Finance 414 Team 9

Team 9 Research
Minjie Lin

Rich Srnec Nick Corbishdale Jimmy Moerdyk Charlene Robson

Contents
Company Overview ................................................................................................................................. 2 Investment Cases ..................................................................................................................................... 3 Investment Risks ..................................................................................................................................... 4 Competitive Landscape ......................................................................................................................... 5 Comparables ............................................................................................................................................. 7

Company Description: Apple Inc is a leading global technology company that operates through three business segments: Hardware, Software, and Consumer Electronics. In Hardware, the company provides customers products such as Mac (personal computer series) and Apple remote desktop. In Software, the company has Mac OS X, I Life, Logic Pro, and Quick Time. In the most profitable segment Consumer Electronics, the company develops and offers consumers innovative products like iPod, iPhone, and iPad.

Finance 414 Team 9

Team 9 Research April 26th, 2011 Apple Inc.

Company Overview
Apple Inc is an American multinational corporation that designs and markets consumer electronics, computer software and personal computers. By revenue, its the world's largest software maker. Apple is most well known for its line of Macintosh computers, their line of iPods and their iPhone. Recently Apple has introduced the iPad which has also become one of the companies more popular products. Its software products range from mobile operating systems to music organizational systems, such as iTunes. In fiscal year 2010, Microsoft recorded $62.5 billion of revenue and S18.8 billion of net income. Software Apple offers many different types of softwares that are exclusively on their products. iOS is a software system that is available for the iPhone, iPad, and iPod touch. Its the worlds most advanced mobile operating system and it is constantly getting updated. Apple allows free updates that you can download straight from their website. Another software product available for your Apple Macbook or desktop is known as Mac OS X. Mac OS X is the worlds most advanced operating system. ITs designed to be simple and intuitive. Its what makes the Mac innovative, highly secure, compatible, and easy to use Hardware Apple also offers a wide variety of hardware products. They have Mac brand desktops, laptops and related hardware to go along with them. Some of the hardware products offered by Apple are, the iMac, Macbook Air and Macbook laptops. Apple also offers two different types of servers that would fall into the hardware category. These are the Mac Pro server and the Mac Mini server. Consumer Electronics Apples largest portion of sales comes from consumer electronics. iPhone, iPod, iPad, and Apple TV sales account for 75 percent of total revenue. iPhone was released in June of 2007 and has had three upgraded models since. The iPad was released in 2010 as a way to transform consumers approach to the personal computer. The iPod is a portable media player that was launched in October of 2001. Storage capacities range from 2GB to 160 GB depending on the model you choose. Apple TV is a digital media receiver designed to play IPTV digital content. These were originally released in September of 2006 and in September of 2010 Apple announced a second generation model. This model would be a quarter the size of the original and one third of the price. Apple Inc (Ticker: AAPL, listed on NASDAQ) Apple Inc is an American multinational corporation that designs and markets consumer electronics, computer software and personal computers Business segments: Hardware (22% of revenues) Software (3% of revenues) Consumer Electronics (75% of revenues) Major Competitors: Microsoft, Google, RIM, and HP Key differentiators: Leadership in innovative technology Artistic design of products makes its products stand out Strong management team led by Steve Jobs, the man with vision Key Facts: Founded on April 1st, 1976 317 retail stores as of September 25, 2010 2010 Revenue: $65225 million

2010 Revenue by Segment

3% 22% 75%

Software Hardware Consumer Electronics

Source: Company Data

Finance 414 Team 9

Team 9 Research April 26th, 2011 Apple Inc.

Revenue by Operating Segments

Investment Cases
Effective Business Model
An effective business model is critical to a company's success. Apple's value proposition comes from its online retail shop for digital goods. On Apple's iTunes Platform, customers can seamlessly search and buy Apps, Music, Books, and etc. This model allows Apple to minimize costs as the costs for delivering digital goods is marginal with the Internet as the distribution channel. Meanwhile, Apple can focus on developing its own iDevices to create their own platform. This strategy allows the company to lock in customers as customers' growing reliance on this media database is making themselves hard to change platform. To ensure the best customer experiences, Apple is in full control of the whole value chain. This business model allows the company to generate 30% sales margin from content plus hardware sales with minimal costs.

