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Surprise, Surprise: The Mainstream Media is Picking Up On The Apple Margin Compression Thesis
After nearly a year of showing nearly incontrovertible evidence that
Apple has seen its heyday, the mainstream media is catching on. First a
quick overview of my thoughts...
- Look & Listen Closely As The Solitary Margin Compression Theory Slowly Bears Fruit: Apple to Drop Flagship iPad Prices?
- How
Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall
Street Will Enable This Without Sheeple Investor’s Having a Clue. - Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
- Is The Evidence For An Apple Margin Collapse Now Incontrovertible?
- I
Absolutely Dare Anyone To Read This And Still Not Consider The
Probability (Not Possibility) Of Apple Suffering From Margin Compression - Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android
Now an excerpts from the Mainstream media:
CNBC: Japan Woes Force Scrutiny of Apple's Margins
Monday, 18 April 2011 11:18 PM ET
Apple may provide the first signs this week that the Japanese crisis is pressuring margins, clouding what should otherwise be another dazzling second quarter for the makers of the iPad and iPhone
The Street.com: 8 Knocks on Apple's Stock
Tech
stocks in general have not enjoyed much appreciation from Wall Street
in 2011, but Apple, a long-time favorite in the group, has had an
unusually rough ride. June has been particularly hard for the tech
giant, whose shares are down 8% so far this month.... Here are some of
the highlights from the checklist of bearish themes on Apple.
- Product Vacuum
Oppenheimer
is the latest shop Tuesday to warn that the next iPhone will be later
than expected. And as first reported by TheStreet, the upgrade this year
is minor with the fully-powered 4G LTE iPhone in development for next year. - It's the Economy
The
U.S. may or may not be in a double-dip recession and Greece's debt
continues weigh heavily on European economies. "I believe investors are
scared of a European recession," said MKM Partners Tero Kuittinen, who
points to a slowdown in first-quarter phone sales in Europe. - It's Technical
Some technical analysts have studied Apple's charts and found that the stock has
fallen through key support levels. For these chartists, the patterns
point to continued drops until the stock reaches a price where buyers
have been willing to move in before. - Google's Android
While Apple has been selling year-old weakling iPhones, Google Androids have muscled-up with dual-core processors and 4G LTE wireless connections.
"The Android camp had a huge May in Europe -- Samsung in particular is coming back in a big way, threatening to undercut the aging iPhone over summer months," said Kuittinen.
- Facebook Apps
Apple's iron grip on iPhone and iPad apps may have been broken with Facebook's development of its own Web-based programs. Buying Facebook apps from Facebook using an iPhone threatens to remove Apple from the transaction.
- J.C. Penney's Gain
Apple's retail brainiac Ron Johnson is off to turn J.C. Penney's(JCP_) business around as its new CEO in November. The departure could threaten the continued success of Apple's retail unit,which boasts $3.2 billion in annual sales and 90% growth.
- Steve Jobs
Apple's
CEO is on his third medical leave since his bout with pancreatic
cancer, but, as he proved earlier this month at Apple's developers'
conference, Jobs is still very much around. This proved once more that
Jobs, the inspiration behind Apple, remains both ill and irreplaceable. - De-Risking
Fearing
those great Apple gains over the years could vanish, investors are
cashing in their positions and banking their proceeds. Given the
uncertainties of the market, and how strong Apple has been, people
aren't eager to risk it.
And there you have it,
logic and common sense. Lower prices will lead to lower margins. For
those that are paying attention, it is evident that it is already
happening. Let's reference the model behind the subscriber document 
Apple - Competition, Cost Structure and Forensic Valuation
and go through the basic fundamentals, step by step for the iPad and
iPhone (together nearly 80% of Apple's profits) are very strategic
segments for both Apple and the industry. The Apple short called in the
beginning if the year has not been a blockbuster, but was a profitable
call nonetheless. If things go as planned, Apple's stock will see some
dramatic downside movement at the same time Google moves to take over
hte mobile computing space sans legal or regulatory hurdles.
