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Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits All Time High
The update to our Apple analysis is now available to subscribers Apple Margin & Valuation Note. This is a more comprehensive, more "scientific" update and approach to our piece from last year Apple - Competition and Cost Structure. Next week, pro subscribers will see a downloadable version of the model behind this that will deliver more Apple stuff than you can ever digest in one sitting. In review, it is interesting to note certain viewpoints in the previous Apple research note, particularly considering Apple's stratospheric rise in price, ex:
"At current price of $347 Apple trades at 2011 calanderised PE of 12x on our estimates and 14x on consensus estimates. Yes, we are more optimistic than consensus, but more realistic concerning future prospects as well."
We were considerably more bullish on Apple's fundamentals than the consensus, but alas we were off the mark, and Apple's share price has went stratospheric - stratospheric to the point that it deserves its own conversation (more on that later). But (yes, there always is a but), the hypothesis behind the afore-linked note still holds. As a matter of fact, not only is it as strong now as it ever was, it is actually playing out now as I type this. I will delve into this, but before I go on I must acknowledge that the mere topic of Apple seems to bring out the immature and impolite in the blogoshpere. So much so, many are literally afraid to mention anything that is no "Pro Apple". That's right, literally "AFRAID", as was pointed out in this recent WSJ article "Apple: Deutsche Dares to Doubt".
The subscriber document is evident on its face with a variety of valuation scenarios, an indepth that the original research document didn't have - an error in execution. So, for those that don't subscribe, let me toss out food for thought, and even more telling, proof that clearly proves the premise behind articles such as:
- 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
- Sliced Apple Margins For Dinner?
- Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
What many fail to understand is that what Google as released with its reincarnation of Android is not a new mobile OS, or a flexible handheld technology, but an innovative business model that harnesses to open source software to profitability turn the suppliers and vendors of fat margined leaders against it - literally ingenious and very, very difficult to counter without compressing your own margins. Those interested in reading more can referenceLooking at the Results of Google's "Negative Cost" Business Model Employed Through Android. So, let's get started by reviewing portions of my hypothesis from last year...
Did Android overtake iOS in marketshare and growth – Yes, Even With Apple’s Successful Launch On Verizon, Google Continues To Increase It’s Lead In The Smarthphone Space
Did Apple miss in 4 to 8 quarters – Yes, as a matter of fact, they missed exactly 4 quarters later. The Only, and I Mean the Only, Investment/Research House To Warn Of An Apple Miss Is Vindicated!!!
I've had many commenters say things such as "You've been crowing about Apple crashing for two years!" The fact of the matter is simply "no", I have never said such a thing. What I did say was that Apple will deliver an unpopular and unforeseen miss and margin compression due to competition. I said this in Oct. of ’10 live on CNBC, and I also said on BoomBustBlog that miss will occur 4 to 6 quarters. It is telling that they couldn't get anyone else to say what should be obvious (reference the fear and loathing surrounding the Deustch Bank analyst note, Deutsche Dares to Doubt). Well, they did miss and they are starting to feel the effects of margin compression from competition. this effect on margins is well hidden due to management's excellent execution (Kudos to you guys, btw) combined with the fact that the mobile market is growing so wide, fast and deep that it easily conceals margin compression behind massive unit sales. Although I did start to issue warnings in 2010 about Apple margins, but I made it very, very clear that this will occur over many quarters. I also made it clear I was not short at the time of the declaration. Short term traders were able to profit from my initial short notes with tight stops that I suggested...
.. but alas, the time to short was premature for a strategy guy (as opposed to a trader), and obviously so. That does not obviate the validity of the compression theory though.
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From Hudson Square research: This morning we spot surveyed 20 people at locations in Connecticut New York and found shorter lines than for the iPhone 4s or the iPad 2. We counted roughly 550 people on line at 5 locations combined, vs. the 2,300 people we counted in our iPad 2 survey last year.