$10,000 $8,000 $6,000 $4,000 $2,000 $0 (in Millions) 12/26/2009 12/25/2010

Source: Company filings Outstanding Sales

Retail Store Expansion

The first retail store of Apple was opened in 2001 and since then the company has expanded aggressively over 180 stores across the globe. As of 2011, Apple has opened about 323 retail stores that generate net sales of $1.9 billion or 95% during the first quarter of 2011 compared to the same quarter of 2010. The profitability of the retail store is clear as the average revenue per store increased to $12 million in the first quarter of 2011, compared to $7.1 million in the first quarter of 2010. In comparison with its other retail stores, Apple is able to generate $4000 per square foot of retail store, higher than Tiffany of $2500, Best Buy of under $1000, and Neiman Marcus of $600.

Net sales during the first quarter of 2011 increased significantly by $11.11 billion or 71% compared to the same quarter of 2010. The breakdown of sales by products indicate growing demand for iPhone and iPad. Net sales of iPhone and related products increased 88% from the first quarter of 2010 to that of 2011. The new innovative product iPad generates incredible sales result. In 9 months time, it was able to sell 15 million units of iPad. The most recent report, which came out in April, 2011 boosted the stock price of Apple as it was able to beat the expectation despite the concerns regarding its supply shortage following last month's earth quake in Japan. Revenue by Products

Substantial growth opportunities exist in developing markets

Apple's net sales had been traditionally concentrated in the US and Europe as two segments combined to account for more than 70% of the total sales in 2010. However, Apple has been pushing its sales into Asian markets to establish a strong foothold in consumers' electronic market. During the first quarter of 2011, net sales in Japan increased $650 million or 83% compared to that of 2010. The sales in Asia-Pacific Segment increased dramatically by %3.2 billion or 175% from the first quarter of 2010 to that of 2011. Apple takes its initiative to gain market share in developing countries by opening 3 more international retail stores.

$12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 (in Millions)

12/25/2010

12/26/2009

Source: Company filing

Finance 414 Team 9

Team 9 Research April 26th, 2011 Apple Inc.

Investment Risks

Product cannibalization
Every new innovative product of Apple is developed upon the features of the previous generation. For example, iPad 2 offers similar features as the iPad 1, but with less weight, faster speed, better graphic, and two built-in cameras to enhance functionality and user-experiences. The coexistence of these products creates the possibility of cannibalization across its product portfolio. Owners of iPhone might be reluctant to purchase iPad due to their similar functionalities. This creates possible risks for lower-than-expected sales or loss of sales to competitors due to their more distinguished products.

Health concern of Steve Jobs

Steve Jobs health has been a concern for Apple for quite some time. His leadership is highly valued by the firm, shareholders, and potential investors. In 2004 he left the company when he had surgery for pancreatic cancer. He left again in 2009 to have a liver transplant performed. Jobs is known for being discreet about his health and the reason for leaving, and it tends to make investors panic. His most recent leave of absence caused the stock price to fall as much as 6 percent. The stock price fluctuations direct link to Jobs health is due to his hands-on approach as CEO and that Apple has yet to create a succession plan if anything were to happen to Jobs. The shareholders were not even able to force Apple to share the succession plan with them at the annual stockholders meeting. The uncertainty surrounding the whole situation is the reason for the volatility of the stock price when Jobs shows any signs of becoming sick or leaving.

Fast-cycle Market
A fast market is a financial market that has a combination of high volatility and heavy trading. This type of market is a market where things are changing constantly. Competitors are also coming up with a product that you have but with something better. The competition is never ending and you can also improve what you have, or improve a product that your competition has come up with. Apple is an example of a fast market industry. A good example of this would be when Apple came out with the iPad, some of their competitors such as Samsung instantly came out with a similar product. This forced Apple to improve their original model and come out with the iPad 2. Apple experiences a fast cycle market with all of the products that they produce.