Now, I've told you before, and I'm telling you again, and I'll probably have to tell you several times in the future...
It Should Now Be Common Knowledge That Goldman’s Investment Advice Sucks???
I'm
not going to bother to mention that Goldman advised clients to by
European banks in direct contravention to my Pan-European Sovereign Debt
Crisis research (hopefully, you see how that ended). An equally
egregious offense is daring to go against the BoomBustBlog grain on
Apple...
- “Goldman’s
$430 Target, Screaming Buy On Apple At Its All Time High Is In Direct
Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has
Been More Right In The Past?“ Tuesday, December 14th, 2010 - “Reggie
Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One
Step Farther, Apple’s Closed System Risks Failure!” Wednesday, December 15th, 2010
Of
course, that doesn't necessarily mean that there is any credibility in
said proclamations, though. Reference this priceless nugget in light of
the links above...
-
Goldman
Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client’s
Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now! Friday, May 27th, 2011
Fear
not, oh ye deprived consumers of the truth! Subscribers can access
unfettered, unbiased analysis on Apple's situation and prospects, by the
numbers: Apple – Competition and Cost Structure Forensic Analysis and accompanying Apple iPhone Profit Margin Scenario Analysis Model – suggested use with Apple Earnings Guidance Analysis
Go to the 40 second marker for my take on Apple in October of 2010 via Herb Greenbergon CNBC.
- advertisements -
while computer shopping yesterday at my local best bye i asked if the illusive ipad 2 was in stock - yes we just got two in via FedEx a 64g 3g and a 32g 3g both in black
I bought the 64g (with the option of returning within 14 days)
I am fairly tech savvy but on opening the elegant apple 2 box and turning on the thing nothing but a graphic of a half usb cable longing for insertion into an itunes device
after numerous starts and restarts i read the teeny little instruction card (looks like a wedding invitation) which talked about syncing the thing with itunes
still bewildered i went online to mashable for a step by step
yes the ipad requires that you have a computer with an itunes account to bring the thing to life
shortly thereafter i get an itunes account and allow the ipad to mate with my pc and presto it comes to life
(no idea what it might have lifted from my PC's hard drive) but had I actually used my real name to create the itunes account my ipad would now be linked to my real identity
then it was time to shop for free apps == lets try Bloombrg I say -- get all the way to third base and boom - i effinging-tunes wants my credit card inorder to proceed even though it's a free app
good effing luck stevil Jobs - not to worry I find some sites like "app.ft.co.uk" that give you their app without going thru i-effing tunes.
next try to play some live streams off my favorite live steam site that hosts stuff like NDTV, France24, ABC Aust etc.. but no nothing works e.g. those are all flash live streams and then I recall Stevil doesn't like Flash.
bottom line it's a nice toy that will be returned to Best Bye within the 14 days and I can't effing believe that they have sold 15m of these things and more importantly that sooo many 'publishers' are bending over to creat apps for this. a good website (without flash) should work just fine.
Finally the reason I was in Best Bye was to look at the new ultra thin and ultra lite samsung i5 laptop-- that is one sweet machine but pricey -- bottom line I don't get the Apple hype and I really don't get how all these apple zombies just give away their personal info to a company that not only can compile that data but geotrack those same zombies -- if Goog is evil then Apple is the pit of Hell. (and with this iCloud thing forget about it, you become little brother)
You are clearly not tech savvy.
I'm not worried about margin compression until it's under 31%. History has shown gravitation towards the ~30% margin area for value added services. Gravity WILL kick in eventually, only AAPL's innovation will keep margins lofty.
AAPL was first to market. It's completely natural for margins from the fourties to fall as they face some intense competition.
AAPL adds just as much value to the BOM of a device then HTC/Samsung/et. al. Many "Apple-fans" say it adds multiples of value compared to Android counterparts... it's probably somewhere in between.
I've said this before, it's disingenious to consider iOS device margins without factoring the entire ecosystem (software and content). I think this is why many readers draw parrells from "margins are falling" to "go out and short aapl." Margins on devices are an incomplete picture of Apple's value. They aren't a manufacturing company.
