REPORT ON CASE STUDY OF

APPLE

Submitted by:
Siddharth Singh Tomar

Roll- 65
Sec - A
 BACKGROUND OF APPLE (TECHNOLOGY COMPANY)

COMPANY HISTORY
Apple Computers, Inc. was founded on April 1, 1976, by college dropouts Steve Jobs and
Steve Wozniak, who brought to the new company a vision of changing the way people
viewed computers. Jobs and Wozniak wanted to make computers small enough for people
to have them in their homes or offices.
BRIEF DETAILS
FOUNDER: Steve jobs
Steve Woznaik
Ronald Wayne
HEAD QUARTERS: 1 Apple Park way, Cupertino, California, US

KEYPEOPLE: Arthur D. Levinson, Ph.D. (Chairman)

Tim Cook (CEO)
Luca Maestri (CFO)
Jeff Williams (COO)
Jony Ive (CDO)

PRODUCTS

 Mac
 iPod
 iPad
 iPhone
 Apple Watch
 Apple TV
 HomePod
 Software
 Apple Energy
 Electric Vehicle
SERVICES

 Apple Pay
 Apple Store
 iTunes Store
 App Store
 Mac App Store
 iBooks Store
 iCloud
 Apple Music
SUBSIDIARIES

 Shazam
 Texture
 FileMaker Inc.
 Anobit
 Braeburn Capital
 Beddit
 Apple Sales International
 Apple Worldwide Video
 Apple Services
 Apple Energy

KEY STATISTIC
Revenue
$265.81B
Net Income
$59.53B
2018 Sales Growth
16.3%
Employees
132,000
 STUDY ON MACROECONOMICS FACTORS

Growth rate
Apple Inc.’s sales fell by -4.51 % in I. Quarter 2018 from the same quarter a year
ago. Ranking at No.2538
Computer Hardware industry recorded deterioration of revenues by -5.05 %

Apple Inc.’s net profit decreased by -0.5 % in I. Quarter 2018 year on year, to $19,965
million.

Valuation

Apple Inc.
current PE on trailing twelve month basis is below Computer Hardware industry average.

Apple Inc. PEG ratio is at 0.64, above Computer Hardware industry PEG average of 0.

Profitability by Segment

Americas 30.57 %

Europe 31.67 %

Asia & Pacific 40.66 %

 INFLATION ANALYSIS

 The table below illustrates that almost all of Apple’s revenue growth was
driven by inflation that is the price increase for iPhones.

 Unit sales growth for the company’s three major products – iPhone, iPad, and
Mac – were either flattish year over year or negative. This has been the case
now for several years.

 If Apple were not able to significantly raise iPhone prices (mainly through the
upgrade to the X) and only grow revenues by the device’s unit sales growth of
0.67 percent, Apple’s total revenues would have been about one third of what
was posted, or 6.7 percent versus 17.3 percent.

 One thousand dollar smart phones are not a sustainable proposition, in our
opinion, folks. China, or somebody, somewhere, will, or already is producing
a quality equivalent smart phone for $250.
 How does Apple make money?

 Apple reported $229.2 billion in revenue during fiscal year 2017, roughly
a 6.3% increase from $215.6 billion in fiscal 2016. In 2015, Apple
announced its highest annual revenue on record of $233.72 billion.
 Over $150 billion of that year's revenue came from iPhone sales,
meaning the company's phone segment was responsible for around
70% of the company's total global revenue.
 iPhone sales reached 216 million units in 2017, up from 150 million in
2013 and 40 million in 2010.
 Apple is one of the most valuable companies to date, yet nearly two-
thirds of its revenue depends on one product line.
 In the future, we may see Apple diversify its product line to include
newer models of accessories like the Apple Air Pods, augmented reality
glasses, autonomous vehicles, and health services.

Contribution to GDP

 In early 2015, it was alleged that Apple's iPhone 6 sales were

responsible for 10% of all U.S. economic growth, as reported by Forbes.

 The claim featured a 1.9 to 2.5% growth rate for the U.S. economy
between 2014 and the first quarter of 2015. Based on pure
mathematical estimates of the productive value of all final American
products, as well as the revenue generated from iPhone 6 sales, the
Apple device was seemingly responsible for 0.25% or 0.3% of the
change in the United States' GDP. On the surface, this meant iPhone 6
sales were 10 to 15% of conventional economic growth.
 GDP is actually a very rough, overly simplistic, and problematic
estimate of growth. Moreover, revenue from iPhone sales is not the
same as a domestic product from iPhone sales, since domestic product
tries to capture value added, not just incoming dollars. Even if
that statistic is wrong (which Forbes admits, it probably is), 10% is still
an interesting figure to express how huge Apple's sales numbers
were—even back in 2016.
 More recently, Apple took it upon itself to illustrate its effect on the
economy and the job market. It claims to have created nearly 2 million
jobs across all 50 states, most of which are attributable to the "App
Store ecosystem." The company based its claims on research by Dr.
Michael Mandel from the Progressive Policy Institute.
Quarter wise performance of Apple

 Facing -4.51% year on year sales decrease in the first quarter 2018, to $ 84.31
billion,

 Apple Inc. reported smaller declines than the Computer Hardware industry with -
5.05% but underperformed the 16.03% Revenue improvement in the Technology
sector.

