Jan 6, 2019

The sign that Apple has ripened

Felix Salmon, author of Edge

The Apple Store in Hangzhou, China. Photo: Zhang Peng/LightRocket via Getty Images

Apple is the most successful and profitable luxury consumer-goods company that the world has ever seen. Its profit margins are stratospheric, its earnings per share continue to reach new all-time highs, and it has no real competitor in terms of being the high-end brand of choice in categories from personal computers to phones to digital watches.

Why it matters: It tops the list of retailers that any real estate developer wants if they're trying to create a luxury-shopping destination, and like Louis Vuitton, it never discounts.

Apple has extended its reach to hundreds of millions of customers around the world who would never buy Gucci or Prada. Still, luxury brands, by their nature, never reach everybody. Most people will end up opting for the cheaper, more utilitarian rival. At some point, any luxury brand will be selling mostly to repeat customers. Apple has definitely reached that point.

  • Apple's repeat customers are incredibly profitable and price-insensitive — which raises the ultimate luxury problem of what Apple should do with all its money. Even after spending more than a billion dollars a month on research and development, Apple generates vastly more cash than it can spend.

The solution: Stock buybacks, which return those profits to Apple's shareholders and help to keep Apple's per-share earnings on an upward trajectory. Buybacks are not an attempt to time the market and buy when shares are cheap; they're better thought of as a particularly flexible and tax-efficient form of dividend.

  • Not all public companies can, should or must grow. The magic of stock buybacks is that they can support the stock price even if the business doesn't grow at all. The rise of Apple's annual buyback budget is simply a sign that the company has matured.
Expand chart
Adapted from a chart by Above Avalon's Neil Cybart; Chart: Axios Visuals

The bottom line: If the job of a CEO is to generate profits that can be returned to shareholders, then Tim Cook has been vastly more successful at Apple than Steve Jobs was. That doesn't mean the end of the age of Apple. It just means Apple has achieved its potential.

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