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Analysts Yiyao Lin yiyao-lin@uiowa.edu

Ross Gibson ross-gibson@uiowa.edu

Company Overview

Apple Inc. (NASDAQ: AAPL) is a leading global provider of consumer electronics and other technology services. Some of Apple’s most notable products are the iPhone, iPad, Mac, and iPod. Within recent years, Apple has begun to expand upon their core line of services they offer which include Apple Pay, iTunes, iMessage, and Apple Radio. With an extremely strong brand and dedicated customer base, Apple is able to market and sell their products to a global audience and generate sales in many countries across the globe. Stock Performance Highlights 52 week High $134.54 52 week Low $92.00 Beta Value 1.30 Average Daily Volume 4.05 m Share Highlights Market Capitalization $609.07 b Shares Outstanding 5.58 b Book Value per share $23.13 EPS 2015 $9.28 P/E Ratio ttm 11.69 Dividend Yield 2.02% Dividend Payout Ratio 21.34% Company Performance Highlights ROA 18.38% ROE 44.47% Sales $233.72 b Financial Ratios Current Ratio 1.11 Debt to Equity 44.79%

AAPL will use strong brand and customer loyalty to capture market share in future markets

• Apple has lost some of its ability to be continually innovative in the highly competitive smartphone and PC markets. • Future products within the consumer electronics industry, such as virtual reality, may be beneficial to Apple if they choose to pursue these product lines. With iPhones being the most popular smartphone in the market, it would not take much for Apple to turn the iPhone into a virtual reality headset and quickly capture market share in the growing virtual reality market. • Apple’s continuing growth of their “services” product lines will help Apple keep market share in the future. • The future for Apple Pay looks bright. With the deceasing use of physical payment methods, Apple Pay has potential to fill this gap consumers are looking for. Apple pay can be easily integrated on any iPhone and already works at many vendors across the country. Also, Apple Pay is already growing to countries other than the U.S. • In addition to Apple Pay, Apple Music and iCloud show strong monetization potential. Consumers are more heavily relying on subscription-based programs for their music. In addition, iCloud has begun to earn money for Apple by charging consumers money to increase the data storage capacity of their cloud storage service.

Apple has strong potential to tap into developing markets that don’t currently have a strong smartphone presence, such as India. One Year Stock Performance

Source: Bloomberg Business

Technology Krause Fund Research Spring 2016

Apple Inc. (NASDAQ: AAPL) Recommendation: BUY

Current Price: $109.85 Target Price: $150 - $180 April 15, 2016

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Apple is the largest technology company in the world based not only on market cap, but also on sales, profits, and assets.4 Although Apple has recently suffered from slowed iPhone and iPad sales in the U.S, we still believe Apple has the potential for growth in the future. We believe this because the company is expanding its services and overall product mix and in the future will not rely as heavily on iPhone and iPad sales. We anticipate a rapid growth in the popularity of Apple’s services, especially in newer services such as Apple Pay and Apple Radio. In addition, we believe that new and innovative hardware products Apple may introduce in the future will help boast increased sales for the company. Apple is reported to be working on both their own electric/autonomous vehicle5 as well as a newly patented virtual reality headset6. Although these are not new ideas, Apple’s strong brand and loyal customer base would help make these two new hardware items become a staple of Apple’s product mix. Due to these factors and potential for future growth, we recommend a buy rating for Apple Inc.

Real Gross Domestic Product (GDP)

The real gross domestic product is the inflation adjusted value of all goods and services produced within our economy during a given time period. GDP is often used as an economic indicator for the overall health of the economy. One method of calculating GDP is by using the expenditure method which is calculated by the sum of four main factors which are: private consumption, private investment, government spending, and net exports.2 Since a large portion of GDP is calculated based upon private investments and consumption, GDP can be related to other economic factors such as Consumer Confidence Interval (CCI) and Unemployment Rate. Future growth rates of GDP can help us to predict the growth in Apple’s sales numbers. With a 1.4% growth of real GDP in the fourth quarter of 2015 and a forecasted growth of GDP being between 2% and 3% in the coming years, we can predict that apple’s sales, in the U.S. will also increase.3 This

relationship can be derived from the increased consumer spending and confidence in the economy. The following chart shows the change in U.S. real GDP in the last ten years. Historically, you can see that real GDP growth remains between 2% and 3%, except during a recession such as in 2008.

