Let’s take a look at the values. Cash and Investments equal about $60 per share, about 33% of the current market value of the company. Take out that cash and it leaves a value of only 9 times 2018 earnings. This is quite cheap for a company that employs the smartest people in the world working to find new products for all of us to buy. And note that Apple is in the running for the largest market cap in the world, neck and neck with Amazon and Microsoft.

The stock is now yielding 1.8%. Add to that, Apple is currently paying out $3 billion to shareholders every quarter through dividends, but making closer to $13 billion in profits. Do you think management might be thinking about raising the dividend again? We sure do.

There is plenty of cushion to do so.

In simple terms, Apple is a consumer products company focused on aesthetically pleasing, technologically innovative and widely admired devices. Under its founder Steve Jobs, world- changing devices like Mac, iPod, iPhone, iPad, as well as Apple TV, are the hallmarks of the company’s success. These products enjoy a religious following throughout the world by hundreds of millions of satisfied customers. Apple products are manufactured to very high- quality standards and sell for premium prices. These high selling devices help explain why there are billions of consumers in the world hoping someday to have an iPhone or iPad of their own.

Apple has created its own ecosystem tied together by its iOS and MacOS operating systems, iCloud storage, iTunes Store, App Store, iBookstore and the phenomenally successful App Store. Enter an appointment on your iMac and it is immediately synchronized with your iPod Touch, iPad, iPhone, and MacBook.

Apple unquestionably holds the record of being the world’s most successful consumer products company. No matter by what measure of comparison: Sales, market share, profits, cash flow, or consumer satisfaction, Apple is on top. The creative guru behind this empire was the late Steve Jobs. What the king of consumer products created, let no man cast asunder.

Apple is a technology-driven hardware company with great software. It’s just that simple. The Apple ecosystem strategy has achieved the goal of connecting and holding the loyalty of its faithful followers. Its objective is the selling of as many hardware devices as the design geniuses at Apple can create. This has been an enormous success. It has however concentrated the business on hardware and more specifically the iPhone. Should the company be faulted for its world-changing success? Of course not!

The three hardware categories are iPhone, iPad and Mac with total sales of $265 billion in 2018. This is a staggering 84% of total business. Tim Cook, CEO of Apple, announced the billionth iPhone had been sold in 2016. At the current rate the 2 billionth will be sold by 2020.The iPhone has the largest smartphone market share at 43%.

Apple’s product strategy for the iPhone continually evolves. For years, Apple would only release one model. Now the company launches multiple models to appeal to broader markets. But compared to other rivals, Apple is incredibly focused, as other companies in the market release dozens of varying models per year.

Apple is a cash machine. There is no other hardware company anywhere that can compare. There is currently $285 billion in cash in the bank. 74% of Total Assets are in cash and securities! Long-term debt is $115 billion but most of it was added over the past few years at very low interest rates. Value investors looking at just the balance sheet liquidity and the dividend payment find a rare gem in Apple.

The four most important trends in technology are in software and services. This includes Cloud Computing, Voice Recognition, Virtual Reality, and Artificial Intelligence. VR and AI are world-changing trends but are some time away from the mass market. The Cloud and Voice recognition are a different story. These are now quite viable opportunities.

So far iCloud has been a miss. It needs to be fixed as the present version is cumbersome and clunky. Even the company mentions this in the installation video. With tens of millions of loyal users including a growing list of business customers, iCloud income could be meaningful. The company’s old nemesis, Microsoft has over 20% of the Fortune 500 paying for their version of the Cloud. And now Amazon is leading the pack with their AWS – Amazon Web Services. This is billions in revenue that Apple is not getting. This will change.

There is plenty of opportunity for Apple Watch. Remember the futuristic movie, Her, starring the voice of Scarlett Johansson and the talents of Joaquin Phoenix? It tangibly illustrated the future role of miniaturization, voice recognition and artificial intelligence. This is a huge and ongoing phenomenon. There will be more innovation. Remember how Microsoft tried to market a weird device back in 2000 they called the Tablet computer? Today the tablet market is a $50 billion business with Apple dominating. No more need be said.

We will touch briefly on Apple’s interest in self-directed automobiles. It would be wrong to overlook this area. It could be a monster. There are just too few facts to make any judgments. Some answers should be coming in the near future. Most car manufacturers have announced plans to have road-ready products on the market before the end of the current decade.

