How APPLE became the first trillion-dollar company in the world

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Today is August 4th, 2018. We will analyze Apple’s recent earnings report and how it became the first trillion-dollar company in the world.

Triggered by disappointing earnings of Facebook and Netflix, the aftermath of Wall Street’s largest wipeout continues to linger on and affect the majority of large-cap tech companies. Investors are losing confidence in the growth potential of tech giants, and are fearful of potential tech bubble burst.

Before Apple’s quarterly performance announcement on August 1st, the markets were anticipating with a mix of fear and optimism. In light of the recent market correction, Apple Inc. (NASDAQ: AAPL) no doubt was under great public pressure, more so as it is the largest company by market capitalization. Fortunately, it passed the test with flying colors: a 17% increase in quarterly revenue from last year’s at $53.3 billion despite selling only 1% more iPhones. Apple’s shares jumped more than 7% since its release of the earnings report, hitting $207.05 per share at the time of writing and finally breaking past the trillion-dollar market capitalization.

How did Apple defy poor sales expectations and outperform?

When Apple released its top-of-the-line iPhone X last year, pundits warned that the high price tag could drag down sales performance. Little did they know that higher selling price actually saved Apple’s profitability. According to Apple’s Chief Financial Officer Luca Maestri, “iPhone revenue grew with a $120 increase in average selling price, driven by strong performance of higher-priced iPhones across the world.” Morgan Stanley believes that a thriving macro environment and an increasingly engaged, quality-conscious customer base are among the growth variables. Currently, iPhones’ sales account for 56% of Apple’s total revenues, definitely a key factor in Apple’s revenue boost.

The rapid growth in Apple’s services and “other products”, at 31% and 37% respectively, are the highlights of this earnings report. Apple’s services unit, which includes digital content such as App Store and services such as AppleCare, is the second largest revenue driver. Mobile games such as App Store-exclusive Fortnite have been generating tons of dollars to the platform. At the same time, the “other products” unit, which sells the likes of Apple Watch, AirPods earphones and HomePod speaker, will soon take over Mac and iPad as the third largest revenue source. The advancement of wearable technology and audio accessories is driving consumer adoption, enabling Apple to widen its network of smart devices.

Any risks?

Not all are optimistic about Apple’s future though, as the prospects of a reconciliation for US-China trade war seem bleak. Apple’s global supply chain is highly dependent on its Chinese operations for final assembly. Last year, Apple shipped 61 million iPhones to the U.S. iPhone 7 series alone contributed about 4.4 % of U.S. trade deficit to China at USD 15.7 billion. While Trump’s latest proposal of 10% tariffs on Chinese imports strategically spares iPhones and Mac computers from the list, its multibillion-dollar “other products” units are unfortunately exposed to high tariff risks.

Moreover, stiff competition from Huawei and Chinese competitors poses substantial challenges for Apple globally. In the last quarter, Huawei overtook Apple as the second largest smartphone manufacturer behind Samsung. This is the first time in seven years that the longstanding top two manufacturers were split. While consumers remain willing to pay for premium products, more are looking for higher value for the bucks and innovative products. The likes of Huawei, which are able to offer quality phones at a price much friendlier than Apple, are winning the hearts of Europeans and markets outsidehome. To continue its premium price strategy, Apple has to exceed consumers’ expectations and deliver more disruptive technology and experience.


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