Source: Bloomberg Business (Updated 2/26/16)7

Unemployment Rate

The U.S. national unemployment rate is calculated by The Bureau of Labor Statistics (BLS) and is done by surveying 60,000 households across the country. After data is collected from this sample population, the unemployment rate is calculated by dividing the number of people who are gainfully employed by the number of people who are out of a job, but who are actively looking.9 People who claim to be out of a job and not actively looking are not accounted for in the calculation of the national unemployment rate.

Consumer confidence is inversely related to the national unemployment rate because when consumers see an increasing unemployment rate, they fear a potential economic turmoil may be near. The current unemployment rate in the U.S. is 5% and as you can see from the chart below, the unemployment rate has been steadily decreasing for the past five years. This is important to Apple, because as more consumers are employed the amount of disposable income consumers are willing to spend on products such as Apple’s will increase.

EXECUTIVE SUMMARY

ECONOMIC OUTLOOK

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Source: Bloomberg Business (Updated 1/8/16)10 Inflation Rate The inflation rate in the U.S. is calculated by tracking the changes in the Consumer Price Index (CPI). CPI and Producer Price Index (PPI) are closely related to one another. For example, PPI in the technology sector has been steadily decreasing since 1990 due to what we believe are improved technologies for producing IT hardware.11 This is idea is related to Moore’s Law which states that the number of transistors on a circuit double roughly every two years and because of this keep technology costs down. Due to the decrease in PPI, the CPI in the technology sector has also been decreasing because of decreased production costs and an increased supply of hardware and software in the market. Within the last five years, the overall inflation rate has been pretty low, in between 0% and 2% with it being less than 1% the last three. This trend is illustrated in the graph below.

Source: usinflationratecalculator.com12 Foreign Exchange Rates

The foreign exchange rate represents the value of one currency against that of another. The value of the US dollar is crucial to many countries and international companies. Companies, like Apple, that deal overseas have to keep a close eye on the exchange rates to avoid losses in their profits. The top eight Information Technology companies have 45% of their net income overseas, so these companies need to pay close attention to these types of indexes so to not affect their bottom line.

The US Dollar Index compares the US Dollar to a basket of six other currencies. The US Dollar Index started at 100 basis points in 1970 and anything below that would imply that the value of the dollar has decreased. This index is currently juts below 95 which means the dollar is still relatively pretty strong as it has only decreased roughly 5% in forty years. Below is the historical chart for the US Dollar Index which shows a fairly strong dollar for the past two years.

Source: Bloomberg Business13 Consumer Confidence Interval (CCI) The Consumer Confidence Interval (CCI) is a measure of consumer’s optimism on the health of the economy. A high CCI means that consumers are very optimistic about the current and potential future of the economy, which has the potential to lead to increased spending of discretionary income in the economy. As you can see from the graph below, CCI has been on the rise for the past five years. We believe that when there is a higher CCI, companies in the Information Technology sector will be more profitable due to increased disposable income for consumers to spend their money on consumer electronics. In addition, with personal income levels increasing around an annual rate of 0.4% we can expect all sector to benefit due to increased money for consumers to use at their

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discretion. In the future, we predict CCI to continue to increase at a constant rate of around 2% over the next couple of years.

Source: tradingeconomics.com14

Industry Overview

Apple manufactures and designs a wide variety of electronic products including smartphones, tablets, personal computers, and smart watches. In addition, they also provide various kinds of software and services for their end consumers. The company operates and compete in several different sub industries, which fall within the Information Technology sector. In the fiscal year of 2015, 66.34% of Apple’s sales revenue came from iPhone sales, which makes the smartphone industry Apple’s main area of operation. Below are the products and services Apple currently offers the following products classified by sub industries: Consumer Electronics: iPhone, iPad, iPod, Apple Watch, Apple TV Personal Computer: iMac, MacBook Internet Software & Services: Apple Store, Apple Music, Apple Pay, iTunes, iOS and Mac OS

The “Information Technology Sector” accounts for 20.8% of market capitalization of the S&P 500 index and a 2.47% YTD return as of march 31, 2016. Due to the nature of the sector, the health of the overall economy will greatly influence this sectors performance.