Finance 414 Team 9

Team 9 Research April 26th, 2011 Apple Inc.

expensive, elite, product once again raises this competitive rivalry, as this creates a differentiation that other companies will battle to supersede. TREAT OF SUBSTITUTES: LOW Substitute products for a PC would include any product that can also achieve similar functions, such as connection through the internet, running office and productivity software, and providing entertainment. Smartphones and Tablet PCs provide the ability to complete several of these tasks, but at a lesser quality, ease, and speed. Many tasks that were made for a PC simply lead the user to prefer use of a PC if possible, while Smartphones and Tablets have the edge in offering portability. Even while PC substitutes dont offer the same experience, Apple still has a strong market presence in these substitute markets as well. MOBILE PRODUCTS INDUSTRY (SMARTPHONES / TABLET PCS) THREAT OF ENTRY: HIGH With the large number of companies that are in the cellular phone market, as well as the computer industry, every company is looking to capture its share of the profits from this growing Smartphone and Tablet PC industry. With a large percentage of cellular phone users upgrading to smart phones and purchasing tablet PCs, companies know that it is very profitable to use their existing knowledge and technological resources to expand into this market. For example, Google has just entered this market with the Android based operating system for Smartphones, and Motorola has recently entered with its Tablet PC, the Xoom. Since many existing technological companies have the engineering and capital available to enter this growing market, they will surly do so, creating a high threat of entry, as new companies continue to enter the mobile products markets very often. THREAT OF RIVALRY: MODERATE There are a very large number of competitors within the mobile products industry, and each one makes a somewhat different product than the next company. The many Smartphone manufacturers actually compete against each other less than the very few service providers for these Smartphones. Take for example the competition for faster broadband networks such as 3G and 4G, and AT&Ts ability to be on a telephone call and surf the internet at the same time with the iPhone, while rival Verizon does not currently offer this feature. With rivalry in Smartphones being more about the carrier than the product itself, it creates a distinct difference from many other electronic markets.

Competitive Landscape

PC INDUSTRY TREAT OF ENTRY: LOW Research and Development costs in the PC Industry are very high, and competitors in this industry constantly need to innovate and upgrade their products to have any chance at remaining one of the few names in the industry. Product differentiation is a must, as each PC maker is looking to provide several similar functions such as fast internet, office solutions, and entertainment solutions, just to name a few. Apple has gained a solid stance in the uniqueness of their operating system, compared to Windows based PCs, as well as offering unique software solutions to further differentiate itself from the number of PC makers offering the Windows OS. Given the enormous costs required to compete in the PC industry, companies are actually leaving the industry, as in the case of Compaq being acquired by Hewlett Packard. This factor, and the difficulty of differentiating products, both lead to a low threat of new players entering the marketplace in the PC industry. TREAT OF RIVALRY: HIGH With the relatively small number of competing firms (HP, Compaq, Dell), each company has the strong need to differentiate itself from one another, causing direct competition between all of the market players, leading to an intense rivalry based upon quality and price. As Apple is relatively higher priced compared to other PC makers, they have the need to create a superior product, and go above and beyond Dell and HP, as their superior product cannot compete if price were the only factor. Whenever an industry has a handful of competitors, rivalry becomes high, as each market player can successfully call on the weaknesses of other companies, and boost their own companys strengths. Apples unique position as the more

Finance 414 Team 9

Team 9 Research April 26th, 2011 Apple Inc.

