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Apple Inc. (AAPL)

Updated: Sep 26, 2023

Business Description

Apple designs a wide variety of consumer electronic devices, including smartphones (iPhone), tablets (iPad), PCs (Mac), smartwatches (Apple Watch), and AirPods, among others. In addition, Apple offers its customers a variety of services such as Apple Music, iCloud, Apple Care, Apple TV+, Apple Arcade, Apple Fitness, Apple Card, and Apple Pay, among others. Apple's products include internally developed software and semiconductors, and the firm is well known for its integration of hardware, software, semiconductors, and services. Apple's products are distributed online as well as through company-owned stores and third-party retailers.

Analyst Notes

Apple’s competitive advantages stem from three sources: Switching Costs, Intangible Assets and Network Effects.

Switching costs is Apple’s primary moat source based on the flawless integration between its hardware, software and services. Ask any Apple user to switch from iOS to Android, and its likely their worst nightmare. This is not because Android is a poor OS or that non-Apple phones don’t meet or even exceed expectations. Instead, it’s about how embedded users become into the Apple ecosystem once they purchase their first Apple product. The two most common ways to enter the ecosystem are the Mac or of course Apple’s crown jewel, the iPhone.

On a broad level, Apple’s intangible moat comes from the know- how of bringing together hardware, software, services and chip design in a way no other competitor has been able to match. While Android has replicated a similar feel of the experience overall, and Samsung and others have matched on hardware, no one has been able to offer a comprehensive and integrated product like the iPhone on its own.

Another element to Apple’s intangible moat is its tight-knit relationship with foundry leader TSMC. Apple’s scale enables it to demand dedicated capacity in TSMC’s most advanced fabs, while its large chip orders enable TSMC to ramp production of its leading-edge process technology more economically. A true win- win partnership.

Network Effects is another powerful source of moat for Apple. As iOS users gravitate to the App Store to purchase new applications, the increasing size of Apple's installed base attracts developers to build new apps for iOS.

Developers also have an easier time making apps for the App Store, as they know that only iPhones will be carrying iOS, as opposed to Android being used on devices from several different makers. This leads to a more fragmented Android ecosystem, which we believe is relatively harder for developers to support.

For full report, see link below

Apple Investment Memo
Download PDF • 462KB

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