Episode 92 | Apple’s Future Under a New CEO

In Episode 92 of Market News with Rodney Lake, Professor Lake, director of the GW Investment Institute, discusses Apple’s leadership transition from Tim Cook to John Ternus. He highlights Apple’s evolution into a nearly $4 trillion company driven by its powerful ecosystem, iconic global brand, expanding high-margin services business, strong profitability, and enormous free cash flow generation. Lake praises Tim Cook’s nearly 15-year tenure for delivering exceptional shareholder returns and disciplined capital allocation. The episode also examines Apple’s elevated valuation, fortress-like balance sheet, pricing power, and long-term consumer loyalty, while emphasizing that investors should closely watch how the new leadership team navigates AI strategy and positions Apple competitively in the evolving AI landscape.

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. This is a GW School of Business George Washington University School of Business.
Episode for the Market News with Rodney Lake podcast that is part of the GW Investment Institute. We're here in the heart of Foggy Bottom, Washington, D.C.. Duquès Hall, Duquès family studio. Shout out to the Duquès family. Thank you very much. We've talked about this company before on an episode, but we're going to spend time today talking about this because there is a big transition.
And that company is Apple, one of our largest holdings. We did preview this on a prior episode, but we're going to spend time and we're going to use the framework, business, management, price valuation, and balance sheet to do a little check in. Maybe not full check in today, but we're going to go deep enough to cover all of the areas: business, management, price valuation, and balance sheet.
That is the GW Investment Institute framework where we use in our fundamental analysis classes. Our students use that framework to analyze companies and a heads up stock pitch day is quickly approaching and we'll have all the pitches from the students. So, looking forward to hearing their pitches. And so this is the framework that our students use to find these companies.
This is how they found Apple as an example. But I think it's really worth noting that we're going to have this transition, you know, from Tim Cook to Ternus who's coming in as CEO. So let's go through the framework and we'll see how this happens or see how this plays out as far as the numbers. But you know, just kicking it off here.
Let's go to the business. So remember we're going to go business. We're going to go management. We're going to go price valuation. And we're going to go balance sheet. So the business of Apple let's go through some of the numbers. We'll talk about their business. So market cap 3.9 trillion. This is this is April 21st here 2026. So over a $4 trillion or about excuse me a $4 trillion market cap company.
Apple has obviously been enormously successful under Tim Cook and has grown orders of magnitude or order of magnitude bigger under his leadership. And so, again, we mentioned this, that, you know, people were concerned about this transition from Steve Jobs, co-founder of Apple, pioneer, visionary, founded Pixar as well, for example, you know, is Tim Cook going to be up to the task?
Is he going to be up to the job? Well, he was and then some. And, you know, turned Apple really into a printing press. And, you know, he was known for good operations and managing the supply chain. That really just made Apple even a further juggernaut. And certainly the demand for their products and services just grew under his leadership and really executed on all fronts, not always necessarily being the first, but certainly making premier products for their consumer base and growing consumer base and really lock it in, which I have been locked into my family, to the iOS system and now also the Mac OS to some degree for the things that that we do.
And so that really helps. You have this ecosystem and it's sometimes hard to get out. Why is it hard to get out? Well, things work. And when when Apple makes it work and makes it look nice and makes it easy to use, people stay in that network. Excuse me. And that's how you get to the $4 trillion market cap.
So let's go through some of the stats. I think some of the products, you know, obviously iPhone, the big services is another big piece. If you're using Apple Music or News or any of these other types of services. But let's get to some of what's happening on the revenue side here. So there fiscal year is a 9, 9/30 or are depending on when it lands, but end of September fiscal year.
And so the latest data we're going to go over is 12/27/2025 that we have available here. So what's the revenue? So trailing 12 months 435 billion. That's with a B. So big numbers here on the revenue side and the growth of 10%. So for a company that size to grow at 10% is pretty remarkable. And the projected growth rates 12% in 2026 for the for the fiscal year, that will be 9/30/2026 and the 9/30/2027 7%.
So 466 billion and then $500 billion is the projected number for 9/30/2027. So these are gigantic numbers, 12% growth for 26 and 7% growth projected, these are projected numbers for 27. Remember investment advice. That's not what this is. So not investment advice. This is for entertainment educational purposes only a reminder disclaimer there. All right. So let's get into what are the gross margins?
So gross margins 47% 206 billion for Apple here. Again that's through 12/27/2025. And let's look at the net margins quickly 117 billion of net income. That would be 27% net margin. So those are big numbers. Now what's the free cash flow here? Not a huge number on the CapEx. So 12 billion on the CapEx for 2020. Last 12 months through December 27th, 2025.