BUYERS POWER: MODERATE PCs, Smartphones and Tablets are somewhat expensive purchases that last usually several years for consumers, so buyers are somewhat tied to whatever product they decide to purchase, thus taking away power from the buyer. On the other hand, for computers, files can be switched from Apple OS to Windows OS very easily, as the file types are, for the most part, identical. Regarding Smartphones, the users unique phone number can be transferred from phone to phone, as well files such as contacts, calendar entries, photos, music, and most other files with relative ease. This increases the buyers power to choose between competitors. However, there is also a certain degree of time and technological knowledge needed to change from device to device for both computers and Smartphones, perhaps again taking away from buyer power simply because of the difficulty adapt from a PC to an Apple, or an iPhone to a Blackberry. Giving these mixed drivers for Buyer Power, this force has been given a moderate rating analysis.

However, these products are always competing to become the next best product amongst its competitors, and being the first to create an innovative interface such as the iPhone or the iPad by Apple certainly provides a large First-Mover advantage in terms of profits. This mixed drivers regarding the Threat of Rivals within the Mobile Products industry leads to a moderate overall threat from rivals.
THREAT OF SUBSTITUTES: LOW

With regards to Smartphones and tablet PCs, the traditional PC or laptop computer could provide as a suitable substitute for the internet, e-mail, and entertainment capabilities. However, these substitutes are not a viable threat, as consumers are looking for the portability of their Smartphones and tablet PCs, being able to travel easily and boasting long battery lives. Traditional cellular phones may also attempt to substitute the calling, text messaging, and portability of a Smartphone, but these lack the computer like interface and productivity of a Smartphone, and therefore consumers would very rarely switch from a Smartphone to an older cellular phone. With the lack of viable substitutes on several comparisons to Smartphones and Tablet PCs, the threat of substitutes is categorized as being very low. INTRA-INDUSTRY FORCES As the analyses of the final two forces are almost identical across the smaller industries within electronics, Supplier Power and Buyer Power will be analyzed together across the PC and Mobile Products Industries. SUPPLIERS POWER: MODERATE There are a large number of suppliers to choose from within this market for various parts such as LCD drivers, Processors, hard disks, power supplies, cameras, WiFi drivers, and so on for every small part within the electronic. Getting the bid to supply parts to the manufacturer is a much more challenging goal, as each part must be specifically engineered for each product. There are often very long term relationships between the company producing the final electronic device (Apple, HP, Dell, Research in Motion, etc.) and the supplier. It is in the best interest for these companies to work together over time to produce the all around best possible products, as both parties profit from long lasting relationships.

Finance 414 Team 9

Team 9 Research April 26th, 2011 Apple Inc.

Comparables
Google vs. Apple vs. RIM
Competition within the Smartphone industry is extremely competitive, as highlighted by this graph. Out of the three major Smartphone operating systems, Apples iPhone OS, Research in Motions Blackberry OS, and Googles Android OS each share nearly one quarter of this market proportionally. With extreme competition between Smartphone manufacturers and Operating System designers, Apple will continuously need to adapt and innovate to maintain and grow its market share within this quickly growing market.

Google Android vs. Apple iOS

The two most widely used platforms Android and iOS have been going head to head against each other in the hardware market. The weaknesses of Apple's iOS lie under its software inflexibility, productivity limitation, and fewer hardware choices. The proprietary nature of the business limits an user's choice to do something that is not within the boundaries Apple has set for iOS. Users are not given a lot of options in choosing products as opposed to Android. They could only choose mainly based on the storage and connectivity of the product, while Android provides products with different features such as higher-resolution camera. The productivity of using iOS is also limited because it is difficult to input data as opposed to laptops more user-friendly keyboard. Google Android, as said, offers users more options in choosing product features, but has weaknesses in terms of ecosystem chaos, inconsistent experiences, and leadership vacuum. As discussed in the case of Smartphone industry, Android is used by several hardware makers. The lack of control of its system jeopardize the company's brand name due to wrongdoings or bad strategic moves of those hardware makers. The lack of control then creates inconsistent experience for users as different hardware makers offer different experiences. Both Google and Apple are market leaders in terms of platform market share; however, as Apple remains full control of its own platform, it is able to fully benefit from the high sales, while Google has to share with a variety of hardware makers.