Risk That Apple Inc Term Paper

Pages: 10 (3491 words)  ·  Bibliography Sources: 5  ·  File: .docx  ·  Level: Master's  ·  Topic: Business

Sales have surged, growing by 87% in FY2011 and 71% in FY2012. The iPad grew 311% in FY2011 and 59% in FY2012 (2012 Annual Report). The growth in these products, however, relates specifically to the growth of these industries as a whole. Despite the incredible growth figures of the Apple products, Apple has actually been losing market share in these mobile consumer products over the past couple of years. Apple had first mover advantage in tablets and the iPhone revolutionized the smartphone industry giving it de facto first mover advantage there. However, Apple's global market share in smartphones is now down to 14.9% compared with Android's 75% share (Perez, 2012) and in the U.S. Apple's share is 48.1%, with the company only regaining the lead from Android with the release of iPhone 5 and no corresponding release of major Android product (Rodriguez, 2012). The threats within the industry add to Apple's risk considerably. The fact that these industries are subject to constant innovation and a fast pace of change increases the business risk of any firm in the industry. While Apple is hugely profitable in the industry today, continued bleeding of market share could impact on the company's pricing power in the marketplace in the future. Apple is particularly vulnerable in foreign markets, where it is less entrenched than it is in the U.S. market.

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Apple, in general, seems to have questionable preparation for dramatic changes in the industry dynamic. The company's strategy has always been to compete as a differentiated provider with premium products at premium prices. The company believes that this strategy will allow it to always have a profitable niche. The company's recent successes have it well-positioned financially, but strategically Apple runs the risk of becoming obsolete if it cannot maintain technological leadership. That leadership is the only thing that will keep Apple "in the game" -- they are performing well financially but underperforming in terms of market share and only have technological leadership to defend against that risk.

Company Analysis

Term Paper on Risk That Apple Inc. Faces Assignment

Apple designs and markets consumer electronics. It has a number of product lines including smartphones, tablets, music players, laptops, desktops and software. The company has premium positioning and relies on branding and innovation as forms of competitive advantage. Apple also has a superior marketing philosophy and infrastructure that has helped it to gain its market share. In recent years, it has been at the forefront of two major revolutions in consumer products. First, it entered the niche smartphone industry and brought mainstream consumers to a segment that previously had been dominated by business consumers. The company then brought back the tablet segment. The company's fortunes in the past five years are almost entirely due to those two products, along with the genius-level marketing strategy the company has employed.

The result has been tremendous growth in the company in all facets (except market share). Apple's stock currently trades at $584. Five years ago, the stock was at $194.30, so it has increased 201% in the past five years. The stock peaked at over $700 per share in September, 2012 before coming down to its current level. From this decline, the stock price has increased again, after the announcement of the iPhone 5 and the iPad Mini, reflecting the correlation between new product innovations and financial success at Apple. Earnings per share growth has been incredible. Five years ago, Apple earned $6.78 per share; in 2012 it earned $44.64 per share. The company paid out its first dividends in 2012, a payment of $2.65, or a yield of 1.81% (MSN Moneycentral, 2012). The company expects to pay a regular dividend from this point forward, but has yet to reveal how fast this dividend will grow, and there are no trends on which to draw.

The stock's beta is 1.21, indicating higher than average level of volatility -- it grows faster than the market. In other measures, cash flow from operating activities has increased fivefold since FY2008, moving from $9.5 billion to $50.8 billion. Sales have also increased rapidly, moving from $37.4 billion to $156.5 billion over that same time period. The number of shares outstanding has not changed much in the past five years. Apple no long-term debt -- the company has $29 billion in cash and a further $92 billion in long-term investments, so debt is not required to finance the business.

The company's innovations come from a centralized development and design team that creates new products, and has enjoyed considerable success of late. The company's marketing is another internal competency that has allowed it to excel. The in-store and online shopping experiences are simple, the product choices are easy, and the company does everything to make it easy for consumers to buy Apple products. Even the choice of FedEx for shipping adds value to the company, since the online tracking FedEx offers gives consumers piece of mind that cannot be achieved with lesser logistics partners. By mastering product and marketing, Apple makes the most significant contribution to its own success, and has also contributed to the development of the industry as a whole by sparking the smartphone and tablet industries.

The outlook for consumer electronics in general is excellent. Western markets are not yet mature, but even when they do mature innovation will always drive new growth. Foreign markets are often in their infancy, with tremendous growth potential still on the table. Apple's management thus far has been excellent, but the company will need to keep the innovation pipeline going in order to maintain leadership. Its marketing remains an industry standard, but its products will need to maintain that leadership as well. The company's management is exceptionally capable, and it will need to be.

Assessment of International Economic Exposure

Apple needs to have measures for foreign currency exposure and for Chinese inflation exposure. Both of these can affect the company's profits. The company's management of international risk was discussed above, but to review it hedges F/X exposure, and relies primarily on innovation to deal with the risk posed by the industry's rapid technological change. At present, it is not known how Apple manages the risk of inflation in China but its premium pricing does provide it with a margin buffer. The company manages its exposure through geographic diversification. Its level of geographic diversification has increased in the past few years, especially with growth in Japan and Asia-Pacific. Overall, the company's exposure to foreign currency risk is about normal for a firm that sells its products in a variety of different markets. Apple employs normal hedging techniques to address this exposure. The company's attitude to non-F/X risk is perhaps more worrisome. Apple believes strongly in its ability to maintain premium positioning in the market, but some analysts are skeptical of this, especially given the importance of Steve Jobs to the new product pipeline (Thompson, 2012). In the company's one big test in the past year with adverse international operating exposure -- the Foxconn situation -- it appears to have handled that test well, but the issue is an ongoing concern (Adams, 2012). As the problem does not affect demand, and there are myriad other suppliers who would be more than willing to work with Apple, these problems are not seen as significant. Most analysts agree that Apple is well-positioned to continue enjoying strong profits, but are hesitant to make long-term predictions about the company. Anybody predicting the consumer electronics industry five years hence is playing a mug's game -- nobody predicted the tablet five years ago yet Apple sells $32 billion of them today. Such predictions are for fools, but most analysts believe that Apple's management, brand loyalty, marketing expertise and financial resources will allow it to maintain a strong position in the coming years.

Scenario Analysis

The most likely scenario is that the new few years will see iterations of the same products. Apple will continue to be a competitor and innovator in the field, but will evolve into a niche player. If it can continue to grow in foreign markets, and maintain most of its U.S. market share, then Apple's performance over the next five years will be exceptional. The company is sitting on two major cash cows and barring major industry changes it will milk those cows for the foreseeable future. The company's P/E is only 13.25, so the market tends to feel that there is not much growth from here for Apple.

The best case scenario would have Apple introduce the next major consumer product innovation, delivering for it first mover advantage, short-term market dominance and large profits in the long-term. This pattern would see Apple's strength extended out five or ten years. This has worked for Apple twice in the past five years to bring the company to the position it is in today, which would have exceeded the best case scenario five years ago of anybody not named Steve Jobs. The worst case scenario has another company introduce the next major innovation… [END OF PREVIEW] . . . READ MORE

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