Stock ETPs

Apple: Product Pricing vs the Recession

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Apple has had quite the year so far, both in terms of stock valuation and market reach. Apple is a veritable repository of case studies on marketing and promotions for products in a space that is hotly contested globally. However, given trends in its net sales and dominant product types, there is ample room for a word of caution.

Revenue Segments and Trends

As per Apple’s financial statements, the share of net sales (i.e. revenue) disaggregated by region as well as product type is shaping up to be largely the same as that seen in its FY 2021 results:

Two facts that become clear are:

  • The Americas is the biggest driver for revenue, with all of Asia (i.e. China, Japan and the rest of Asia-Pacific region) together coming nowhere close. This makes Apple an “American” story. 
  • Outside of the iPhone, no other product comes close to having as much relevance to being a revenue driver. This makes Apple more of a “smartphone” company than anything else. 

In terms of trends seen both in Year-on-Year (YoY) as well as the quarter-on-quarter (QoQ) since the last FY results, the picture gains additional detail:

Three additional points of distinction gained from this are:

  • While all of Asia (particularly China) was the driver for explosive revenue growth in FY 21, the region now shows increasingly ominous revenue decline in the Year Till Date (YTD). 
  • While Europe trends towards a decline as well, the Americas is the only region showing the least decline in the previous quarter. 
  • Revenue trends in two products that traditionally accounted for nearly 60-65% of all its revenues – the iPhone and Mac – have witnessed a solid collapse in revenue with other product segments not picking up the slack. 

Total net sales in the three quarters since last FY’s results stand at being 16.9% lower than the previous FY. Ordinarily, as trend analysis studies in articles in the past had shown, this would have been enough to suggest that it’s a safe bet that Apple could break even by FY-end and perhaps even show a modest gain. However, this doesn’t imply that the forward outlook is going to be similar – at least in terms of unit sales. 

The Cost-Price Gap

Apple’s iPhone line has nearly always maintained a high markup relative to the cost it incurs from its contract manufacturers.

For instance, it has been estimated that the previous model – the iPhone 13 – has at least a 75% base markup.

In another prior model – the iPhone X – it was estimated that the cost of parts relative to price was the lowest among its top competitors (including its own predecessor):

It’s a fair bet that the iPhone 14’s competitors – both present and future – would show a similar level of disparity in terms of the “cost-price gap”. 

The higher price point doesn’t necessarily imply a better or feature-rich experience, as Apple’s bete noire Samsung – and comparable product manufacturer – is fond to point out. For example, in September 2012, Samsung ran an ad with the tagline “It Doesn’t Take a Genius” in major newspapers all across the Western Hemisphere touting its product’s features relative to those of the iPhone 5:

Almost exactly 10 years later, Samsung ran a series of social media campaigns about the iPhone 14’s big upgrade – the 48-megapixel camera:

Some Theories about Apple’s Market Resilience

Given that Apple doesn’t necessarily produce “best-in-class” smartphones relative to their price points, the question of market resilience (at least in the U.S.) can be estimated in historical terms.

First, the company’s excellent relationship with telecom service providers meant that the product’s high costs were “belayed” across a two-year period. Historically, this meant that the provider would earn a little more than the phone’s upfront cost over a two-year period while locking the customer into a contract for that period. In exchange, Apple is able to transfer the “payment default risk” off its books. Recent initiatives, however, have drawn the two-year payment plan’s costs largely on par with that of the upfront cost across all carriers, including Apple’s “in-house” store. 

Second, Apple’s PR campaigns have helped foster a unique sense of “social equity” among the buying public over the years. This sense of “social equity” from the mere act of owning a device has led to some rather amusing consequences: over the years, media outlets have highlighted surveys indicating that iPhone users in the U.S. prefer not to date Android phone users. For example, a survey by Match.com confirmed this in 2017 while a survey by Decluttr confirmed it again in 2018. In 2022, a survey by British price comparison platform MoneySuperMarket (which also received significant mentions in digital media) on dating sites across the Western Hemisphere which indicate the device used show that Apple users get more matches than Android users

However, a word to the wise: surveys are only as good as their sampling techniques and ripe for all sorts of interpretation. For example, in 2022, app-based motor insurance startup Jerry found that Apple users tend to be poorer, have lower credit scores and are worse drivers than Android users. All the surveys mentioned were done on relatively smaller scales and aren’t as carefully designed as those executed by, say, the Pew Research Center.

The popularity of the optics associated with this imputation of “social equity” is an important lesson in “branding” that business school graduates, startup founders, “tech gurus” and social media influences have studied and emulated ever since it became apparent that not having the “best-in-class” doesn’t necessarily exclude one from being able to lead in a race.

The third point is rather intuitive: switching devices is a relatively easier experience if the new device has the same operating system. iOS is exclusive to iPhones while Android users have a wide range of phone makers to choose from. Thus, it’s more likely that an existing iPhone user will switch to another iPhone. It bears noting that this is largely a matter of perception: given that the “range of use” for most phone users is rather standardized, this implies a rather flat learning curve for device switching in either direction.  

The choice of “paying more” for “less” isn’t necessarily a choice that most customers would be comfortable with in more recent times. 

Global Smartphone Shipments Are Falling

It has been estimated that, as of Q2 2021, Apple’s share in global smartphone shipments have shrunk back to nearly Q1 2021 levels:

In the U.S., the company’s market share has shrunk back to Q3 2021 levels, with Samsung being a net beneficiary in recent times:

However, it bears noting that smartphone shipments have been falling in the YTD:

The quarter-wise “heat map” indicates that neither Apple nor Samsung have maintained a constant winning streak in comparative performance. 

In terms of pricing, Apple products globally and predominantly compete against a set of products offered by Samsung and Xiaomi. In the QoQ trends in the YTD until Q2 2022, Apple has had a precipitously larger fall in shipments relative to the other two global rivals:

As previous articles on U.S. wages and debt indicated, there is an increasing tendency among the U.S. buying public to not spend, given inflationary effects and rising debt (and loan defaults which the Federal Reserve considers to be “masking potential distress”). Paying “more” for “less” is increasingly less sound (financially) than, say, two years ago.

Price Ratio Trends

There’s a very good reason why Apple’s stock should be considered a “bellwether” indicator for the S&P 500 and vice versa. Lets consider the Price to Earnings (PE) Ratio of the two in recent years:

The median value is a reasonable “baseline” for longitudinal trends when coupled with correlation of observations. While observations can indeed go north or south of the median, the correlation will advise on its degree of correctness. 

With these in mind, 2020 was a stalwart year: the implied PE Ratio of both the index and the company’s stock were nearly identical with a very high correlation. The buying spree observed in the company’s products in 2021 imputed a much higher median on the company’s stock and upended the correlation with the index, thus imputing an “overvaluation” effect. In the YTD, this effect is winding down and correlation has a “steady increase” effect in more recent observations. 

What also needs bearing in mind is that the S&P 500’s PE Ratio is nowhere close to the historical average built up over the course of the 21st century and much farther away from the lows seen in the financial crisis of 2008.

In other words, given the company’s historic “bellwether” status with the S&P 500 and the fact that the underlying factors affecting consumption haven’t received adequate remedy yet, there is no reason to assume that the bottom is apparent just yet – either with the index or the company’s stock. 

Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500, and the upside or the downside to Apple’s stock.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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