Can you name another technology gadget maker that has profits to rival those from Apple, Inc? No. Why not? Apple has become not only the most valued company on the planet, but the most profitable, too. Where do all those profits come from each year?
The math surrounding Apple’s profit is simple. In basic terms, expenses are subtracted from revenue and that yields a difference which is called gross margin. From that, additional expenses are subtracted to yield total net profits. Who cares about profits?
Profits are the lifeblood of every company. A company with investors who have deep pockets can last for awhile, but without profits death awaits on the vine. Even publicly traded companies that don’t have profits will struggle until something catches on and sells well– with good gross margins– or slowly fade away because they cannot keep up with the competition.
We see that taking place in the personal computer industry and the smartphone industry. Among the latter, Apple takes home about half of the industry’s revenue and about 85-percent or so of the actual profits. Samsung gets most of what is left in the other half of revenue and profits so what does that say about every other smartphone maker in the world?
Google doesn’t sell as many Pixel smartphones in a year as Apple does in an average workweek.
Well, what about all those giant Chinese smartphone makers that were said to take over Apple’s perch as the market leader? Where are they? Many of the nearly 300 Chinese makers have closed shop, some of the larger ones that remain haven’t introduced many new models, and the smartphone industry has begun to mirror the personal computer industry a few years ago.
There are PC makers, but the duopoly is mostly Windows and Mac at the top, Linux and also-ran operating systems at the bottom, and guess who takes home all the industry’s profits? Just like always. Microsoft and Apple’s Mac. Researchers say Apple’s Mac profits at barely double-digit marketshare, take home half the industry profits.
All of this is happening at a time when personal computers and smartphones have stopped growing in most of the developed world. PCs are still on a downslide in annual sales, and while Mac sales may have plateaued, it’s a record setting plateau. Ditto for iPhone which has peaked, while revenue and profits have grown.
What does all of Apple’s profits mean?
Well, compared to competitors, those profits mean continued existence. It also means Apple can afford to invest in R&D (research and development) to introduce new features which competitors become hard pressed and cash poor to match or copy. The notion that technology gadgets have become commodity items does not jibe with history. Differentiation is key and Apple is well differentiated as the premium brand– that means higher revenue which means more gross profit which means ever greater riches.
That means Apple can treat customers to a growing ecosystem of products that are different than so-called commodity gadgets which are here today and gone tomorrow. That’s the real value of Apple’s profit margins.
Alright, that said, those profit margins are so high and the company so profitable with so much cash on hand that executives do not know what to do with it all, so they give it away to undeserving shareholders and waste in on stock buybacks.