Execution on behalf of many of Apple's competitors has been TERRIBLE. PlayBook rollout? XOOM sales? RIM market share? Windows Phone? Uhh.... Palm WebOS? It's mostly been vaporware. With the expection of Android in a phone form factor, competition is pathetic. Regardless of your opinion on the technology, Android tablets has failed to capture the minds and hearts of consumers.
The big question right now is can iOS grow at a similar pace to Android in emerging markets? They don't need to beat Android in growth, mearly maintaining a presence in EMs will be adequate as iOS offers more value and consumers move up in hardware and features.
Also Reggie, you may want to clarify any interest interest in selling Android devices and customizations.
Still love your work!
The big question right now is can iOS grow at a similar pace to Android in emerging markets?
They are the name in China already and they were late comers there.
This is the story to watch.
Ecosystem is where Apple is at and only getting bigger with iCloud.
Once you're locked into their iCloud, you have no choice, but then again that's true with whatever Google and MS come up with to clone iCloud.
Ecosystem = Free razors so you have to buy the blades.......
hey reggie, why didn't you focus all your time bashing RIMM?? a stock that you knew was dying and losing market share and you could have looked like a genius, but you chose apple?? this does not make any sense, apple AND droid are picking up old RIMM users. even if you are eventually right, it doesn't make a shit if you are 3 years off
my view that Apple will in sometime become a serious competitor to RIMM...considering the stuff that corporate users are going towards..
The security on Android is its biggest weakness....
It all depends on what those millenials decide is cool and tug at Mom and Dad's sleeve to buy them.
I see the compression and the risks to Apple from growing too fast in a bad economy.
Reggie, your arguments make sense from the top down or from an observers point of view. The challenge is that the great masses decide based on a blend of function and fashion. Never underestimate the foolish and fickle nature of humanity.
The marble mouse (Logitech) is the most fast, functional, and ergonomic mouse ever made but people still use a regular mouse and it is getting hard to find a marble mouse.
The IBM trackpoint (eraser) is much more efficient and functional than a touchpad - but it takes EFFORT to learn to use it and get used to it.
The computer, laptop, iPad, cellphones and smartphones are for most becoming entertainment devices versus tools to get something done (and no, updating your Facebook page is not getting something done).
I don't doubt that Android will retain market share or that Microsoft will bungle yet another opportunity yet somehow spend enough to stay in the game; however, on the consumer level and perspective at the current time Apple is kicking butt.
I love the marble logitech trackball, three of them in fact, and they are hard to find.
+3 trackballs as well, hope they retain a niche market...
But if we look at this from a factual perspective, it is Apple which will have to retain market share and Android that's "kicking butt". Android has blown past Apple in terms of market share for conusmers, but many talk as if it was the other way around. This is dangerous, for it does not prepare you for what should have been an obvious sign of the changing of the guard.
Android benefits from an ingenious business model that will be very difficult to beat with walled garden, fat margin approach. It's possible, but not necessarily probable.
I hear you.
Think, however, of the power of fashion.
A kid in china SOLD HIS KIDNEY to get the latest iPad.
It does not make sense, it is not rational, but when the drivers of the market are 15-25 reason is out the window.
People will go into massive debt to be perceived as "hip".
Apple machines are extremely functional and hit the sweet spot between function and fashion, despite the high price.
I don't have a horse in the race, just my observations.
I hope we retain a market and that no one has a monopoly.
Unfortunately, Apple has forced Windows to dumb down and defeat the utility of those who understand how computers (and Windows) work.
Why are manual transmission cars dying out?
If common sense and rational thought reigned supreme we would not have the pay/service model we have for T.V., movie, and Internet access we have.
Market share is mostly due to the android operating system being adopted by multiple manufacturers, verses 1 IOS. Example, sign up at Cricket and get a free android.
From WB7's chart it would appear the IPhone market share has picked up considerably since Verizon started selling the IPhone, which reinforces my idea.
Androids market share increase appears to be mostly from RIMM, Windows, and Nokia demise.
