Apple’s Diversification Push

By Joshua Barzola

Since Apple’s (NASDAQ:AAPL) initial public offering back in 1980, the company has become a must have, blue-chip stock. However, can the technology giant continue its large stock appreciation from the past year? Or will the highly competitive and stagnant smartphone market begin to affect the company’s valuation?

In terms of the technology sector, the majority of companies can be extremely volatile in terms of risk. However, Apple has increased by over US$500 billion in market capitalization in one year, now valued at US$1.3 trillion. This growth came after the company continued to show slow smartphone sales and a lack of new innovation in its smartphone business. Given the saturation of the smartphone market, how does Apple continue to grow its market capitalization?

In the first quarter of 2015, 70.0% of Apple’s total revenue was attributed to smartphones. Only 9.0% of Apple’s revenue came from wearable technologies and other services. Their strategy focused on the smartphone market, hurting the company for several years in terms of the stock price. From 2015 to the beginning of 2019, Apple’s stock price only grew 36.0%, showing investor’s hesitation about the future of the California-based company and smartphone market as a whole. 

During the past year, Apple implemented a new strategy and began to branch out into different services using its smartphone business as a launching platform. Across the world, there are over one billion active iPhone devices. To leverage this massive platform, Apple has introduced new products and services to diversify its revenue and bolster non-iPhone sales. 

Creating wearables such as AirPods and Apple Watches, has expanded the famous ‘Apple ecosystem’ creating more barriers to prevent active users from switching over to competitors. Furthermore, introducing new services such as Apple TV+ and Apple Credit Card, in addition to their pre-existing Apple Music service, has also diversified revenue away from their dependance on new iPhone sales. 

Analyzing their third quarter revenue numbers in 2019, wearables and services account for almost 30.0% of Apple’s total revenue. While their strategy is increasingly focused on diversification, the company continues to generate a strong profit. 

Although, pessimistic investors are skeptical because they see the smartphone business as saturated and with little innovation. Growing through diversification requires Apple to maintain their smartphone platform. 

For  perspective, if only 10% of active iPhone devices sign up for Apple TV+, this amounts to about 100 million subscriptions. At its current US$5 per month subscription package, this would create $500 million in new revenue for Apple. This just shows the power of the Apple ecosystem and the benefits of introducing new revenue-generating services. 

According to data from Bespoke Investment Group, 10.0% of the S&P 500 Index’s 29.0% rise last year was attributed to Apple, demonstrating their size and power. As the company continues to find ways to exploit its massive audience of users, investors will be closely watching growth figures.

Photo by Julian O’hayon on Unsplash

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