AAPL - Apple Inc.

[Guest valueInv]

Regarding Apple's margins, Apple's 10-K flat out states that their margins are going to drop:

 

In general, gross margins and margins on individual products will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions and potential increases in the cost of components, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.

 

It's unclear to me whether or not this is a good or bad thing.  If Apple drops its prices then you might expect their volume to go up.  On the other hand, a lower price could hurt Apple's status as a premium brand product.  So it's even possible that their volumes go down.  (In other words I don't know.)

 

It is much easier to analyze Apple's business after it announces products. But no, everyone wants to be the expert in Apple's future when there is little information available.

 

Apple has a million options is going to a low priced segment- they can release a cheaper phone only for emerging markets, only for prepaid carriers, create a big differentiation between the higher priced phone and lower priced phone, etc. Nobody knows which option they are going to pick, but somehow, everyone  seems to know exactly what is going to happen. This is despite the fact the almost every failed to handicap Apple correctly in the past.

 

One more thing- Cook's job is to optimize FCF/share not gross margins. Anyone who has studied basic economics and looked at a price- profit curve should know that a lower priced phone could actually increase Apple's overall profits. Whether or not it does will depend on the new price points, the go-to-market strategy and many other factors. All of which we don't know much about currently.

[plato1976]

Do you agree with Don Yacktman ?

I think apple didn't start the low margin products early enough - they shouldn't have given Samsung etc. the chances...

 

Regarding Apple's margins, Apple's 10-K flat out states that their margins are going to drop:

 

In general, gross margins and margins on individual products will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions and potential increases in the cost of components, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.

 

It's unclear to me whether or not this is a good or bad thing.  If Apple drops its prices then you might expect their volume to go up.  On the other hand, a lower price could hurt Apple's status as a premium brand product.  So it's even possible that their volumes go down.  (In other words I don't know.)

 

It is much easier to analyze Apple's business after it announces products. But no, everyone wants to be the expert in Apple's future when there is little information available.

 

Apple has a million options is going to a low priced segment- they can release a cheaper phone only for emerging markets, only for prepaid carriers, create a big differentiation between the higher priced phone and lower priced phone, etc. Nobody knows which option they are going to pick, but somehow, everyone  seems to know exactly what is going to happen. This is despite the fact the almost every failed to handicap Apple correctly in the past.

 

One more thing- Cook's job is to optimize FCF/share not gross margins. Anyone who has studied basic economics and looked at a price- profit curve should know that a lower priced phone could actually increase Apple's overall profits. Whether or not it does will depend on the new price points, the go-to-market strategy and many other factors. All of which we don't know much about currently.

[beerbaron]

I find it funny that people question the strategy of the most successfull company of the 21st century.

 

BeerBaron

[Palantir]

I disagree with the notion that lower margins are bad for Apple. Lower margins will also be correlated with higher overall profits, which is the key. High margins are sort of a curse, they attract competitors and are usually unsustainable. Low margins are more stable.

 

A lower margin Apple may well be a more stable, resilient firm especially as they port their business model over to a more software and services orientation.

[ItsAValueTrap]

I find it funny that people question the strategy of the most successfull company of the 21st century.

Sorry if I wasn't clear.  I really don't have much of an opinion on whether or not it's a good/bad thing if Apple lowers it prices.  But basically they have stated their strategy going forward: they are going to lower their prices.  They haven't stated by how much.

 

I do think that the best place to be is in software.  That has historically been an area in computing where you can have sustainably high profitability.  Apple does that with iOS.  Google is in that space with Android (but unfortunately it doesn't try to make a lot of money off Android).  Microsoft is trying to break in.

The worst place to be is in manufacturing.  Manufacturing semiconductors is ok if you are the #1 company (Samsung makes SOCs for itself and Apple).  Anyways, back to software...