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I’m a fundamental and forensic strategist, not a short term trader. In addition, I run a subscription site, hence I do not – and will not – give valuation bands or price targets to the public for free – plain and simple. As a strategist, I make medium term projections, and they have been – on balance – rather accurate. This article started out with For some absurd reason, the mere topic of Apple brings up the most immature in the blogosphere. For instance, I started saying Greece would default considerably before I warned of Apple margin compression –both stances indicated that this would be a medium term occurrence. Well, exactly two years (8 quarters) later Greece defaulted, see Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!! For some reason, that is a lot easier to swallow than waiting even less time for Apple margins to shudder, even though the miss that I called for came at the first month of the window that I anticipated and market share and margins are exhibiting behavior congruent to what I anticipated. Of course I know what the issue is, the share price has spiked. Alas so did Greek bonds at a point, and so did the shares of RIM, who faced the same margin compression scenario that Apple faces, see RIM Gets RAMMED! Again... Remember That Contrarian Call 1st Quarter of 2010. Apple's management is head and shoulders over that of RIMM's (who should have been replace two years ago, alas it's too late now), but compression is still compression.
Now, I hear many saying, "... but Apple's margins are at all time highs!!!" Really? Did iPad margins shrink due to competition – Yes.
Okay - This is the part that the immature are bound to ignore, so I can save some of you some time and you can stop reading now. Those who are actually curious about how I come up with margin compression while others state record margins...
As it stands now, Apple is rapidly (much more so than can be gleaned from sell side analyst reports and the media) losing market share in both tablets and smartphones!
As Apple loses market share, its costs to manufacture are actually increasing due to massive competition…
Apple's losing tablet market share faster than it lost smartphone market share
Android has moved to over 44% market share in tablets from less than 3% in less than a year and a half. That's amazing and much faster growth than it exhibited in smartphones – a category in which Android literally dominated in worldwide and US smartphone growth (as well as installed base re: US) in just a few short years. Apple dropped from just over 96% to just under 55% in the same time frame. Again, as with the smartphones, the Android tablet tech is superior to that of iOS products and as iOS normalizes the difference, margins will suffer. Margins will drop (is dropping) faster for tablets because prices are coming down as fast as tech is increasing.
Prices are dropping…
Costs are increasing…
So what does all of this add up to? Margins dropping!!! Just as I said last summer... Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
Hey, I would hope that I raised the specter of margin compression just now in all but the staunchest of fanboys, but why isn't it showing up in the reported numbers? Because Apple had what appears to be an unrepeatable blowout quarter that allowed them to shovel large quantities of deprecated iPhones to consumers at full price. In said quarter iPhones where just over half of the company revenue. With stiff competition from Android, they will have to show and prove in terms of R&D and/or discounted pricing and that's going to cost some margin reducing, real money. The upside? The iPhone 5 should be an amazing device. You see what a little competition provides?
Still, the iPad is 20% of revenues and if it grows, margins drop even more...
Have I been wrong on Apple? – Not yet, at least not any more wrong than I have been on Greece, or RIMM. Granted the share price has soared, but remained within 10% to 13% of the recommended valuation bands for about 5 months, with benefits to nimble traders (of which I am not). The stock price has performed well, but I never said the stock price wouldn’t do well. I don’t discuss stock prices outside of paid subscriptions. If or when I’m wrong, I’ll be the first to admit it. In 4 quarters if there’s no further sign of my thesis bearing out I’ll admit it, but guess what’s happening already….
Will I be wrong on Apple? Of course its possible, but things are looking like they are following the thesis rather well.
This is the story. Apple is a phenomenal story that makes a lot of money…. But… They make supranormal profits through supranormal margins in a highly competitive space wherein they have extremely competent competition since Google arrived on the scene. Until Google, everybody else was fumbling so Apple printed money Bernanke style!. Most importantly, though… They compete directly with their own suppliers! Does anybody who is not the staunchest fanboy truly believe their profit position is sustainable competing against the very same companies they have to rely on? They can still be wildly successful, and just have a normalizing of sales growth combined with a slip in margin and there goes the rosy share price projections. Is there a chance of this happening? Once more then, shall we
Well, they are currently losing marketshare (which the media never reports)
They are forced to drop the prices of their key products (which the media seldom reports).
