Daily: Apple’s margins will continue to decrease
Since there are so many Apple stories out there in today’s links, I am going to expand upon my feature-length post “The Case Against Apple” from earlier today. The dilemma as I set out early in the year is between margin and share. Apple is a premium-priced producer whose huge market cap comes from its unique position as a seller of premium-priced items that dominate their respective growing markets. Apple gets a triple benefit from margin, market growth and market share.
The first of these benefits to erode was share. As I began predicting three years ago, Android has taken share in Apple’s most profitable market and is now the leader from an operating system perspective. But so what? The mobile marketplace is still growing and Apple still has high margins. Or should I say had high margins? The fact is that even while Android has taken share in handsets, it is now set to take share in tablets as well, at the exact time developed markets are becoming saturated with product. The dilemma for Apple then is how to maintain growth without diminishing margin.
Unfortunately, its position on the premium end leaves it vulnerable to this share/margin conundrum and so Apple has decided to split the difference, by maintaining the premium orientation but steadily moving downmarket with older handsets and now the iPad mini. This will erode margins. Moreover, the market for high priced devices is saturated and depends heavily on unit upgrades now. To the degree, Apple wants to maintain earnings growth, it will need to increase volume or find new ancillary markets like Apple TV where it can churn up big numbers.
My sense is that this game is played out. Market saturation at the premium end will mean unit prices will steadily go down as adoption moves down market. And that favors Android. The same is happening at an astonishing speed in tablets, with Amazon entering this market. The result will be margin compression at Apple as it tries to maintain share. Atthe same time, unit volume growth will begin to slide as the market saturation becomes clear.
2013 will be a tough year for Apple in my view, and the low 16x P/E multiple will not help shares from sliding when earnings stagnate or decline and Apple ceases to be a growth company. That’s where this is headed. Apple should recognize this and increase dividends, while trying to maintain its superb execution and its premium strategy. Moving too far down market would be disastrous.
“We have learned over the years not to worry about cannibalization of our own product,” Cook said. “It’s much better for us to do that than for somebody else to do it.
“And the far, far bigger opportunity here are the 80-90 million PCs that are being sold per quarter. There’s still over 300 million PCs being bought per year.
““What we’re reading is that it’s a fairly compromised, confusing product,” Cook said. “One of the toughest things you do when making a product is to make hard tradeoffs. That’s what we’ve done with the iPad, and the resulting user experience is incredible.”
Microsoft didn’t quite do that with Surface, Cook implied, and the market will recognize that. “You could design a car that flies and floats, but I don’t think it would do either of those things very well. … People will look at the iPad and at competitive offerings, and I think they’ll conclude the iPad is the better choice.””
Oppenheimer called the upcoming period “the height of the cost curve,” saying that this always happens with new products but that they are often more spaced out. He noted that Apple also lowered the price of older iPhones and is putting pressure on its own margins.
“Launching the iPad mini required being “aggressive” on pricing according to Apple on the call, which is why the company chose to go below its ordinary margins. In past articles, I estimated that the bill-of-materials and construction costs might put the iPad mini within Apple’s existing range in terms of gross margins on hardware products, but it seems like the company’s unique design is keeping the iPad mini costs above the range I’d suggested.”
Apple’s Q4 results mean we also now have the total hardware sales the company managed for the 2012 financial year. The company sold an amazing 125.04 million iPhones, 58.23 million iPads, 18.1 million Macs and 35.2 million iPods. To put that in perspective, it sold only 72 million iPhones across all of FY 2011.
Apple also sold around 32 million iPads in 2011, 17 million Macs and 42.6 million iPods. The FY 2012 numbers make for a 74 percent increase in iPhone sales year over year, an 81 percent bump in iPad sales, a 6.5 percent jump in Mac sales and a 17 percent drop in iPod sales.
“Europe is a key market for Apple. Last quarter it remained the second-highest revenue generating region after the U.S. Yet it’s an increasingly challenging market, yielding the lowest growth of any region for Cupertino in its Q3. And for smartphones at least, it’s also a market firmly in thrall to Google’s Android OS (not that Apple would put it that way). “
Apple, the greatest company in the history of America, reported quarterly earnings last night that fell short of Wall Street forecasts for the second quarter in a row. It warned investors to go ahead and expect the first quarter of 2013 to suck, too. Fawning analysts took to CNBC to say this horrible quarter was absolutely great news for Apple, that its results were bad only because its products are just too good. They explained that, as often happens to Apple, customers simply delayed purchases of the old, boring Apple products because they were saving their money for slightly newer, slightly different versions of those same products. It just makes too much sense. So the stock somewhat surprisingly did not collapse in after-hours trade — although it has fallen nearly 15 percent, or about $100 billion in market value, over the past month.
“At least three brokerages cut their price targets on Apple Inc by up to $50 a share after the iPhone maker surprised analysts by forecasting lower gross margins for the current quarter.”
“Looking ahead to next quarter, Apple’s fiscal 2013 first quarter, the company says it sees $52 billion in revenue and $11.75 in earnings per share. The revenue prediction is a rather bold estimate: The company’s fiscal 2012 first quarter was its biggest ever, and that brought in $46.3 billion and earnings of $13.87 per share.”
“According to Apple’s SEC filings, the company sold a total of 84.12 million iPads as of June 30, the last day of a quarter in which it booked 17.57 million sales.
