Apple – the way forward

Apple is still viewed as the company that led the way in smartphones and tablets, creating a brand that was craved by consumers. But now it is evolving into something entirely different, which could offer new attractions for investors.

There was a sense earlier this year that Apple had lost its mojo. Declining iPhone sales, a stagnant tablet market and the disappointment of the Watch - the less said about that the better - had, apparently, heralded the end of the Apple era. And yet, the brand is still the most valuable in the world, with brand consultancies suggesting its value is up 5% over the year.

CEO Tim Cook has laboured long beneath the shadow cast by Steve Jobs. Mr Cook’s task was to take Apple forward into an era when the great innovations were supposedly behind it, moving Apple from being an exciting, growth company, to being a ‘boring’ part of the S&P 500, with a less astronomical valuation.

However, as Mr Cook looks ahead, it is likely that he will oversee the next big revolution in Apple’s product lines. This time it will be in software and expanding the Apple ecosystem. UBS argues that the expanding range of products will allow Mr Cook to pursue an ‘iOS everywhere’ approach, with Apple’s ecosystem expanding outside of individuals and moving on to embrace companies and academia, creating its own ‘Cloud’ system similar to Microsoft’s.

As Microsoft has discovered, this is a great way to enhance revenues. Instead of customers buying one product (Windows, an iPhone), now they pay for the service, giving enhanced visibility to earnings and turning Apple into a cash cow (some might argue, even more of a cash cow than it is now).

At around 12.5 times forward earnings, Apple’s stock is valued only slightly higher than its long-term average of 11.9. Apple’s growth is thus expected to be relatively conservative for the coming year, which does leave plenty of room to the upside. Heading into Q4 earnings, the firm is expected to see a drop of 16% in earnings, to $1.64 billion, while revenues are forecast to fall 9.1% to $46.794 billion.

Any improvement in earnings would mark a turnaround in the decline seen over the past three quarters, and ignite significant upside. Tim Cook’s plans will take years to come to fruition, but it represents Apple’s best chance of maintaining its place as a major player and brand in the years to come.

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