They are losing margin (which the media never reports)
Despite this, the company is growing profits and revenues like bananas. Why? Because the market in general is growing like bananas. There’s a lot of risks to this growth though:
- Patent litigation (the company was forced to remover the iPhone from German shelves just a month or two ago, and got it overturned)
- Natural competition (should be self explanatory)
- Margin normalization (ditto)
- Direct competition with suppliers
- Heavy macro headwinds (high unemployment, Euro crisis, China hard landing) for its two primary products, both of which are essentially luxury products
Despite this. Apple as a retailer, now has a larger market capitalization (at $542 billion), than the entire US retail sector (as defined by the S&P 500), as per Zerohedge: It's Official - Apple Is Now Bigger Than The Entire US Retail Sector
A company whose value is dependent on the continued success of two key products, now has a larger market capitalization (at $542 billion), than the entire US retail sector (as defined by the S&P 500). Little to add here.
Is Apple truly worth more than the entire retail industry in the 500 stocks of the S&P 500. Just sit back and let that settle right next to the margin compression theory. And in closing, also borrowed from ZH: Apple Responsible For 90% Of Intraday NASDAPPLE Gain
If the biz class 101 rules ring true, this could very ugly very fast... The Company had a slam bang quarter last, but much of that is essentially unrepeatable in the near term, reference Anecdotal Observations On Apple's Recent Quarter.
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Reggie, man. They kickin' yo' ass. C'mon man.
Exactly... Reggie is great at housing, but no so much for technology... I liked his "prices are dropping"... Apple doesnt reduce their prices unless it is an older version to a newer product.
Also, it is kind of hard to push the idea that Apple is in "trouble" with a market space they created and has over $100 Billion of cash on hand to potentially defend it with.
Reggie is great at housing because he lost his ...shorting Apple
...and his shirt ...soon his credability
Should stick to bwankers, we all like a piece of that
The good news is Goldfuck Sacklickers will take you Reggie, I hear there is an opening for filling peoples heads with bullshit.
No muppets to be found here -- wrong again.
The irony will be extremely rich when Apple is brought down by a worm.
Indeed sir. Or someone takes a giant BITE out of it.
One caution that I would have for looking too high upon apple's competition, is that right now they aren't making money. They can't try to buy market share forever, especially when they need to constantly pile more money into developement.
You can iPad all of the people some of the time, and some of the people all of the time, but you cannot iPad all of the people all of the time. ;-).
I offered a bet to Reggie... think it was last year. I won, he lost, though the bet was never consumated.
While I did sell my Apple stock as it appears to lofty for my gut, I am now inundated with iPad development work. And, the Android faction is losing developers. Their OS is 2nd rate compared to Apples iOS, their Eclipse development tools a time sink and soon, Windows8 will be out to put the final nail in Reggie's "Android wil win meme."
Cheers.
has went stratospheric
Reggie too ...a twisted frothing meteor lodged firmly in Planet Uranus
I wish there were a better tablet than the eyepad but this is unfortunately not the case. I have an android smartphone and REALLY want to buy a good android tablet but I have not found one - and believe me I have tried. Unfortunately none of them (Samsung, HTC, Asus, Sony, blablabla) beat the iPad in a relevant combination of features - screen resolution, battery endurance, ease of use, harmonization of hard - and software, range of apps, speed ....etc etc. Probably there are too many developers peeing in the Android broth to allow a seamless combination with the different hardware manufacturers... or whatever. The nearest approximation in overall performance was the HTC Flyer but it only has a 7 inch screen.
My decision: I will buy neither an eyepad ( much too expensive) or a crap Android tablet. I will wait until Android tablets catch up (if ever)
I have been a happy user of Apple products since I bought my first Macintosh SE-20 in 1988. I have never owned any stock in the company. This is not because I don't believe in the future of the company, but because the stock price is buffetted by so many extraneous and ultimkately meaningless factors such as this post.
I use an original iPad 16 GB/wifi almost every day. It has performed flawlessly and I have not yet seen a reason to upgrade it.
When I go to IT meetings at my hospital or the local chamber of commerce, I have noticed almost everyone now carries an iPad. I have yet to see any of these techno-savvy (PC-centric) people bring an Android pad. I do know one Linux geek who has one "to play with".