 Technology sector grew above market average, while Computer Hardware industry
and Apple Inc. results underperformed, in the first quarter.

 Company's sequential top-line increase was 34.04% from the fourth quarter.

 Average annual sales rise for Apple Inc. is 9.22%, while S & P 500's average yearly
sales growth is 7.29% over the five years, including only Businesses with the first
quarter 2018 Results.

 Apple Inc.’s EPS slowed to the 7.46% year on year, improvement in the first quarter
2018 to 4.18, underperforming the 27.6% improvement in Computer Hardware
industry and 184.01% EPS surge in the Technology sector.

 Technology sector grew above market average, while Computer Hardware industry
and Apple Inc. results underperformed, in the first quarter.

 Bottom-line grew by 43.45% from the fourth quarter.

 Average yearly income per share growth for Apple Inc. is 15.97%, while S & P 500's
average annual income per share increase is 13.76% over the five years, including
only Businesses with the first quarter 2018 earnings reports.
 TOP 10 COMPETITORS OF APPLE

 MICROSOFT
 GOOGLE
 BOSE
 FITBIT
 SONY MOBILE
 DELL
 AMAZON
 TESLA MOTORS
 PAYPAL
 SAMSUNG

BRIEF DETAILS ON MICROSOFT

 Microsoft Corporation (MS) is an American multinational technology company with

headquarters in Redmond, Washington.
 It develops, manufactures, licenses, supports and sells computer software, consumer
electronics, personal computers, and related services.
 Its best known software products are the Microsoft Windows line of operating
systems, the Microsoft Office suite, and the Internet Explorer and Edge web
browsers.
 Its flagship hardware products are the Xbox video game consoles and the Microsoft
Surfacelineup of touchscreen personal computers.
 As of 2016, it is the world's largest software maker by revenue, and one of
the world's most valuable companies.
 The word "Microsoft" is a portmanteau of "microcomputer" and "software".
 Microsoft is ranked No. 30 in the 2018 Fortune 500 rankings of the largest United
States corporations by total revenue.
 Microsoft was founded by Bill Gates and Paul Allen on April 4, 1975, to develop and
sell BASIC interpreters for the Altair 8800.
 COMPARISON WITH MICROSOFT

Better growth
Microsoft has done an incredible job of delivering solid growth for shareholders.
 Last quarter, for example, the company reported year-over-year revenue
growth of 12%, with operating income rising 18% during that same time
frame.
 The company's productivity and business processes segment saw sales
increase 13%
 Its intelligent cloud segment enjoyed a 20% jump, and even its more
personal computing segment -- which has heavy exposure to the relatively
uninspiring PC market -- grew 7% as its search advertising, gaming, Surface,
and Windows Commercial products grew enough to offset a 5% drop in
Windows OEM sales.
 Microsoft is also calling for revenue between $29.4 billion and $30.1 billion for
the quarter -- up 11% year over year at the midpoint of that range.
Apple, on the other hand, isn't a growth company right now.
 In its most recent quarter, the company reported a 5% year-over-year decline
in revenue.
 For the following quarter, Apple is guiding to revenue of between $55 billion
and $59 billion.
 At the midpoint of that range, the company's sales look set to drop 6.7% from
the same quarter a year ago.
 For the full year, analysts expect Apple's revenue to fall 3.9%, suggesting
moderating declines in the second half of the company's fiscal year.
 In the subsequent year, analysts expect Apple to turn in revenue growth of
3.9%, but that utterly pales to the 10.4% growth that analysts forecast from
Microsoft in its fiscal 2020.
 Microsoft seems like a better stock for growth-oriented investors than Apple.
Better risk profile
 Microsoft's business is far more diversified than Apple's.

 While Microsoft has roughly even exposure across its three core reporting segments
(and there's a lot of diversity within those reporting segments), Apple's business is
highly dependent on a single product category: iPhone.

 For some perspective, nearly 63% of Apple's revenue in fiscal 2018 came from sales
of the iPhone. By contrast, Microsoft's largest segment in fiscal 2018 -- more
personal computing -- made up only 38.3% of the company's overall revenue. It's
also worth noting that this segment consists of a broad spectrum of products.

 To make matters worse, Apple's iPhone business is currently tanking. Last quarter,
iPhone revenue dropped 15%. Moreover, in addition to the fact that the company's
outlook for the current quarter is fairly weak, there has been a flurry of negative news
items regarding iPhone demand, particularly in China.

 So on one hand, Microsoft has a collection of businesses that, in aggregate, are

delivering significant and seemingly sustainable growth. On the other, Apple's
biggest business is declining and its other segments simply aren't able to completely
pick up the slack.

 As far as risk profile goes, Microsoft seems like the safer pick.