Every year Apple makes small acquisitions by the dozen. Rumors have it there is a super- secret group within Apple that is responsible for these deals. The self-driving car project is part of this group. What future products will come would be pure speculation but we’ll try anyway! Here is a look at several of the most recent acquisitions. Turi is a machine learning and artificial intelligence startup, that will assist developers using Apple’s XCode, and shift focus to more analytics-based services. Flyby Media is an augmented reality start-up that enables mobile devices to create a 360-degree field of view. Metaio develops augmented reality software Apps. Faceshift has software that scans facial features. PrimeSense creates motion-tracking technology.

Many analysts are now talking about how the future success of the company will hinge on the Services business. We agree. According to analyst estimates, Apple’s Services business will provide a key driver of revenue, reaching as much as $100 billion over the next five years or double 2018 levels of $45 billion. Services — which includes the App Store, ApplePay, iCloud, and Apple Music — now makes up 18% of overall quarterly revenue, up from 16% in Q2 2017.

Growth in the Services unit is being driven in part by Apple's subscriptions business. Nearly 30,000 third-party apps sell subscriptions through the App Store. And in the past year, Apple has sold more than 300 million subscriptions through both its own apps (like Apple Music) and third-party apps (like publishers' apps), up more than 60% YoY.

Apple takes a percentage share of monthly fees for any subscriptions sold through the App Store — it takes a 30% cut in the first year, and 15% every year thereafter. For example, the $9.99-a-month music-streaming service Apple Music now has well over 60 million subs — up from the roughly 40 million it had in early 2018 — with revenues up 50% YoY.

There are some very important implications from this trend. First, the trend offers significant support to gross margins as the services business is more profitable than the hardware business. Running all the numbers, analysts are now saying that as much as 55% of gross profit will come from recurring business within five years versus 15% today.

Second, the trend toward an increasingly annuity type business model will ultimately warrant a higher valuation – as Wall Street pays more for recurring software/services revenue streams versus one-time hardware sales. Accordingly, the business mix shift should cause the stock to move higher from what is already a pretty low P/E multiple. To be clear, a shift in Apple’s valuation is not likely to happen overnight, but will more likely occur over the next few years as the business shows gradual revenue growth, sustained margin, and more predicable free cash flow.

Additionally, beyond the commercial opportunity of Services, there are some other favorable characteristics of the business to note. Many analysts point out that Apple’s vertically integrated structure across hardware, software and services, and across multiple products results in several strategic advantages versus its peers. For example, it leads to a high- quality level of integration that rival platforms such as Android and Windows lack. With this high level of integration comes high loyalty (Apple enjoys a retention rate of close to 90%) for key products such as the iPhone.

Another example – seamless availability of services and software competency results in high levels of usage. Whether looking at mobile browsing, mobile commerce, or data usage, iOS devices materially outperform their installed base of competitor devices, which makes the company an attractive partner for new ecosystems.

As for one final example, given that many Apple devices cover all aspects of its consumers’ lives, from TV consumption to mobile telephony to PC’s, the company owns a Big Data advantage that few of its competitors have, which is useful for new businesses and product improvement.

Growth in Services is a big deal for gross margins. In fact, based on analysis of Apple Services, its gross profit contribution is 15% at a gross margin of 68%. This gross margin level could be sustained near 70% over time. How? The major contributors over the next 5 years will include: Apple Music, Apple’s TV offerings, and growth in Apple’s other services such as iCloud, Apple Pay, etc. However, the biggest potential contributor of the incremental gross profit will come from the App Store. Apple enjoys a gross margin of 68% on Services. The shift in Services revenues has already driven material gross margin expansion, which is likely to continue.

Analysts are already having to recalibrate estimates for each business. The gross margin on the key hardware products are running lower than previously assumed. Specifically, the iPhone business is generating a 42.5% gross margin, lower than the 45% previously assumed by the market. This margin is now likely to decline to 38% long term. But not to worry – this is normal.

Additionally, the iPad business could have significantly lower margins and we now see iPad gross margin at 31%, down from closer to 37%. Those only doing light homework on the topic start clamoring here that Apple’s gross margin is eroding and investors should run from the stock. However, those who keep digging, find that the Services trend is going to offset all the bad mentioned above. Outside of quarter-to-quarter volatility, the improvement in the Services mix will drive higher gross margins for the company overall. As a result, total corporate gross margin should be retained in a range of 40% or slightly higher. Concerns over gross margin pressure are overstated!

In summary, an annuity-based hardware business model is unheard of. Perhaps the most important aspect of Apple’s services innovation over the past decade is that the results have come at record levels of customer satisfaction with retention rates close to 90%. Additionally, while monetizing many of these services is not Apple’s primary objective, it does allow the company to price at premium levels. Whether it is the customer lock-in and essential headache of leaving the iOS ecosystem or the loyalty to the brand, the output is the same – once an individual or family is part of the Apple ecosystem, they very rarely leave it.