I also have heard some app developers grumble about how much trouble it is to test a new Android app, as there are so many potential hardware/software issues that are not really an issue on the iOS side of the market. They are tired of buying every new Android device to use in testing. Some are threatening to stop Android development and go strictly iOS.
I'm sure Apple stock will continue to have its ups and downs. No tree grows to the sky. I considered buying some Apple stock in January 2009 when Steve Job's first medical leave was announced. I think APPL was $85/share. Perhaps the next time it is this low I will have the courage to buy some.
there are only two ways you might see AAPL trading at $85 again:
1) DOW drops to 3000
or
2) They hire Reggie as CEO
Outside of those scenarios...it's highly unlikely you'll see those prices again.
I WAS COMING TO WORK AT 6:00 AND THERE WAS ALREADY A MASSIVE LINE UP OF APPELITES WAITING TO GET THEIR APPLE FIXES. PRETTY SOON THEY WILL HAVE SAFE INJECTION SITES FOR PEOPLE THAT CAN NOT AFFORD TO PURCHASE ONE
Reggie is this post a psyop?
he's trying (desperately) to mount a Monopolist Matrix dirty tricks campaign that's true. Hard to when you're firing blanks from a pea shooter against one of the most perfect companies ever to walk the iSpace.
He regularly cries out to Bill Gates and Steve Schnitzerpockface to be 'plugged in' too. He put Gates above Jobs on charity work alone, a big criteria (the only criteria) Gates has amongst a career of peddling pure monopolist garbage (that didn't come into it for our Reg)
Never call Reggie biased and deranged though, the foaming mouth is just a cafe latte residue (he claims)
let's hope he's paid well for this garbage
the cost of all electronic devices falls after a sufficient period of time.....
Huh?
Do you mean price?
Given all the need for rare earth metals (the "West" is whining about China not opening up the flood gates for exploitation) I can hardly see how cost is going to override this physical reality.
yeah, I remember when Lucent, I2, Qualcomm and all the others soared to the sky.....then fell like a chunk of lead.
GL!
perhaps if they had, like Apple, 100 billion in cash and zero debt they wouldn't have fallen like a hunk of lead?
gee...ya think?
Apple sauce!
Apple makes mincemeat of competitors (and detractors)
look at Reggie, he now resembles roadkill like all the other shrill haters
If there's one lesson to be learned from the history of computer software and hardware it's that ultimately nothing is unique and special. Everything can be replicated by someone else, usually at a much lower cost. Apple is simply the current focus of the fickle crowd's attention.
If you take the time to study the evolution of APPL you will see that this is not the result of a Fad.
There may be faddists out there, but certainly not the people who run that company.
Apple is a pure class act from top to toe.. never quite seen anything like it or as perfect, from product to executing a brilliant business plan, they just have the lot ...'Wow'
...and the designer is an English sharp cookie par excellence
http://www.ft.com/cms/s/0/5cd6f134-686a-11e1-a8cc-00144feabdc0.html#axzz...
Reggie is so out of his depth it's like watching a Barbie Doll trying to take on Mike Tyson in his prime ..beyond pitiful ...and very entertaining..
grab some popcorn and watch the slaughter continue as per last year
I remeber silver to the moon some time back....everyone was ready for the next double. fun ride up though.
In technology, lots has to do with timing, APPL has had a certain approach from the very beginning. The integration of hardware and software environment. They are also unafraid of starting fresh design from the bottom up.
Now the timing is perfect for them. They are at the cutting edge of the cloud.
You can argue about the stock price being frothy, but the idea that APPL is being pressured in the tablet space is absurdist.
another key is that Apple has proved that piracy really does cripple a market. They are able to get the price point and ease of install of apps to a level that makes pirating more of a burden than its worth. Kinda like how Xbox and PS3 does it. Sure you can pirate on all of these but it is way more of a hassle than with PC games or grabbing music
Music is still a hassle and too expensive to when bought legally so people tend to still rip music off since if they have to get their hands dirty putting the music where they want it then just go grab it for free if possible
nothing "fickle" about choosing Apple
you've got to be a moron to choose the crap from the also-ran, breathless, wheezing 'competition' (cribbers)
Reggie, IPAD losing market share? You're an idiot. Do you adjust for the fact that the tablet market is growing exponentially? I don't think so. What are your sources? No one says..Dad I want an Android Ice Cream Samsung Galaxy Gobbledy Gook...They want IPADS.