Over the past year, the information technology sector has been outperformed the market, while the Technology Hardware, Storage & Peripherals industry underperformed the market.15

Source: Fidelity Industry Trends and Recent Development

The consumer electronics industry is extremely sensitive and competitive, as companies are constantly introducing new technologies and products. The industry also presents a great potential for growth, as there are many technologies and products, such as Virtual Reality (VR) and the Internet of Things (IoT), which are under development and customers have high expectations about them. Smartphone Sales

Over the past 8 years, the sales of smartphones have been increasing dramatically. This is mainly due to the replacement of traditional feature phones with cell phones and has attracted new customers. In 2012, the ratio of non-smartphones and smartphones was 58% to 42%, respectively. According to IDC, they expect the ratio to become 27% to 73%, and will eventually reach 12.3% to 87.7% by 2019, which suggests a well penetrated market. The growth rate of shipments of smartphone in 2014 was 27.5% while the growth rate in 2015 decreased to 9.8%. This suggests a slowly declining growth rate due to the increasing market penetration. IDC also suggests that current smartphone shipments of 1.3 billion will reach 1.9 billion in 2019 with a 7.4% CAGR. As for the flow of shipments, IDC suggests over 50% of smartphones will be going to APAC countries, about 30% will go to Europe and East Asia, and the rest will go to the Americas. Tablet Sales

INDUSTRY ANALYSIS

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Source: IDC

The shipments of tablets have grown from 19 million in 2010 to over 220 million in 2012. However, the increase has slowed down over 2013-2014 due to the cannibalization of large screen smartphones. We believe the current tablet industry is undergoing a major change. The total shipments of tablets ahs dropped from 230 million to 206 million in 2015, which is a 10% decrease. The shipments for detachable tablets reached 8.1 million in 2015. Customers consider detachable tablets as a replacement to laptops, which suggest strong cannibalization between the two industries. IDC forecasts the sales of tablets to steadily raise and reach about 276 million by 2017.17

Source: IDC PC Sales

The shipments of PCs and laptops have been consistently decreasing since 2011, mainly due to the longer lifecycle of PCs and the introduction of tablets and large screen smartphones. While the other four major PC vendors suffered a decline in their PC shipments, Apple had an increase of 1.2 million units and a 2.5% increase in revenues over 2015. The free

trial program of Windows 10 may have delayed some customers to upgrade their PCs and the release of the iPad pro may have affected laptop sales as well. IDC is also forecasting a -3.1% growth in PC sales in 2016.16

Wearable Sales

The wearable market has been rapidly growing in recent years. IDC expects the shipments of wearable devices to reach about 90 million in 2015 and increase by at least 30% in 2016. We expect great potential for growth in the wearable industry because smart wearable devices are capable of enhancing the integration of mobile devices.18

Music Streaming

Currently there is a great shift going on in the music industry, instead of downloading or physically purchasing music. People are starting to use paid or ad supported music streaming services such as Apple Music and Tidal. Within the past year, the number of paid music subscribers increased form 7.7 million to 10.8 million. In 2013, the revenues generated by music steaming was over 1.4 billion. This only accounted for about 21% of the total revenues in the U.S music industry. Revenues increased to 2.4 billion in 2015, which accounted for about 36% of total revenues in the U.S. music industry. 19

Markets and Competition

Apple offers a wide range of products and services across a variety of industries. Since the iPhone is the major source of income of Apple, which accounted for 66% of total sale revenue in 2015 and also the center of the Apple’s “ecosystem”, we will be focusing on comparing Apple with large cap competitors that are publically traded in the U.S., and its biggest competitor in the smartphone market, Samsung.

