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Apple at the Margin
In continuing with my attempt to educate my readers on the folly of
believing Apple’s position to be unassailable, I am illustrating exactly
how vulnerable Apple is to either a compression of margin on the iPhone
or a slow down in sales. Apple is just penetrating the market and has a
fertile field to conquer, it is just that it will not be able to pursue
that field devoid of competition as it has over the past 3 years. This
should dictate an adjustment to the highly optimistic aura attached to
the multiples used in forecasting economic results.
The graph below illustrates the importance the iPhone represents to
Apple’s franchise. Believe it or not, this graph actually understates
the importance of the iPhone to Apple for while it brings in 45% of the
revenues, it is responsible for about 70% of the profits. Apple has
become too reliant on one product, although that reliance was borne from
the fabulous success of said product. While Apple will probably derive
some much needed revenue diversification from iPad sales, the iPad will
face the same hurdles that the iPhone is coming up against – and that is
competition from Android-based devices and potentially even Windows
Mobile 7 (albeit this is an admittedly much more speculative statement).
Breaking the argument down even further, you see how the iPod and the
iPhone have literally transformed this company. While I am sure it will
continue to be fantastic company with cool products, I doubt very
seriously that it will be able to grow in the future as it has in during
the last 7 years.
The saving grace is that the smart phone and portable computing
market will grow quite quickly, allowing companies with dwindling market
share to still capture increasing revenues. The ugly reality is that
those revenues will have to be burdened with increasing R&D,
marketing and distribution costs since the amount of competition will
probably scale faster than the market itself. That, my friends, is a
very good thing for you and I, the consumer!
All paying subscribers are welcome to download the mini-model which
shows Apple’s earnings sensitivity to margin compression through
competition. This is the very crux of determining the extent of Apple’s
success or lack thereof, in the near to medium term. Click here to
download (
Apple iPhone Profit Margin Scenario Analysis Model), and click here to subscribe.
Additional must read portable computing commentary and analysis:
- There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
- The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
- An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
- Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet
- This article should drive the point home: An iPhone 4 Recall Will Hurt Apple More By Opening Additional Opportunity for Android Devices Than Increased Expenses
- A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
- After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
- Android is gaining preference as the long-term choice of application developers
- A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
- Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
- advertisements -
If you are wasting your time deciding with which handset equity to go with(long or short)....you are part of the greater problem.
Apple has such killer marketing that they can have (more than) a few stumbles and still have the huge sales revenue numbers they come up with.
The market could probably absorb an "iPad pro" or an apple flat screen tv (with one or two cool, "must have" features) or ...
They still have room for growth with new products (without even mentioning the iPhone 5 next summer or the iPad 2, etc.), so just wait for the pullback and get in at a better price if you wanna go long.
quite frankly i had the displeasure of having to go to the G E N I U S bar (NOT). last saturday. damn these punks are not any where near GENIUS>
direct opposite. tattoed, nose rings, purple hair, fat young and dumb,
I D I O T S>
couldn't even sell me some ear phones with cash. then the idiot figured out how to make change. gave him my email address to send me the receipt. guess what he spell my real name with a C instead of a K. i spelled it out 3 times. then the damn ear phones broke or rather came apart at a critical place. take them back to the dumbing down store apple. no receipt, took an hour just to find "William" the stupid sale man. he couldn't find it. they are in turmoil in this particular store. i swear to G O D, this apple dunce store has the dumbest client base. the genius's are just young and stupid BS graduates from CU. entitled tits.
Sure beats the old Circuit City personnel...
(too soon?)
Apple has you say 8% of the desktop. Do you realize how much more growth they have in hthat sector alone? They are working on new OS's as we speak.
Remember Android was actually around longer than iPhone! Google bought them years ago and the OS is still behind
Subtle things like the touch interface, new form factors, heck and iWall
The iPad is just out of the gate and getting much corporate interest. This is a huge new segment for Apple... the corporation
Sorry, there is a lot of meat on the bone when you only have 8%.
I use iOS4 and Android 2.2, there is no way one can justifiably convinve me that Android is behind iOS. It is defintiely the other way around. Did you realize a JIT was released today for Android? Give it a try.
Reggie, I think your overall thesis is valid, re: Apple won't continue to grow earnings/revenues at 15%+ per year as they have in past years. That means a revaluation of the stock occurs at some point, but the most likely path is a slow drift down while earnings catch up and compress the multiple. I'd be wary of shorting AAPL because the best catalyst you can really get is an earnings miss and it's just too much guesswork to know when that happens.
I appreciate your efforts to remove the emotion from the conversation. There are superior technologies and functionalities to Apple's products, but people overlook that technology rarely drives the business. As one poster pointed out, AAPL is an astounding marketer. Your comparison to writing about gold is spot on, people get so emotional on either side, it's tough to take any argument seriously.
Remember how quickly Apple captured media player and smartphone revenue, profits and market share? That is how the business works. They can lose it just as quickly as the companies they took it from. The future is too cloudy to call definitive winners and losers, but to assume that the next 7 years will see gradual changes would be an erroneous assumption in my humble opinion.
I would certainly not rule out the possibility of a dramatic drop in the price of Apple, but it would take several quarters of nearly catastrophic events for that to happen. I think the probability of that is rather remote, which is why I said "the most likely scenario". I point to MSFT as a template, a company that was dominant in it's space but running out of ways to replicate past growth didn't plummet in price, it's mostly been hovering around $28 since 2001 (save for the crash in March of 2009). I think something similar to that action is a likely course of events for Apple.