You have been bashing AAPL since it was $250. You have been wrong on every count and you will contnue to be because you have a) Certain paid baises or b) are an contrarian for contrarian's sake.
"Did Apple miss in 4 to 8 quarters – Yes, as a matter of fact, they missed exactly 4 quarters later. The Only, and I Mean the Only, Investment/Research House To Warn Of An Apple Miss Is Vindicated!!! "
You fool (or liar?). AAPL did not miss. Analysts were blown out of the water every quarter and they got into a "let's rachet up estimates arms race". This was an engineered miss. AAPL BEAT it's own guidance by 30%+
"Do you adjust for the fact that the tablet market is growing exponentially?"
Do YOU?
I DO.
As a matter of fact, I'm on Reggie's side, though not for the same reasons. I'm taking the side that says that Apple cannot trump physics, that it cannot achieve perpetual growth on this finite planet.
All you stock-jockeys and techno-heads can clamor all you want, but the road only leads in ONE direction, and that's that it'll end. The ENTIRE economics system in which Apple resides is one Big Ponzi. How's the Big Ponzi looking? Bond holders and governments, through the growing wave of austerity, will be slurping up more and more $$, $$ that WON'T be available to feed Apple's growth.
And whatever miss there was, it was just because people were putting off buying an iPhone until the 4S was launched. Had nothing to do with his thesis being right.
Reggie on iTilt
thanks for playing
Want to put up your post from 09/2010?
I'll check back later
You have been right on so many things, and it shows how good you are. You will eventually be right about Apple when the money is gone, but nothing will stop them until that time. Nothing has replaced an Apple product yet, and everything has copied much of it's function. They evolve faster and create the market. If it is about functionality, Apple wins.
I want to know about the other things you seem prescient about, eh? That is where you always win!
Reggie always loses with Apple
when they go through $900 a share (and they will) we'll have to put Reggie down for his own sake
AAPL to $900? I won't hold my breath.
$900?...perhaps not. But a 2:1 split and a move to $450 would achieve the same thing (in market cap)...and that I do believe is possible.
we'll see lads
1 year share performance
Google: ($550 to $625) +14%
Apple: ($340 to $585) +70%
Reggies nag is doing well isn't it? ...ready for the Goo factory yet Reg ..soon will be
actually, that 1 year assessment of GOOG stock is quite generous.
If you look at a longer range, you will see that GOOG has been trading within the 500-625 channel since October 2009.
In that same time frame, AAPL has gone from 200 to 600. That's a full 200% gain.
Indeed.
Apple and Goofballs share performance reflect their product performance.
Apple is a 'must have' stock just as their products generate huge demand/desire
Whereas Reggie keeps giving Goofball top billing as a 'competitor' to Apple while their shares fall as flat as a pancake, just like their also-ran brandless products
Goofball, like Microshite, are not "competitors" (they wouldn't last a second competing directly with Apples price levels or consumer desireability.. they would be wiped across the floor). Instead they are both cribbers of everything Apple does, just as Google is now copying verbatum Apples past 3 year business plan
Goonbubble and Microshite are both rather grotty spoiler campaigns, not competition
IV is the killer there unless you have some inside insight...
I have seen the new iPad. I look at images all day and that display is a killer.
A sold out killer.
I'll tell Reggie when nursey let's me into his padded cell
He's only allowed one visitor a day poor sod, too stressful for him since Apple pissed all over his shorts and went through $600 a share
Reggie just spare us all and stop with your nonsense in 2010 with this trading $275 you were saying it would implode now we are close to $600. Just stop Reggie.
Interesting that there is no source for the ipad market share chart that is central to the thesis. I call bullshit.
Give him an hour and bet he can post one...but then again will you listen or are you knee deep in AAPL iStock
Cheapest tablets superstore
"What's an android!?!" says grandpa angrily to his portfolio manager.