178 Billion Reasons to Buy Apple

By Markets Fool.com

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According to the recently released 2016 Best Global Brands Ranking from Interbrand, Apple (NASDAQ: AAPL) is the most valuable brand in the world, with an estimated market value of $178 billion. These kinds of rankings and value estimates are always a matter of discussion, but it's hard to argue the fact that Apple is world-class brand, and this has important implications for investors in the company.

The value of a brand

Investing in companies with strong brand value can be a powerful strategy for superior returns over the long term. When a company has a differentiated brand, this means customers are willing to buy that company's products over products from the competition offering a similar price and quality. This protects the business from competitive pressure, and it can also mean above-average pricing power, which has a positive effect on the company's profit margins.

Interbrand implements a holistic approach that includes both quantitative financial data and subjective considerations for valuing a brand. Financial analysis incorporates variables such as after-tax operating profits, minus a charge for the capital used to generate the brand's revenue and margins. Interbrand also includes other aspects such as the portion of the purchase decision attributable to the brand, as opposed to factors like price and product features. When it comes to measuring brand strength, the consulting firm also evaluates the brand's ability to to create loyalty and sustained demand in the future.

On the other hand, the Forbes Brand Ranking puts more weight on financial considerations than Interbrand. According to Forbes: "We measure the value of a brand by looking at the financials instead of fuzzy consumer surveys. The most valuable brands are ones that generate significant earnings in industries where branding plays a major role."

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Forbes also considers Apple the most valuable brand in the world, with a calculated value of $154 billion. Interestingly, both Interbrand and Forbes put competitor Alphabet's Google (NASDAQ: GOOG) (NASDAQ: GOOGL) brand in the second position among global brands. Interbrand estimates that the Google brand is worth $133 billion, while Forbes has a more conservative valuation of $82.5 billion for Google.

Samsung (NASDAQOTH: SSNLF) is another top player in the industry, even if the company is facing a massive blow after the Samsung Galaxy Note 7 disaster, which will probably take a considerable toll on Samsung's brand value. Interband puts Samsung in the seventh global position, with an estimated value of $51.8 billion. When it comes to the Forbes Brand Ranking, Samsung is ranked in the 11th place, with a brand value calculated at $36.1 billion.

How brand value benefits investors in Apple

The consumer electronics industry is notoriously challenging and competitive, and most companies in the sector operate with razor-thin profit margins. Global smartphone demand is slowing down thanks to market saturation across the world, and research firm IDC has recently cut its growth forecast for the industry to an anemic increase of 1.6% in shipments during 2016. In this context, many smartphone manufacturers are aggressively cutting prices to protect market share, which is hurting profit margins across the board.

However, you wouldn't have guessed that by looking at Apple. Even if the company is facing declining revenue, the business still generates enormous profitability for investors during challenging times. According to data from Morningstar, Apple produced an operating profit margin around 28.5% of revenue during the 12-month period ended in June of 2016. This is more than double the 12.8% operating margin produced by Samsung in the same period, and the profitability gap will probably increase over the coming months because of the problems Samsung is facing with the Galaxy Note 7.

Based on data from financial services company Cannacord Genuity, Apple captured a staggering 75% of all operating profits in the smartphone industry during the second quarter of 2016. This is in spite of the fact that the company accounted for a relatively small 11.7 % smartphone unit sales during the period. Because Apple launched the new iPhone 7 in September, and because Samsung is suffering a major setback, chances are good that Apple will grab an even larger share of profits in the industry.

It's hard to objectively calculate how much a brand like Apple is worth, so investors need to take these estimations with a grain of salt. However, the main point to consider is that brand value is a crucial return driver for investors in Apple stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andres Cardenal owns shares of Alphabet (A and C shares), and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days.

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