Source: Yahoo Finance

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As the biggest competitor of Apple, Samsung had 167.94 billion in revenues while Apple had 234.99 billion in revenues in 2015. Apple had the highest revenue over its competitors. Considering over 60% of Apple’s revenue comes from smartphone sales and the fact iPhone only occupied about 13% of market share in 2015, their ability to make customers pay a premium on their product is incredible. Apple has the highest profit margin among their listed competitors at 22.87%, while its competitor Samsung is only at 8.86%. Google has a slightly lower profit margin, but way lower sales revenue. The huge advantage Apple has on profit margins is what differentiates Apple from its competitors. With the high profit margins, Apple also has the highest ROA/ROE ratio in the group at 16.02% and 30.28% respectively, while Samsung has ROA/ROE of 6.99% and 10.98%, respectively. All the companies in the group are incomparable with Apple in statistics.21

Innovation is most critical for the technology industry, and as a rough indicator of efforts a company is investing in innovation, R&D expenditures represent a company’s indirect competitiveness. Among the listed companies, Samsung has the highest R&D expenditures at 13.8 billion while Apple has only 8.06 billion of R&D expenditures. Intel invests 21.9% of their sales into R&D, being the highest percentage in the group. Samsung has R&D expenditures of 7.3% of sales compared to Apple’s 3.5% in 2015. This does not indicate Apple does not care about research and development. The main reason for Apple to have a low R&D cost is that, compared to its competitors, Apple operates in less industries and offers a narrower range of products and services to customers. Porter’s Model Analysis Competitive Rivalry (Strong)

Apple faces strong and highly aggressive competition from its competitors, such as Samsung and LG. Apple operates in various sectors of consumer electronics, such as operating systems. Apple is constantly competing with other companies in every industry Apple operates in. As the switching cost for smartphones is relatively low and service carriers are offering various plans and contracts, the competition is even more intense. Bargaining Power of Buyers (Strong)

Apple experiences strong influences from the bargaining power of buyers. As mentioned above, the

cost of switching brands is low and the competition between companies is very high. The mobile phone market is mature and well penetrated. The market share a company has could strongly influence the revenues of the company. Bargaining Power of Supplier (Weak to Moderate)

Apple faces a weak to moderate influence from the bargaining power of suppliers, mainly because of the large amount of suppliers available. However, the opportunity cost and time investment for rebuilding the supply chain is high and unworthy. Apple is likely to accept reasonable requests from suppliers in their supply chain. On the other hand, the suppliers would most likely want to retain Apple as a customer. Based on this we suggest weak to moderate bargaining power of suppliers. Threat of New Entrants (Weak to Moderate)

Apple should not be worried about new entrants too much. It is likely that there will be new entrants in the industry, but these new entrants would not be able to take away much market share from Apple. This is because Apple has already built up its ecosystem of products, has a strong brand, and a loyal customer base. It would also require extremely high amounts of capital, development expenses, and a large amount of time to build up attention and a strong customer base. While the mobile phone market is a matured and well-penetrated market, the competition between existing companies is extremely aggressive; the opportunity cost of entering in the high-end smartphone industry is high. Threat of Substitutions (Weak to Moderate)

Apple experiences a weak to moderate influence from substitutes, there are already various kinds of substitutions to apple’s products in the market. However, Apple products are also usually more high-end and expensive compared to its substitutes. These substitutes have either lower performances or less attractive features, which makes them less competitive.

Apple has built up its brand and brand name over the past decade, which distinguishes them from their competitors. Apple is capable of selling their products and services at a premium and customers are willing to pay that premium for their products. This advantage is unlikely to be surpassed by competitors in the near future.

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Catalysts for Growth/Change

There are two types of catalysts that can drive this industry forward. Technological advancements could lead to new potential customers or could lead to increased sales in existing product lines.

For instance, wearable devices, specifically smart wearable devices, serve as a great catalyst for growth in the industry. There is potential for the sales of smart wearables to grow if most of the devices have standalone internet connection opposed to being reliant on another smart device for an internet connection such as a smartphone. In addition, there is room for growth with different kinds of wearables that may be developed in the future. In the future, wearables are not limited to watches or glasses.

