On the strength of extraordinary fourth quarter earnings, which included net profits of $18 billion, Apple last month became the first U.S. company to have its market cap break the $700 billion barrier. In the weeks since, Apple’s shares soared even higher, making it twice the size of Exxon Mobil, Wal-Mart and Microsoft. Now comes news that it is joining the Dow Jones Industrial Average on March 18, replacing AT&T.
Even by the company’s lofty standards, it’s a stunning valuation, especially in light of the fact that only eight months ago it had a market cap of less than $500 billion. But despite Apple’s rapid climb, it continues to present value for investors relative to its peers.
Apple, of course, made its name with hardware offerings, going back to its origins as a personal computer company. After some lean years and considerable reshuffling, it shifted the focus to mobile devices, including the iPod, iPhone and iPad, all of which have been transformative in their own way.
Up next is the Apple Watch, which is due out in the next few weeks. This latest device represents Apple’s foray into the wearables market, where, for various reasons, other players in the industry haven’t had much success. But leave it up to Apple to succeed where others have failed. There could be a lot more to the Apple Watch than initially appears.
A key element of Apple’s growth over the years has been its ability to combine the enormous profit margins generated by its signature line of devices with the revenues derived from their complementary suite of services, including the App Store and iTunes. The introduction of the Apple Watch won’t change this dynamic, it will continue to enhance it.
The recent roll out of Apple Pay is a game changer for Apple. Given the resources and effort Apple has dedicated to building out this service, it’s clear that it envisions mobile payments and transactions as the next big area for future growth. While it’s true that adoption rates for Apple Pay have been relatively low (mostly due to retailers having to incur hardware costs to implement it), it’s easy to understand why Apple is pursuing this space so aggressively.
Think about it this way: Apple is now positioning itself to benefit every time someone watches television (Apple TV), downloads a song, TV show or movie (iTunes), uses their debit or credit card (Apple Pay) or plays a game on their phone or tablet (App Store). It could be that its strategy moving forward is to grab a piece of virtually every entertainment related purchase in the world – on top of broader list of traditional transactions, from groceries, to gas, to apparel, to dining out and beyond.
Clearly, the movie industry could undergo some major changes. The biggest thing to come out of the recent controversy surrounding “The Interview” had nothing to do with freedom of expression or foreign policy. Rather it was the movie’s release, which potentially provided a new model for future film releases.
Outside the large movie theater chains, the current model isn’t serving anyone well. Viewer behavior is shifting. Thanks in part to Apple’s devices and suite of services, so-called ‘cord cutters’ are becoming more numerous by the day and fewer are happy waiting six months to stream or download a movie. This could force production companies, such as Lions Gate and Disney to make more films each year available for simultaneous theatrical and digital release or just simply release films on iTunes directly.
Studios will realize paying apple 30% of the download price versus 50% or more to the movie theaters is not so bad. Studios could potentially make up those revenues by gaining access to a wider universe of viewers. Apple and other device makers have made significant inroads into China and other emerging markets in recent years. These countries are open for business, and it’s time for movie production companies to leverage their content more effectively on all platforms.
The music industry, too, will have to evolve. Last year, U2 released its latest album, ‘Songs of Innocence,’ exclusively on iTunes before embarking on a physical release about a month later. The approach was somewhat controversial, since as part of the agreement Apple automatically downloaded the album onto millions of its devices without notice. But it worked, for the most part. People listened to it and U2 is playing 5 sold out shows in LA in a few months. Soon Apple will be releasing its own streaming service to rival Spotify through Beats Music. Having access to Apple’s library of music for $8 per month will change the music industry forever.
It’s only a matter time before more major artists abandon traditional distribution methods to release their albums exclusively on iTunes. When this happens, Spotify and Pandora will have to compete for access to streaming rights with iTunes.
The large credit card companies have also thrown in their hat with Apple. While electronic currencies such as Bitcoin are trying to uproot the current system entirely, Apple Pay simply seeks to make it safer and more efficient. Companies like Visa, MasterCard and American Express have chosen to get with the program and all are supporting Apple Pay as it will still provide them with the fee revenue they live on but it will save them billions in fraud and card costs. We are waiting to be able to ditch plastic cards for good and truly be able to do commerce over your phone. That day is rapidly coming. If it seems like a stretch to say that Apple’s IOS-based devices will power a significant portion of all the world’s monetary transactions in the future (especially within the world of entertainment), consider what Apple accomplished by revolutionizing the phone and computer.
The company’s history and current trajectory tell us that there’s no limit to what they are capable of doing. At the very least, it would be nothing short of insane to bet against Apple’s ability to transform the future in transactions and entertainment. The future that Apple envisions for us is becoming more clear.
By Ross Gerber
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory and wealth management firm with approximately $325 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.
Ross Gerber is a (insert LPL compliance approved title here) with and offers securities through LPL Financial, Member FINRA/SIPC. Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.