You are confusing actual profits with share prices. Share prices do not always reflect reality. For instance, Apple is valued more than MSFT even though MSFT throw off much more revenue and profit diversified over a much larger product base.
MSFT also conquered several markets sine 2001, but management lost its way in terms of being a growth company. If Apple loses its phone and media player franchise momentum it will be harder for them to conquer new markets than MSFT for MSFT had literal monopolies and technology locks in several different markets.
I don't think I'm confusing share prices and profits at all. In fact, I am implicitly making the same point that you are - that share prices don't always reflect reality (I would qualify that with "in the short run"). My whole point is that I agree with you that Apple's business/growth is at increased risk of slowing dramatically compared to prior years and as you rightly point our, that scenario does not support the premium valuation they are currently getting. I just made an observation what I view as the likely path for them to get to their "new normal". MSFT was an example of how it's played out in the past, and there are countless others (INTC, GE, railroads in the early 1900s, etc.). Growth rates don't often drop off a cliff for companies this size and this entrenched, that's the point I was making. It can happen, sure. Technology can be very disruptive. But I think history is a useful guide here, and it tells us what typically happens is a gradual multiple contraction over a year of many months and even years. There are examples to the contrary where a high flier implodes on itself, but they are less frequent.
I get you. Still, all of the examples that you used are companies that serve the enterprise, thus their clients literally cannot just drop them. Apple deals with the much more finicky, and less entrenched consumer. That is how they grew so quickly (literally in a year or two), and they can lose that share just as fast.
Selling an iPod, and iPad or an iPhone to a teenager or a club-hopping, 24 year old cutie with nice legs does not necessarily qualify a company as entrenched, at least not in the same league as someone who has standardized their 3,000 employee company on MSFT office apps and Exchange Server, of GE turbines in thier brand new fleet of planes.
Way I figure it, its time to retire the "i" and start on "j"
There, that should do it, they'll be lining up around the block with fists full of cash.
Why the hard on RE APPL? There are plenty of large caps with inflated PEs and bad management to boot. Did Steve Jobs crap in your Cheerios?
*yawn*
Reggie, Apple is and will continue to make creamed corn of the rest of the PC market, and the phone market is too close to call with Goog.
I know you are 15x leveraged long Microshaft, but what are they doing other than spinning their mismanagement wheels on "hope and change [the price upward]?" Nothing people will pay for as long as the Apple product pipeline is moving that is for certain.
Apple will go long into the $550's.
Research what people are doing with their ipads and mac mini's working together over the internet for a glimpse of possibilities most are missing from their "toasters."
Wait until every kid gets an ipad at their school, and lessons are conducted anywhere there is internet from the schools "server" straight to the tablet. Its coming faster than most realize.
One thing aapl haters always seem to overlook is that apple makes a product suite, most of which are now standing the test of time as old tech is recycled into future integration with other products.
Writing about Apple is like writing about gold, despite the fact that there is a strong fundmental argument for or againt it, the emotional response and lack of empirical outlook clouds the fundamentals, ex. Apple creaming the PC market when it has less than 8% market share (although the iPad pushes it into the bigger leagues). I am not a Apple hater, and I am probably one of the most advanced iPad users you know of. Apple has its pluses and minuses, but people (including many professionals) are failing to look at the facts and instead are joining their respective "fanboi" clubs.
I will post the capabilities of Apple's most capable competition on my blog later on today or tomorrow, and I will let you be the judge as to whether Apple will take market share by the tonnage in the future as they have done in the past. As it is, Android has already started outselling Apple, but event that doens't give those who think with their heart vs their spreadsheets pause. hmmm, sounds like an opporunity.
As strapped as schools are for cash, I would think they would get an Asus or HTC tablet, both high quality vendors, at two thirds the price and 1/3 more functionality, ex. HDMI and USB ports.
Thank you for your response, I would agree with the parallels of gold!
Remember, schools have always been strapped for cash, and Apple gave computers for soup labels with the first Apple-education revolution.
One tablet is 4 books, not even a curriculum for one student in paper form.
The doors of integration across their products is only just starting to open, and even though off your graph, I would assert ipad sales to be huge.
Asus, HTC, etc, all good products, but come at the expense of quality. In a kids hands this is a big deal.
I can easily argue the aspects of quality in both directions. For instance, Apple decided to make the iPhone 4 out of glass with a black background and metal for purely aesthetic reasons (assuming you won't argue with this), an becuase of this they sacrificed real world usability. Notice how quickly the iPad (confirmed) and presumably the iPhone will shut down on a NY summer day due to over heating, and you literally have to put it in front of an AC vent to start it back up again. Notive the antenna issues on the iPhone, quality in engineering.
Apple makes a lot of good products, but many are of limited use - targeted at a limited user base. The quality mythos is 1 part engineering, 2 parts marketing.
My HTC phones have created more than a few Apple converts!
I would agree with the emotional interference on the product, and the equity. For disclosure the only Mac I own is a Performa-something lost in Narnia.
Overheating (any LCD is subject to the side effects of direct sunlight), battery life, reception, etc can all be cherry picked for a few examples that are more the exception than the rule. However, when shelling out double money the expectations are inherently higher.
I'm looking forward to your analysis in a future posting.
Apple products are garbage. Apple is an astounding marketer.
A computer is an appliance just like a toaster or microwave.
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