That puts free cash flow at 123 billion one two three billion of free cash flow for the trailing 12 months. All right. So let's go through this a little bit. So again, when you talk about the business of Apple and really we're talking about the transition today or that's the the catalyst for going over this. The revenue has been growing steadily but the numbers have not been enormous.
Right. So when you look you go back to 2022 again, the 9/30 here, 394 billion, then you go 383 in 23, 391 in 24, 416 in 2025. And then trailing 12 months, 434 435 and then the projected 466 through 26 9/30 and so you're talking about growth rates in 22 of almost 8%, then you're actually lost. So -2.8% when you went from 394 to 383 in 22 to 23.
And then you get up to 391, so modest 2% and then modest again to 416. That's 6.4% and then 10%. Obviously, that's a pretty big bump. And so you're definitely seeing really that, you know, that acceleration came from the iPhone 17. And so products and services continue to do very well. But you certainly had a little bit of a bumpy ride through that through that patch.
And people were concerned about Apple. But if you look at the numbers there they're quite good. Now let's go through when you talk about, okay, what's the quality of the business, we're going to say very high for Apple. And we're going to give a couple of reasons here. But let's go through what's happening on the gross profit side.
So if you look at the margins here from 22 43%, 23 44%, 24 46%, 25 46 projected 48 and full year 26 and 47 and 27. So you can see that, you know, over time, the margins have actually expanded. And part of that is because services is becoming a bigger number. Those are higher profit margin businesses. You get locked into the Apple ecosystem, you purchase more iCloud storage, you purchase the news, you purchase the music and other services that you might want to pick.
Then you have the platform and you're getting 30% from that as well for the App Store. So those are great businesses. Those are higher margin businesses, and Apple has benefited from that. Now, on the business side, one of the areas that people are remain concerned about is AI. Now we'll see. We'll have to see what's happening with this transition from for the CEO.
And Tim Cook is going to be sticking around. And Ternus we'll take over on September 1st. And Tim Cook will stay around as the executive chairman. So we'll have to see how how that really works out. So what do we think there? Well, you know, I think time will tell. And the big thing that they need to tackle is AI.
And obviously people have been thinking about that. And what's happening with, you know, you know, AI and where why is Apple not a leader in this now they haven't always necessarily been the leader. And maybe and some people are saying well that's the playbook here. They're not going to be first let other people spend the money. They're going to come in.
They've already had announced the partnership with Gemini, which is very good. And so we'll we'll maybe that's going to be the way that they're going to access this. They're going to remain as the platform and they're going to access the best AI that's out there. Ternus comes from the hardware side and we'll talk about management. But on the business side, obviously they remain super competitive.
But this AI front, I think, is worth noting. And really, you got to think about what they're going to do there. So, you know, what score would we give the business before we get to the score? I just want to mention one more component, which is pricing power that they have. And so, you know, how do you quantify the pricing power?
Well, you can look at the stability of the gross and net margins over time as one indicator for that. And so if you look at that it's quite good. So if you looked at the the gross margins again, 43, 44, 46, 47, 47, 48 that's from 22 up until 26 projected. And so they have been very good gross margins.
And if you look at the net margins, 25, 25, 26, 27, 27, that's 22 to 25. And also very good. So stable and increasing. And so here's an exercise that we often do in class to demonstrate pricing power. So we ask people who has an iPhone? Many people have an iPhone. And then we say okay next up next question is if the price of your iPhone goes up 10%, are you changing?
No. No one raises their hand. Right. Nobody's changing their iPhone for 10% increase. There is probably some point where that that does make a difference. Maybe it's 25, maybe it's 30, maybe it's 50% right. You're willing that demonstrates pricing power. So if a if a company can raise the price of its products and its consumers are less sensitive to that, they have pricing power.
Right. And Apple and its management team has this also responsibility to make sure that they strike that balance, right, because they want to maximize, you know, the utility to their consumers, and they want to maximize, obviously, the profits to the shareholders at the same time, but they want to make sure that they're building for the long term, and they're not just taking an extra dollar right now that they could, but really they're making sure that they're delivering quality and value, and they have that embedded pricing power when they need it.
So for example, if inflation comes up, which it has more recently, you can pass along those costs to your consumers because the value of your product exceeds where it is now. And you have that pricing power. And that's something that is important to note. Not all these companies have pricing power. Apple I would say again, not investment advice, has very significant pricing power and has demonstrated that over time.