Investor takeaway
Currently, Microsoft stock looks like a better bet than Apple's.
Microsoft's business is more diversified and is set to grow at a significantly faster
pace than Apple's is over the next couple of years.

Performance to expectations
 Much of the success of Microsoft's stock is due to the fact analysts expect so
little from the company. Microsoft beat quarterly revenue forecasts by 1.9%
and topped adjusted quarter profit targets by 9.9%.

 On the other hand, Apple remains a darling with investors so expectations are
that much higher and tougher to beat. Apple did top beat quarterly earnings
expectations - but by just 1.6% - and missed revenue expectations by 0.9%
for the quarter.
View of the future
 Analysts currently expect Microsoft to report 7.8% higher earnings and 4%
higher revenue in 2016. That's much higher than the 1.9% decline in profit
and 2.2% drop in revenue in 2016 expected for Apple.

 Apple warned investors that iPhone shipments would fall for the first time in
the first quarter. Apple's most recent quarterly revenue growth of 1.7% was a
fraction of its 18% growth in the past 12 months and well below is 22% growth
in the third quarter, which underscores the rising concern and feeling the
smartphone market has peaked.

Financial fortitude
Every company will eventually face tough times, and our tech giants are no different. Let's
review a number of metrics to see how they stack up when it comes to their ability to endure
financial hardship.

Metric Apple Microsoft

Revenue (TTM) $255.3 billion $110.4 billion

EBITDA (TTM) $84.1 billion $49.5 billion

Net income (TTM) $56.12 billion $16.6 billion

Cash from operations (TTM) $73 billion $43.9 billion

Free cash flow (TTM) $58.6 billion $32.3 billion

Cash and marketable securities $243.7 billion $133.8 billion

Long-term debt $114.60 billion $76.24 billion

 It's important to note that Apple has more than $173 billion in long-term marketable
securities on its balance sheet that I included in its cash and marketable securities
calculation -- in order to show the truly rock-solid nature of the company's financial
position.

 These figures reveal that both companies have strong balance sheets and more than
adequate reserves in the event of a downturn. But massive revenue and free cash
flow generation give the edge here.
Dividends and buybacks
 Any discussion of these two tech titans wouldn't be complete without a nod to the
funds they are returning to shareholders via dividends and buybacks.

 Over the past half-decade, Microsoft has repurchased nearly 8% of its shares, but
Apple has bought back nearly 23% of its stock over the same period.

 Microsoft's dividend has increased 93% over the past decade, while Apple's has
jumped 110%.

 Microsoft has the edge when it comes to yield, at 1.55%, and is currently only paying
out 77% of its profits to support the dividend -- but that requires some explanation.

 The company took a one-time charge of $13.8 billion in its fiscal second quarter
related to U.S. tax reform late last year, which skewed the results. Adjusting for this
one-time event results in a much more reasonable payout ratio of 42% -- leaving
plenty of room for future increases.

 Apple has a current yield of 1.35%, slightly lower than Microsoft, but is paying out just
23% of its earnings to fund the dividend, giving it much greater ability to fund
increases going forward.

 Even with Microsoft's slightly higher payout, Apple's recent dividend growth has been
greater, and it has a much greater ability to fund future increases.

Valuation

Any better-buy scenario would be remiss if it didn't include a review of valuation. Applying
several different widely used valuation metrics will give us a sense of which company might
represent a better value. Here's how they compare using price-to-earnings (P/E) and price-
to-free-cash-flow (P/FCF).

Metric Apple Microsoft

Trailing P/E 20 52

Forward P/E 19 26

P/FCF 19 26

At first glance, it appears Apple has this locked down, but once again, Microsoft's trailing P/E
ratio is thrown off by the aforementioned tax charge. Adjusting for that one-time charge,
Microsoft's valuation drops to a much more competitive trailing multiple of 28, but that's still
not low enough to keep up with Apple.
 CONCLUSION

 In the race of revenues and profits, Microsoft kept winning from 1995 to 2010. But,
Apple has come back strongly from then on.

 Both the companies have created industry dominating positions for themselves.
Besides Amazon, Facebook, and Google, not many other industry players can
challenge Apple or Microsoft.

 Microsoft dominates desktop personal computers software. Apple is trying to gain

desktop market share with Mac.

 Apple dominates smartphone sales. Microsoft is trying to gain smartphone market

share with the Windows Phone efforts.

 Apple company-owned retail stores strategy has been very successful. Microsoft has
also developed a similar strategy.

 Microsoft has been successful with Xbox gaming and online advertising. Apple has
been successful with digital music, video, and games sales over iOS devices.

 Both of the companies are trying to gain more share of existing markets. Both of the
companies will keep bringing incremental innovations to their existing product lines.
However, it will be interesting to see which company comes with a next break-
through product first. The winner will be the one that creates new markets.
 REFERENCES
 https://en.wikipedia.org/wiki/Apple_Inc.
 https://en.wikipedia.org/wiki/Microsoft
 https://csimarket.com/stocks/eco.php?code=AAPL