Where Apple Makes Its Money

Apple(AAPL) launched its latest iPhone model, the iPhone 15 earlier this month. Investors in Apple are eagerly waiting to see if this version would be a huge success or a failure. In the US, the mobile phone carriers will be helping push the model on to consumers through various deals. So the success or lack there of, of this phone would depend on how well carriers are able to make their customers switch. In many other countries, the iPhone holds a major market share relative to others. For instance, in the UK iPhone accounted for 50% of handset sales last year according to an article at Fidelity UK. In other big markets like China and India, Apple does not command a leading market share as consumers in those countries cannot afford to buy its costly phones or they are able to find even better phones at cheaper prices from the competition.

Where does Apple make its money? The following short excerpt from the piece provide some insight:

iPhone still key – but Apple is diversifying

You can gauge the importance of the iPhone to Apple when you examine how it has made its money over the years.

In the years following its launch the iPhone rose in importance until it accounted for around 80% of Apple’s gross profits by 2015. Since then, its role had diminished somewhat thanks mainly to the expansion of Apple’s ‘services’ business, which includes App Store sales and digital offerings including iCloud and Apple Music.

Using the same data, it’s possible to see how profits from different areas of the business have come through. In particular, you can see how earnings from iPhone have been highly cyclical, rising and falling with each new iPhone launch. Compare that to the steady rise of services where user subscription models have provided more steady revenue.

Source: How important is the iPhone 15 to Apple’s success? by Ed Monk, Fidelity UK

Following the auto companies, Apple is trying to see how far customers are willing to go to get its new models. The iPhone 15 Pro version would cost an astonishing $1,199 in the US. It would be interesting to watch how many of these units Apple ends up selling.

The entire article linked above is worth a read.

Disclosure: No positions

Tax Treatment of EVs by State: Chart

The tax treatment of Electric Vehicles(EVs) varies by state in the US. Some states give credit while others penalize consumers for purchasing EVs. Some pretend to be neutral by charging both the penalty and offering a credit. Consumers get a credit of $7,500 for qualified EV purchases from the Federal government. But at the state level it is a mess. The following chart from Tax Foundation shows the tax treatment of EVs by state:

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Source: How Are Electric Vehicles Taxed in Your State? by Benjamin JarosAdam Hoffer , Tax Foundation

Some states charge higher annual registration fees in order to compensate for the loss of gas taxes from an EV owner. States charge gas taxes for each gallon of gasoline sold to fund road maintenance and build new roads.

Most of the “fly-over” states penalize EV buyers by not offering a credit and charging more registration fees. This is not surprising. Example of such states include Michigan, Kentucky, Missouri, etc. No wonder lots of brand new gas stations are popping up in these states instead of EV charging stations. Indirectly these states are implying that they prefer fossil fuels.

For more details on this topic checkout the above linked article.

Correlation Between Oil Price and Inflation: Chart

Inflation in the US continues to remain stubbornly high. Currently the annual inflation rate is at 3.7% based on June data. This rate is still higher than the Fed target rate of 2%. The actual inflation rate that a consumer sees such as food, insurance premiums, etc. have risen to astonishing levels in the years since the pandemic. Inflation may rise higher due to soaring oil prices. When the price of crude oil rises it has impact on pretty much everything. To add insult to the injury so to speak, Western ally Saudi Arabia and Western enemy Russia announced cuts in their supplies to the world market in order to maintain high oil prices. This is not surprising since Saudis could always use an extra dollar to do whatever they do with all the oil revenues. Russia of course wants to take revenge on the Western world due to all the sanctions that were imposed following its invasion of Ukraine last year.

With that said, curious investors may be thinking on the relationship between oil prices and inflation. For instance, does high oil prices help drive inflation higher or lower. Inflation and oil prices are highly correlated. When oil prices go high inflation follows. The following chart shows the relationship between inflation and oil prices:

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Source: 3 unmissable charts in the week: oil and inflation, US valuations and pensions by Nafeesa Zaman, Fidelity UK

The key takeaway is that investors may want to keep an eye on oil prices and be ready to buy quality should markets decline. Brent crude closed at $93.27 for November delivery. Analysts are predicting it may reach $100 again.

Related ETF:

  • United States Oil ETF (USO)

Disclosure: No positions

Checking on the Performance of Five Food Stocks

Food company stocks are in the doldrums this year. These companies were strong performers during the past few years due to the pandemic and other factors such as continuously increasing prices. However this year sales have stagnated and consumers are no longer willing to put up with high prices and they are switching to cheaper generic options. High yields offered on CDs, bonds and other fixed income products have made their stocks unattractive as well. Investors think why they need to invest in a food stock such as General Mills(GIS) which pays a dividend yield of 3.6% when they can easily get a 5% or more in a 1-year CD. Traditionally these consumer staples have been regarded as great dividend stocks. However that is not the case now. With the restart of student loan repayments in October, the already tapped out American consumer will further cut back on pricey and discretionary food items.

With that said, it is surprising to see that Hershey(HSY) stock has performed very well so far this year among five select food stocks. In the past 5 years also, Hershey has beat others with more than doubling the share price as shown in the charts below. HSY currently has a divided of 2.29% and market cap of $43 billion.

Year-to-date price return of select food stocks:

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5-year price return of select food stocks:

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Source: Yahoo Finance

Note: The above returns do NOT include dividends and are as of Sept 22, 2023

From an investment point of view, it is better to wait for further declines and consider adding them in phases. As mentioned above, at current levels these stocks are unattractive and these companies cannot depend on price rises to juice earnings going forward.

Referenced Stocks:

  • Campbell Soup Company (CPB)
  • Hershey Company (HSY)
  • General Mills, Inc. (GIS)
  • Kellogg Company (K)
  • J.M. Smucker Company (SJM)

Disclosure: Long GIS