And I think people probably might even pay double for their iPhone. Maybe not double, but certainly I think you would lose some people there, but certainly you could raise prices by 10%, by 20%, and I think you wouldn't lose a ton of consumers on that. So what are we going to give the business that has all these collection of things and has this great brand and really revered brand?
You know, certainly you're talking 9 or 10 on when you talk about Apple's brand. Right. And so I think that is something to really think about and really consider if you're, you know, if you're a 9 or 10 for the business, it's hard to obviously get any better than that. But I think Apple's brand is stellar. And really, it's when you talk about brands that are better than Apple and more revered, it's a pretty short list, right?
So when you talk about things that people recognize, you might talk about Nvidia right now, but certainly on the consumer side, you know, it's not as well known as as an Apple, for example, not as many people are buying GPUs personally. And obviously they're selling to a lot of businesses. But iconic brands might be Nike and Starbucks and and these sorts of things.
And so you have an iconic brand that has pricing power. That's a great business that has very consistent and high growth in net margins. And so when you talk about that, I think you let's give it a nine just to be a little bit conservative. So on the balance sheet sorry. Up next is the management side. We'll get to the balance sheet.
So these are important things right. So you're getting John Ternus is coming in. And he's been at Apple for a long time. Insider running the hardware side and taking over for Tim Cook again this transition last time people were concerned about it. Now we won't spend a bunch of time talking about specifics here because, you know, time will tell.
Now, a couple of things about the current management. Tim Cook has again made Apple into a juggernaut of a company, and financial returns for the company have been significant. If you've been an investor in the Investment Institute, to be clear, has been an investor since 2005 in one portfolio, and 2008 in another portfolio. And so obviously those portfolios have benefited.
And thanks again to the students who picked those who picked Apple at those times. And by the way, thanks to all the students who decided to keep those in our portfolio. Right. One of the other decisions is to make sure when you find a great company, that you hold on to that great company, if the thesis hasn't changed, and possibly in this case, it improved over time.
So Tim Cook did a great job steering this company over the last nearly 15 years as CEO, taking over from, you know, another icon to talk about Steve Jobs, co-founder of the company, you know, created iconic products and certainly the heart and soul of Apple. When he was there, people were concerned, can he make that transition? He obviously did and did even more than that.
And so really fantastic job by Tim Cook. And so if we're going to give management the current score, we have to think about, you know, are we going to incorporate this transition? I think right now you should because you know the news. And so I think you have to include that in the outlook. So Ternus obviously obviously not as you don't have you know as much public data on you know how he directly impacted he's on the hardware side and certainly you know some of that.
But certainly now as CEO you will have much better granularity onto his decisions in the direction of the company and how that's going to impact it moving forward. Tim Cook, obviously a careful person, so put a lot of thought, I'm sure, into the transition and everyone at Apple on the board and everyone else thinking about who's the right person to take over this.
And so I do think, you know, we're going to give him the benefit of the doubt right now, at least I am to see where he comes up with. So when you talk about the management, another piece that I think is super important. So returns to shareholders and the share buybacks have been enormous, bigger than any other company from Apple.
So that has been a good way, a tax efficient way to get capital back to Apple shareholders. And so, but with that, I think when you talk about the management, I think it's hard to give a score that really just reflects Tim Cook track record at this point. I think you also have to think about, okay, well, Ternus is taking over.
He's an insider, so there should be some stability. Tim Cook is moving to executive chairman, so I think that's helpful for the transition. Who knows how long he'll stay in that role. But certainly in the short term that helps. This will happen on September 1st. But I think you've got to give a little bit. You know, you give the benefit of the doubt.
You don't have to. I'm doing that. But I think you also get pulled back a little bit and say, okay, well, you're not going to get the track record. There is a transition coming. So I do think on the management side for the moment, you got to say, okay, well, you know, maybe you're going to give a little nod, which I am but not full.
And so you bring that back. Maybe that's a seven. So I think that's something that you have to think about. So fantastic run Tim Cook. All the accolades that he's getting are well deserved. He's operated under different presidents and has gotten along really with everyone. He all should get a star for being a fantastic diplomat, you know, not just here across the world and really excuse me, doing a great job of working with everyone.
Certainly a very special person, a very special business person, a very special CEO. Tip of the cap obviously goes to Tim Cook for his fantastic work. And we've benefited directly at the Investment Institute from owning shares in Apple for such a long time. So thanks to our students for finding Apple. Not not that it was unknown, but certainly, you know, coming up with the investment thesis then and convincing their peers to put that in the portfolio.