Did this bring back happy memories of Windows 3.1?
Do not confuse the company with the stock.
What I mean by that is that APPL may or may not be over valued - depends on your time horizon and many unpredicatable exogenous events - a market crash will take down everything. QE3 will push up everything - even AAPL.
As far as Apple the company I have over 30 years of experience developing software and 20 years of experience in the financial industry. Personally I switched to Apple products exclusively in 1998 and never looked back. As we used to say Apple is only more expensive if your time is free.
I bought Apple stock when it was trading in single digits and have since sold out (way too early but I'm risk averse). I look forward to the next opportunity to by it cheap. In the mean time my Quad G4 desktop, two laptops and iPhone will most likely continue to work.
x-q
Sad - it's come down to Reggie playing games with "exactly what he said".
Because he happens to like the interface of "android" Reggie has been sadly ranting about a field he knows nothing about - it's just a downer!
Fundamentals 101: a decline in price does not necessarily have to lead to a decline in margins. Volumes could rise on the back of lower prices, leading to higher utilisation rates and therefore less fixed costs per unit. In the end you could even see a margin expansion.
Nice work, Reggie.
we may or may not be in a double dip recession???
smoke that hopium babe...
Good work as always Reggie.
I do not perceive Reggie as being anti APPL, just presenting the facts, which sometimes offends the Apple culture.
Margin compression yes, who knows what the future holds, another phenomenal Apple product is always possible.
Well your beloved Goog now has a 4 handle sitting in front of it just like I told you it would. Back when you were bashing AAPL in October Apple traded 300 and is now 326 for an 8.6% return while your beloved GOOG was 613 and now trades 489 for a 20.2% loss. But oh Reggie you warned us, not sure what an investor would do without your brilliant analysis. Do you have any paid subscribers?
* crickets *
How can you rationally analyse a company whose customers behave like religious zealots. E.g. see 'chinese teenager sells kidney for iPad' here: http://www.bbc.co.uk/news/world-asia-pacific-13639934
I did a whole post on that kid. Check it out.
Reggie's Relentless pursuit against Apple.
All this time effort and analysis over 1 stock. We get that you think, AAPL is too high, Goldman Sux, and that you have been saying that for awhile. Why keep repeating just to say you are right? Seems to me we have bigger problems than just 1 stock. And if you haven't gotten through to people on Apple then repeating it, over and over, may not make a difference. This bashing of Apple by the windows crowd has been going on since 1984. Apple's products of late, are much better integrated products, last longer, do not go obsolete as fast, and earn the premium in brand, in many ways. Much of your argument is like saying "hey this Ford is a car and it has 4 wheels, seats, glass and and engine, gets better mileage, and cost 1/5 of a BMW or Mercedes. Why buy the more expensive? When you can get the functionality of the car for far less? It drives you the same places.
Extreme example- but there is a difference, in product.
I agree with the 1st post. I like your other work, especially Real Estate, but this borders on obsession "anti-apple"...
It is an interesting study in social science to ascertain why a claim of margin compression (which is pretty much all I have claimed about Apple) is tantamount to "borders on obsession "anti-apple", "Relentless pursuit against Apple."... " and "Apple bashing" when the exact same observation about any other company would probably be taken as... well, probably the possibility of margin compression.
I just had a similar posts on Groupon, LinkedIn and Facebook. No one, and I mean no one, said I was "Bashing them". I write about the banks much more than Apple, yet no one says I'm bashing them! I know, Apple is ""Special"".
It is this mentality that will probably make Apple a very profitable short on the downside if and when it misses. There is too much emotion and not enough objective analysis in regards to many of the buyers of the stock.
Emotion, completely.
I try to tell my Canadian home-owner friends about the possibility of collapsing CDN housing prices due to all the ills of the world we're currently experiencing.
They think I hate houses (I'd love to own a house, just not at current prices) and I think they may even hate me for talking about it! Like I'm "jinxing" their investment or something :|
Great friends, I know...
No one, and I mean no one, said I was "Bashing them".