The sale of mobile phones could very likely be a critical catalyst for growth or change. Even though the mobile phone market is well penetrated and mature, 27% of mobile phone shipments are still feature phones, so the potential for growth is huge. There are countries and regions in the world that have huge populations, but have a rather low smartphone penetration rate. For example, India only has a 26.3% smartphone penetration rate as of 2015, and India’s population accounts for about 17% of the world’s total population. In addition, since smartphones are generally priced higher compared to traditional feature phones, customers with lower income would be more likely to consider feature phones due to their reduced cost. If the average purchasing power of consumers increases or the economy is in good shape, the sales of mobile smartphones will likely increase, which will drive the industry to raise.20

Key Investment Positives and Negatives Positives

There are various rapidly developing technologies that have potential to be the “next big thing”. Technologies such as virtual reality, internet of things, cloud computing, wearable devices, and 3D printing, all show a positive investment outlook.

The majority of companies in the industry have a high product margin, since they outsource the production and assembling of their hardware products to overseas factories. This reduces the labor, inventory, and transportation costs, and leaves room for higher profits. Negatives

The major sources of income for the leading companies in the Technology Hardware, Storage & Peripherals sector is smartphones. As the smartphone market is highly competitive, smartphone manufacturers have to adopt quickly and introduce new features, since their different product lines are become less distinguished. Companies will have to compete on price and lower their margin on smartphones to stay competitive, which leads to the decrease in profitability of the entire industry.

Overview

Apple Inc. is the largest company in the technology sector, the company design, manufactures and sells various kinds of consumer electronics and digital services. The company offers products and services which include iPhone, iPad, Mac, iPod, Apple TV, Apple watch, iOS and OS X operating systems, iCloud, Apple Pay and a wide variety of other services and accessories. The company also delivers digital content through iTunes. The company sells its products and services through its own retail/online stores as well as third-party cellular carriers.

Source: Apple 10-K1

Company strategy

We believe Apple’ business strategy is to bundle its products and services. They primarily focus on the sales of iPhone, the core product of their product ecosystem, and maintain a high profit margin and stable market shares for iPhone, and develop other product and services to “add value” to their iPhone. We’ve seen for the past few years, Apple starting to develop products and services that are highly integrated with the use of iPhone, such as apple music, apple pay and apple watch. Apple built an ecosystem using their various kinds of products

COMPANY ANALYSIS

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and services, which all benefit from the brand and fame they have built up. Apple is able to reinforce the strength of the whole ecosystem and maintain their profitability as they keep adding and integrating new and existing products and services. As the number of Apple product users increases, their future products and services would benefit from the increasing customer base and brand name, which creates a virtuous cycle. As Apple keeps introducing new services and products that are highly integrated with their ecosystem to consummate the functionality of their product system, it would be hard for competitors to imitate or compete with Apple’s products. After an ecosystem was built, other products and services in the system would add value to the product, for there is a potential for the customer to receive extra benefits from other products in the system, and that is worth a premium. Recent Development

Apple recently released iPhone 5 SE, which is a new product with smaller screen and decent specs and is priced at $399 with 16GB of storage. It provides apple’s customers with more choice on screen size and price, it is supposed to compete with Samsung’s wide selection of smartphones and attract and retain customers from low-end smartphone users. The sales estimation for iPhone SE is 17 million units, which is an additional $7 million in revenue. Based on current gross margin of 40.1%, this will yield a profit of $2.8 billion, and we anticipate the cannibalization of other iPhone models to offset and attract new customers. Catalysts for Growth iPhone

Since the core of Apple’s ecosystem is the iPhone, and the major revenue generating product line, an improvement in iPhone that would further distinguish their products form their competitors would be a great catalyst for growth. For instance, the introduction of the 3D touch screen and live photo on iPhone 6+, which adds more features than its competitor’s products. The release of iPhone 5 SE would benefit both the company and the product system, as the release of iPhone 5 SE provided customers with more options on specs, screen size and price, which creates value for customers. This would also attract customers who prefer lower cost smartphones. As we believe iPhone will remain at the

center of Apple’s ecosystem, it is likely iPhone will be the major source of income with in next 5 years, and an increase in iPhone’s diversity, such as offering multiple models, would help Apple to better satisfy customer needs.

Apple Watch

Apple watch has the potential to improve Apple’s ecosystems, as currently Apple watch itself is highly integrated with iPhone. We see a great potential of growth in wearable industry, as the industry is redefined after the introduction of smart wearable devices, and Apple as the pioneer of the industry, could gain benefits from the development of the industry.