And for all those years, many of our students saying, okay, that needs to remain in the portfolio, but management making it transition. So I'd give that a seven when you go to price valuation. All right. We got to talk about that. So where is Apple right now on on that price side? So let's dig into that a little bit.
Well it's not cheap. So when you talk about when Tim Cook took over Apple you're probably looking at something like 12 times forward PE. Now you know approximately 15 years later 13 and change depending here. The the valuation is much much higher. So the forward PE on Apple right now again April 21st here 2026, 31 times. Now that is a huge rerating right?
I mean more than a double on the rerating just on that. So you're you know obviously you had to grow earnings to to get that to get to that number. You can't just rerate, you know, more than two a little more than two times closing in on three. But you know, two and a half times to get the market cap for where it was to to $4 trillion.
So you had to grow earnings. So fantastic job again. Back to management execution there. But you know that's a very different number than 12 times. And so why. Well services, the business has changed. The gross margins have been very consistent. The net margins have been very consistent. But the mix of products and services has changed over time since when Tim Cook took over, and particularly you could say on the services side.
So people buying services from Apple is a very high margin business. And the bigger portion of the business that becomes as a percent of the total, you can, you know, assign a higher margin because if you're paying, you know, those monthly subscriptions, that's cash flow every month. That's high margin of revenue every month. Consistent high margin gets a higher multiple.
The market's going to rate that higher. And so 31 times is not cheap though it could you could say maybe it's fairly priced. But when you look at the price valuation I would say you're talking something more like a six and a half or a seven right now. We don't have to spend a ton of time on this.
I think it would be hard pressed to get people to to certainly disagree with that. But I think we can be I think probably, you know, let's even ding it down to a six on your paying. You're paying for it, right. So let's do that. But like let's go to the balance sheet now before we wrap up and bring everything back.
So let's let's work a little bit on the balance sheet here. So if we go to the balance sheet all right. So historically at least in the recent past you know for the most part Apple has been a fortress balance sheet. And that's no change right now. So you're talking from for 12/27/2025 cash and cash equivalents 144 billion and 90 billion in debt.
And so they're obviously levering up a little bit here, but certainly not a ton. You know, you know, $34 billion in net cash still makes you sleep like a baby at night. We're not worried about Apple. And if you look at the free cash flow 123 billion for that period. And so you got, you know, 30 plus billion in net cash, you're generating 123 billion in free cash flow.
So that's sleeping like a baby at night, which we've referenced before. You're not worried about Apple's balance sheet. So I think for the balance sheet you can give this even a ten. So there's nothing really to be worried about. Their people you know can say that okay. Well a little bit concerned about, you know, what Apple is doing with levering up.
You know why. You know why get cute with that. You don't necessarily have to. You know, you could certainly make an argument that, you know, why do it that way. But it's it's about, you know, being efficient and certainly still having a fortress balance sheet, still having in that cash position 30 plus billion dollars and still dreaded writing tons of free cash flow.
All right. So let's review business, management, price valuation, and balance sheet to to wrap the episode here. Again, the catalyst for this episode to check in on Apple is John Ternus taking over as CEO, long time CEO 13 plus years, probably closing on 15 years for Tim Cook here. Fantastic job, remarkable business person, remarkable CEO. Got along with everyone.
World diplomat as well. Fantastic job for Tim Cook business. Apple continues to be a fantastic business with pricing power, high net and gross margins, and generating lots of free cash flow. That's a nine. The management side, obviously there's a transition period here where little a little bit concerned with what's going to happen. I think you're giving some benefit of the doubt.
At least I am in this number. But the transition has to happen. Tim Cook is staying. That's a positive as executive chairman. So giving that a seven. Price valuation giving it a ding there because you're talking over 30 times on the forward multiple. Is it deserved? Obviously at the moment it could be fairly valued. But giving that a six at the moment and the balance sheet net cash 30 plus billion generating 123 billion of free cash flow all set there.
That gives it a composite score of an eight. So super solid not not a huge concern. You know couple of things to watch for the wrap here. One on the business side and management we're really got to watch what's happening with what John Ternus is going to do. On the AI side I think that's critically important. And the other part here is to really watch, you know, just the transition to make sure that Turner's can do a fantastic job and follow in the footsteps in his own way.
He'll have to make his own path just like Tim Cook did. But can he manage the company and push it forward? AI is going to be part of that. So those are interrelated. That's it for this episode. We look forward to seeing you back on another episode for Market News with Rodney Lake. Thank you.