If you put forward your thesis and leave it at that fine. If you up date from time to time fine. But the frequency and tenor of your posts reveals more than a basic lesson in "margin compression."
As much as this subject interests me, I avoid reading all the Apple Moonie publications and that is why this rubs me.
Objective full framed analysis is what i respect.
And as a Reggie fan that is what I expect from who else...Reggie ;-)
Right, but it only bothers you with Apple. Not JPM, GS, GOOG, RIMM, etc. You seem to be missing the point. I'm opinionated, and make no excuses about it. I'm also quite objective. Apple makes an interesting target and study due to the fanaticsm behind it.
You know, more than a couple of prominent analysts and financial bloggers have contacted me to commend me on my stance (which is in no way anti-Apple btw, but you will have to be objective to see that) because they are literally afraid to post objective analysis on Apple that is not tantamount to cheerleading because they are afraid of the backlash that would ensure. What does that tell you?
I have presented more than enough evidence on the Apple margin/competition topic to at least make the objective man/woman consider its plausibiity, yet turn on CNBC and tell me how many investors/analysts/pundits have espoused similar views?
This is the funniest shit about Android I have seen from the Onion.
http://www.theonion.com/video/new-google-phone-service-whispers-targeted...
Spot on- With this this comment Reggie. I agree. Consumers come to be loyal to brand, after repeated positive experience. and like most 'things sociological' if "them" attacks "us" you sometimes get an illogical / emotional response. Which may in deed be why like your above post AAPL or any company with this following, may remain profitable, even if and when, they shouldn't.
But this is no different than the market in general "not enough objective analysis in regards to many of the buyers of the stock" could describe most buys, or any IPO run up or panic selling. It's the dual nature of man, and the markets. Other wise all decisions & markets would be based on objective analysis. It is frustrating tho- if you are on the rational side.
Keep up the iconoclast work tho- I sincerely enjoy your work. I just think AAPL may defy logic. I know, I was burned waiting for the upside when the iPhone came out Short term AAPL Calls... It lagged too long. RIMM was the 800 lb Gorilla, and iPhone was laughed at as a pretty, but not serious for business toy. Now see williambanzai7 's market share chart above. The lags may be due to the "study in social science." as no one wants to get rid of their "religious" beliefs...
Regarding Banking and Real Estate, Reggie is 99.9% indisputably accurate and correct.
Regarding Apple...I think he's ignoring the simple thing that makes the company successful: A superior product with a longer lifespan than any offered by the competition. For me, quality is all that matters. In the end...it's cheaper.
I have addressed Apple's pros and cons in detail, encompassing many viewpoints. The only constant was that they were realistic and not contrived from Apple marketing.
Not ignored, but discussed in detail on my site. You are simply not correct in that statement.
I'm assuming that explains how Android overtook iOS and drove down prices and increased functionatliy across the board, exactly as I anticipated early last year as a contrarian viewpoint???
It was built into the inital thesis of diversity and competition. Apple faces competition from many, many fronts and from many geographical points in terms of OEMs. Japan's woes will affect those entities who produce their own chips, screens and memory (ex. LG and Samsung, both of whom produce the same for Apples products that lead to nearly 80% of Apple's profits) a lot less than it will affect Apple who is beholden to outside producers and is much more concentrated in terms of reliance on vendors for parts in relation to Android devices as a whole.
So you see, this was foreseeable and it was taken into consideration.
Simply face it. Apple is a company that is facing a lot of competition. It's not magic and concieved from pixie dust and Unicorn farts, it's a C corporation.
Here is my prediction. Competition will drive all this players to do new incredible amazing things and APPL will be at the cutting edge, margin pressure or no margin pressure, QE or no QE.
Jobs has built a machine that thrives on innovation and decimating competitive laziness.
Bingo.
AAPL products have always been not merely innovative, but exciting, graceful and beautiful. How often can you say this about the product line of a huge company? They perform superbly, are preposterously easy to intuitively understand and operate, are designed to fit into a useful ecosystem, but above all they are the closest thing to magical one finds in a world of increasing shoddiness and cheapness.