Mobile device services

Services such as Apple pay and Apple Music, are critical in perfecting the ecosystem of Apple. The “value adding” services would not only generates a revenue stream, it would also help Apple to expand their customer base as they venture into new industries or enhance their influence in the existing industries. Providing more services would increase customers' daily usage of Apple products, gradually accommodating customers with apple product system and build a long-term relations. Marketing Competition

Apple operates in a market that is very competitive. The Information Technology industry is dominated by constant innovation and because of this leads to very short product life cycles. New products and whole product lines are constantly being developed and marketed. Smartphone Market The smartphone market is very large and spans multiple countries in size. Apple is the dominant force in this market, but there are many other global competitors. Some of the major competitors include Samsung, Huawi, Xiami and Lenevo. Apple as well as its competitors are continually coming out with a newer model of their devices, some of these companies will produce anywhere from one to two devices in each of their product liens per year. Tablet Market

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Apple was one of the first to develop a tablet, the iPad, but many of it consumer electronics competitors have followed suit. Today, Samsung is not far behind Apple in unit sales of tablets. In the 2nd quarter of 2015, Apple sold nearly 11 million tablets, followed by Samsung who sold about 7.5 million.1

Wearable Market Although Apple was not the first of its peers to design and create a wearable, smart, device, Apple has begun to capture a large market share wit their release of the Apple Watch. Nearly 72 million wearable devices were sold in 2015 alone with annual sales projected to more than double by 2019.21

PC Market Although Apple is not the current leader in PC sales, they were the one of the first to innovate and create the idea of a personal computer. With the rise of tables and newer devices, PC sales have for the most part been cannibalized by other product lines. In addition, due to Apple’s steep premium on their computers, many consumers are, and will continue, to choose Apple’s competitors if they want to purchase a PC. Research and Development Expenses Apple currently has some of the lowest research and development costs among its peers. In 2015, Apple had a mere 3.5% R&D as a percentage of sales.1 Although this may sound like a bad thing for Apple, it is in fact because Apple has a core line of products in which it is researching into and trying to innovate opposed to its competitors who have many more product lines. Investment Positive and Negative Positive Strong Brand: Apple has one of the strongest brands in the whole industry. Consumers simply hear or see the Apple logo and know the product they are buying is of high quality. Product and services structured around the brand and iPhone, we expect a healthy and positive growth as other products and services keep creating value for the ecosystem. Apple have 233 billion of cash and equivalents available, which would prevent the company from short term financial issue.

Positive future for wearable and software services industry, which Apple currently starts to operate. Negative Over 60% of company revenue comes form the sales of iPhone, the company is dependent on the revenue of iPhone, the smartphone industry is highly competitive and Apple might be forced to lower the margin on iPhone due to strong competition, which would have a huge impact on their revenue.

Assumptions

We used four models to compute the future value for Apple Inc. stock, which are Discounted Cash Flow (DCF), Economic profit model (EP), Dividend Discount Model (DDM) and Relative price to earnings analysis. The price calculated by DCF/EP, DDM and relative price to earnings analysis are $170.57, $105.00 and $146.95 respectively. We believe the instrinsic value of Apple stock is within the range of $150 to $180.

We believe innovation is the key value driver for the industry, and due to the nature of technology, the product life cycle in the industry is rather short. Being able to stay innovative is key to survive and grow in such a competitive industry. That is why we anticipate a steady growth in Apple’s R&D expense, in the past 3 years, Apple’s Research and Development expense raised from 4.4 billion to 8.06 billion, which is 2.6% and 3.5% of sales. As stated in the annual report, Apple believes investments in R&D is critical for them to stay competitive in the future. As the range of products and services Apple offers keeps expanding, such as Apple Pay, Apple TV and the possibly virtual reality/augmented reality in the future, we believe that apple will keep increasing their R&D expenditure and will reach 11.9 billion by 2021, which is 4.4% of the forecasted sales.

