My, how the times do change. Anyone who came of age before the turn of the millennium can remember when Apple (NASDAQ: AAPL) was just a niche seller of pricey computers. But today, of course, after a series of evolutions powered first by the breakout success of the iPod, and then by the iPhone, it has metamorphosed into a tech juggernaut that has literally changed how humans interact with technology, and in some ways, with each other.
Though the iPhone business now dominates its revenues, the company is far more than a one-trick pony, or even just a maker of hardware. It has built its service business up to the point where it accounted for $29.14 billion of its $202.69 billion in sales through three quarters of 2019. That's important -- and shows the company understands the need to diversify -- but it's still only about 14% of it total revenue.
Sales of iPhones have provided more than half of Apple's revenue in every quarter since 2013 began, with the exception of Q3 2019, when the percentage dipped to just over 48%. That was partly due to the company's growth in other areas, but mostly because the slowest quarters for iPhone sales are generally those right before the new models are released.
Apple has a revenue diversity problem
Nobody has to worry about Apple's viability in the short term, nor even the medium term. It closed Q3 with roughly $95 billion in cash, cash equivalents, and marketable securities. Overall, it has $134 billion in current assets on its balance sheet and another $187 billion in non-current assets, compared to $89 billion in current liabilities and $136 billion in non-current liabilities. That's roughly $97 billion in the plus column for the company meaning it could weather significant losses and still maintain its dividend.
Apple has also been consistent about delivering those dividends and share buybacks.
"We returned over $21 billion to shareholders during the quarter, including $17 billion through open market repurchases of almost 88 million Apple shares, and $3.6 billion in dividends and equivalents," Apple CFO Luca Maestri said in the earnings release.
That's double the $10.04 billion ($2.18 per diluted share) the company reported in net income. Apple can clearly afford that, and its dividend payout of $0.77 was easily funded by its profits.
Sum up all of these factors, and they'd seem to suggest that it would be a pretty good idea to put some Apple stock in your retirement portfolio, and keep it there for the long haul. I may not follow that plan, however, because the company's hedge against iPhone sales someday dropping significantly is an extremely expensive one.
What is Apple doing?
While it has in recent years launched successful new products like the Apple Watch and AirPods, and will likely do so again, Apple has more or less conceded that it probably won't ever have another hit of the magnitude of the iPhone. The company won't say so out loud, but it got soundly thrashed in the digital speaker/voice assistant market by Amazon and Alphabet, and it has largely been a niche player in connected-TV and even tablets.
The company will, of course, keep developing products, and it may yet defy the odds and deliver a piece of hardware that qualifies as "the next iPhone." But in its efforts to avoid putting all its growth eggs in one basket, Apple recently decided to make a major bet on becoming a content provider. That's a risky strategy in an incredibly crowded space, and it may fail.
Apple is launching a paid video streaming service in a market dominated by Netflix, where Disney has a major new entrant about to launch, and a whole raft of established entertainment companies are making similar moves backed up by better assets, deep catalogs, and familiar intellectual property. In theory, Apple could spend billions on content and still fail to amass a profitable audience, simply because consumers will have so many other ways to access top-tier content.
This is a strong company that's steadily profitable and has enough cash to do pretty much whatever it wants. What's it's doing, however, may not be the answer it needs if the iPhone becomes markedly less popular or if consumers simply start holding onto their old smartphones longer. So if you have a long-range view and aren't retiring anytime soon, Apple may not be the right buy-and-hold pick for your retirement portfolio.
Apple has enough cash to mask any problems it may experience for a long time, but when more than 50% of a company's revenues come from one product, that's a warning sign. And a strategy for diversification that involves moving away from its core competency and into an industry where failure is common only adds to its risks.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel B. Kline owns shares of Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.