Cook’s announcement meant that as of Oct. 9 the company had sold roughly 15.88 million iPads. Ten days earlier, when Apple closed its books on the last quarter of fiscal 2012, the number would have been even lower.
Rather than gaining momentum, as Cook had implied, the iPad was losing it.
That realization sent many analysts back to their spreadsheets. And in the 24 hours since Cook made his announcements, I’ve heard from 17 of them.”
“Apple just reported its quarterly earnings of $8.67 per share on sales of $35.97 billion.
The earnings were lower than the $8.75 consensus though sales beat the $35.8 billion in sales that analysts had expected. Both numbers were as usual, substantially higher than Apple’s guidance of $7.65 per share and sales of $34 billion.”
“Sony took an excellently engineered solution and held it tightly, the better to extract big profits. But every generation, every iteration, Sony’s need to control the format became more and more of a liability. Even loyal Sony customers could tell the proprietary formats were a screw job, eroding their happiness with their Sony product every time they had to shell out a premium to buy a Sony-authorized blank.
Unwillingness to Commit
Sony is rife with good ideas. Too afraid to commit to each one fully, Sony instead releases a ridiculous number of products in an attempt to see which might take hold, making many that seem like one-off oddities that even Sony doesn’t believe in.”
“Our fiscal chemistry lab, however, may be conducting more destructive experiments than investors acknowledge. Warning signs and distress flares are being sent out by more than the credit rating agencies. Recent annual reports issued by the International Monetary Fund, the Bank for International Settlements and our own Congressional Budget Office speak to what economists term a fiscal gap — a deficit that must be closed if a country is to stabilize its debt as a percentage of GDP. It is not necessary, these reports say, to be totally drug-free; a small deficit, after all, has been a trademark of the United States for decades. But a fiscal gap that exceeds minor levels — 2 to 3 percent of GDP — must be closed, or a country’s financial foundation and, ultimately, its economy may unravel. Its growth rate will almost surely slow down and fail to lower high levels of unemployment.”
“At exactly 25 percent, Friday’s official number was the highest since the Franco dictatorship ended in the mid-1970s, and gives fresh impetus to calls by labor unions for a general strike next month.”
““As we speak, my funding needs for this year are almost covered, at 95 percent, and my intention is to start funding the Treasury for next year so that we can start the year with our homework done,” said Fernandez de Mesa, who reports to Economy Minister Luis de Guindos.”
“South Korea’s economic growth almost halted in the third quarter as hesitant and indebted consumers were unable to make up for steep spending cuts by companies on declining exports to Europe and China.
Gross domestic product grew just 0.2 per cent in the July-September period from the previous quarter as corporate spending on facilities plunged on gloomy export prospects, advance estimates by the country’s central bank showed on Friday.”
“The operator of Japan’s quake-struck Fukushima nuclear power plant said on Friday it could not rule out the possibility that it may still be leaking radiation into the sea.”
“India is essential to the stability of a neighbourhood that includes other nuclear powers (China and Pakistan) and a failed state trying to recover (Afghanistan).
Despite all this, the west seems to be paying too little attention to what has been going on in the Indian economy. Growth has slowed significantly. The fiscal deficit is sizeable. Internal political conflicts are increasing. India has all but stopped climbing the World Bank’s rankings of countries by ease of doing business – despite being far down the list to begin with.”
Gross domestic product expanded at a 2.0 percent annual rate, the Commerce Department said on Friday, accelerating from the second quarter’s 1.3 percent pace. A pace in excess of 2.5 percent is needed over several quarters to make substantial headway cutting the jobless rate.
Economists polled by Reuters had expected a 1.9 percent growth pace in the third quarter.
“In the past couple of years, as the eurozone woes have unfolded, international investors have been transfixed by one small country on the edge of the region: Greece.
They would do well to keep watching another tiddler: Finland. For while Finland has not created much drama, precisely because it is one of the strongest eurozone members, some fascinating discussions are under way. Most notably, as the eurozone crisis rumbles on, some Finnish business and government officials are quietly mulling the logistics of leaving the currency union.”
“A leading supporter of Mitt Romney has suggested that Colin Powell endorsed Barack Obama because both men were the same race.
The comment threatened to create new controversy for the Republican campaign only days before the US presidential election.”
“Four years out of office, W. still can’t get anyone to notice. Electing Barack Obama was supposed to be a repudiation of his predecessor’s policies, and in many ways I wish it had been, but the truth is that it’s been nothing of the sort. W’s policy innovations have been so popular among the governing class that there have been few serious challenges to them from any corner at all. When these policies, all of them less than twelve years old, are challenged,the challenger is typically presumed to be a crank.”
“Samsung Electronics Co, the world’s top technology firm by revenue, reported record quarterly profit of $7.4 billion on Friday, with strong sales of its Galaxy range of phones masking sharply lower memory chip sales.”
“Amazon.com just released its third-quarter earnings report. Analysts had been predicted growth in sales along with a net loss, and that’s what happened — but the numbers still fell a bit short. Net sales grew to $13.81 billion, up 27 percent from the same period last year. The company saw a net loss $274 million, or 60 cents per diluted share, compared to operating income of $63 million last year.
Analysts had predicted revenue of $13.9 billion and a loss of 8 cents per share. Amazon’s net income has been falling for the past couple of quarters, as you can see in the chart below.”