We expect revenue from the iPad product line, which accounted for 9.94% of total sales in 2015, to slowly decrease over the next 5 years and remain stable after that. Since iPad market shares are being cannibalized by bigger screened iPhones, its also facing strong competition from lower end tablets with cheaper prices. We expect the introduction of the iPad Pro to slow down this

VALUATION

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declination, and we expect the iPad revenue to decline to 20.25 billion in 2021, which will account for 7.44% of total sales. Forecasted Sales We expect that the sales of iPhones will begin to slow in the near future. iPhone sales in the United States have already begun to slow and we feel the same will happen in the Asian market unless there is some intense innovation in the market, which we do not foresee. With the ever increasing screen size of the iPhone, expect that what iPhone sales there are will cannibalize some of the iPad market share. Due to this we think that the end consumer will have less incentive to purchase iPad and will lead to deceasing sales volume of iPads. Due to this high premium on Apple products, especially on their Mac product line, we feel that Mac sales will taper off and consumers will start buying more of competitors devices which will be smaller, have more features, and be priced lower than Mac. With all that being said we do predict that Apple’s “services” product line will show strong growth in the coming years. Apple Pay shows strong potential as consumers are moving more towards contact-less paying instead of using physical cards. With many consumers already having apple devices, the switch to Apple Pay will be quite effortless. In addition, Apple Music shows strong upside as many people are going by the subscription plan for their music. Also, with the rise of cloud computing and cloud storage, we predict that iCloud will be able to monetize on this in the future b consumers purchasing larger storage space on the iCloud platform. Cost of Goods Sold Historically, Apple’s cost of goods sold has remained between 54% and 64%. We used the average COGS from the last ten years and used this average number to forecast cost of goods sold as a percentage of sales into the future. Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the

University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report. References 1Apple 2015 10-K 2Investopedia GDP(http://www.investopedia.com/terms/e/expenditure-method.asp) 3Bloomberg Q4 GDP (http://www.bloomberg.com/news/articles/2016-03-25/u-s-economy-grew-1-4-in-fourth-quarter-supported-by-consumers) 4Forbes Apple Article (http://www.forbes.com/sites/liyanchen/2015/05/11/the-worlds-largest-tech-companies-apple-beats-samsung-microsoft-google/#19e19538415a) 5Apple Car Rumor (Project Titan) (http://www.techtimes.com/articles/123597/20160112/apple-s-project-titan-everything-we-know-so-far-about-apple-s-highly-rumored-electric-car-project.htm) 6Apple Virtual Reality Patent (http://www.techinsider.io/apple-just-patented-a-vr-headset-2016-3) 7Historical GDP Chart (http://bloomberg.econoday.com/byshoweventfull.asp?fid=472136&cust=bloomberg-us) 8Growth in Apple Services (http://seekingalpha.com/article/3848226-understanding-apple-growth-services?page=2) 9Unemployment Rate Calculation (http://www.investopedia.com/ask/answers/063015/how-does-us-bureau-labor-statistics-calculate-unemployment-rate-published-monthly.asp)

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10Historical Unemployment Chart (http://bloomberg.econoday.com/byshoweventfull.asp?fid=472111&cust=bloomberg-us) 11Historical PPI Data (http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=WP_ppibrief) 12Inflation Rate Data (http://www.usinflationcalculator.com/inflation/current-inflation-rates/) 13Exchange Rate Data (http://www.bloomberg.com/quote/DXY:CUR) 14CCI Historical Chart (http://www.tradingeconomics.com/united-states/consumer-confidence) 15Inforamtion Technology Breakdown (http://us.spindices.com/indices/equity/sp-500) 16PC Sales (http://www.idc.com/getdoc.jsp?containerId=prUS40909316) 17Tablet Sales (https://www.idc.com/getdoc.jsp?containerId=prUS40990116) 18Industry Trend (http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/showPublication.do?dataPosition=1&KEY=45202030) 19Music Streaming (https://www.statista.com/chart/4557/us-music-industry-revenue/) 20India Smartphone (http://www.statista.com/statistics/257048/smartphone-user-penetration-in-india/) 21Smartphone Market Shares (http://www.idc.com/prodserv/smartphone-os-market-share.jsp) http://marketrealist.com/2016/03/will-new-iphone-impact-apples-average-selling-price/

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