Reggie, there are other, better battles for you to fight. Direct your talents elsewhere.
Egomaniac, pure and simple?
Reggie: you obviously do lots and lots of research and your arguments may hold water, but do you have to be so 'in the face' about everything?
It makes me feel like I've been beaten up, every time I read one of your agressive, adversarial posts.
Reggie dont listen to this guy, I like your style even if I dont agree with you
He's a google butt sniffer--thats all you need to know. Hows that google stock treating your clients Reggie. Keep shorting Apple douche.
The way to play Apple is to stay out or light right now and get ready to load up when Jobs dies. He looked like he weighed 100 pounds at the keynote which isn't a good sign after a liver transplant.
And to be sure when the stock drops on his death we can all look forward to Reggie "I told you so articles" claiming that his death validates margin compression. Just as logical as using tsunami damage to validate his margin compression argument.
You lose credibility by presenting an incessant anti-APPL thesis based on pressures facing all market participants. Moreover, you never present that data can be seen as inconsistant with your view.
You are also ignoring the the interesting discussions I see elsewhere regarding the strategy behind APPLs new operating system, the iCloud as opposed to the other approaches pursued by Google et al. particularly the concept that it will take a long time for the content cloud of the cloud to catch up with the richness of APPL's App/content ecosystem
You seem to be riding on the coattails of Uncle Ben's QE program and the impact thereof that has hit the entire market.
Finally, you seem to be implying that supply chain cost pressures created by the natural disaster known as the Fukushima event were built into your initial predictions of margin pressure. I wonder what the impact of said event is on the entire industry. Since they are all mimicking APPL's designs I would guess pretty much the same.
WB7, u can't even get reggie to look at things like cash flow, overall growth, increase in net income, etc., you know all the most important stuff, i've been trying to for a year now, good luck
Inflation driven margin compression I beleive. But Apple always drops the price of thier first generation products after a year or so. Not to mention they change the features on thier computers so you have to buy a new cable/adapter which costs a fortune. (firewire?)
They are a product dev machine and will add some inane new features to the iPad/iPhone/iBook and the fan boys and girls will line up and pay anything to have it first. Will they lose that if Jobs leaves is the real question?
I have switched from Apple to MS a couple times and always come screaming back. The products are just better and work with minimal effort. Not to say the stock isn't a little lofty. Stay paranoid.
C'mon Reggie...these guys get fanboys to line up in the cold to buy shitty low-power ARM processors at a premium and they can do the software and app side better than anyone.
How tight can their margins really be when their product is made by slaves?
What isn't built by slaves nowdays.
well...if CNBC is saying it...then it must be true. /sarc
In related news, Apple is scheduled to put the final nail in the Avid coffin this month with the release of Final Cur Pro X. The completely redesigned editing studio. Additionally, the price has been slashed from $999 to $299. RIP Avid.
EDIT: correction...FCP X was released today.
reggie, I like your work, and am a big fan of the material, but this isn't something to brag about. an investor following your advice would have been shorting apple stock from 250 to 350/330. So you have given them huges losses. it doesn't matter to mr market if you are right in the long run if you bankrupt the client getting there. Sometimes you are really over the top with your self congratulations. being correct without proper timing is being wrong with mr. market
Reggie Repeat and his same ol' same ol'. You've been talking of Apple's demise for a long time now, if that isn't an indication of a short, what is.
Nobody gives a hoot about your "margin compression" either.
An investor following my advice would have lost no money shorting Apple. My advice is behind a paywall, to begin with. More importantly, I never told anybody to short Apple publicy and the video clearly states that I wasn't short Apple in October, although I did feel they would face competitive pressure in the near future. I'm glad you're a big fan, but you are misrepresenting both my statements and my stance. Since I said I would be experimenting shorting Apple, it is down about 8% or so (after its big pop).
Sorry, I misunderstood then. it says on the headline that you have been saying this for nearly a year. I went back about one year and that is where I started from. That was the way I read the introduction.