 

If Apple wants to succeed in software, it should aim to have dominant market share.  Once you have dominant market share, the network effects tend to build in your favour as other companies build software around your OS.  It usually ends up in a highly profitable monopoly.  Companies understood that in the BluRay/HD-DVD war.  So it could make a lot of sense for Apple to get really aggressive about dominating the smartphone and tablet markets.  To do that it should get really aggressive on pricing.  (Personally I don't think Tim Cook will do that.)

[Guest valueInv]

I disagree with the notion that lower margins are bad for Apple. Lower margins will also be correlated with higher overall profits, which is the key. High margins are sort of a curse, they attract competitors and are usually unsustainable. Low margins are more stable.

 

A lower margin Apple may well be a more stable, resilient firm especially as they port their business model over to a more software and services orientation.

Lower price points don't necessarily mean proportional reduction in margins. They may actually have a higher margin on the lower priced iPhone 4 than the 5. They are using 2 year old components on the 4 thath cost much less.

 

Then, there is price segmentation. If Apple differentiates products in a way that prevents significant bleed through between segments, they will have higher profits with lower average margins.

[Parsad]

Apple increases dividend 15% and stock buyback to $60B.  Pretty much what I said.  Cheers!

 

http://finance.yahoo.com/news/apple-more-doubles-amount-crash-203611156.html

[Guest valueInv]

Apple increases dividend 15% and stock buyback to $60B.  Pretty much what I said.  Cheers!

 

http://finance.yahoo.com/news/apple-more-doubles-amount-crash-203611156.html

 

Something tells me we won't be seeing Wellmont on this thread for a while. ;)

[Parsad]

Apple increases dividend 15% and stock buyback to $60B.  Pretty much what I said.  Cheers!

 

http://finance.yahoo.com/news/apple-more-doubles-amount-crash-203611156.html

 

Something tells me we won't be seeing Wellmont on this thread for a while. ;)

 

Damn, I knew I should have bought a ton of LEAPs...instead I only bought 25% more stock at $391 last week.  Anyway, one hell of a month, and I think it may still get better!  Cheers!

[Viking]

My one big watchout with Apple was their plans regarding all the cash. Most companies waste it on overpriced, poorly thought out aquisitions. It appears Apple will return it to shareholders via increased dividend and share repurchases. Nice. Perhaps Tim Cook is not the dummy many have portrayed him as.

 

Apple's underlying business continues to motor along.

 

I look forward to hearing about their product plans in the coming months.

[Guest valueInv]

Lets hope the stock price stays low for more buying from me and Apple.

[Parsad]

My one big watchout with Apple was their plans regarding all the cash. Most companies waste it on overpriced, poorly thought out aquisitions. It appears Apple will return it to shareholders via increased dividend and share repurchases. Nice. Perhaps Tim Cook is not the dummy many have portrayed him as.

 

Apple's underlying business continues to motor along.

 

I look forward to hearing about their product plans in the coming months.

 

Yup, they are returning the cash to "long-term" investors, not the "one-time" investor who wants just a special dividend.  Obviously with competition, margins are going to contract, and we've seen that.  But their margins are still higher than the competition, and year over year sales of products are still increasing.  So, it isn't going to grow to a trillion dollar company in the next 3 years, but it will remain a dominant, technology company that happens to be a cash cow!  As long as their products are competitive and they continue to innovate on the product experience, they will remain a very big company generating a ton of free cash.  Cheers!

[Guest valueInv]

My one big watchout with Apple was their plans regarding all the cash. Most companies waste it on overpriced, poorly thought out aquisitions. It appears Apple will return it to shareholders via increased dividend and share repurchases. Nice. Perhaps Tim Cook is not the dummy many have portrayed him as.

 

Apple's underlying business continues to motor along.

 

I look forward to hearing about their product plans in the coming months.

 

Yup, they are returning the cash to "long-term" investors, not the "one-time" investor who wants just a special dividend.  Obviously with competition, margins are going to contract, and we've seen that.  But their margins are still higher than the competition, and year over year sales of products are still increasing.  So, it isn't going to grow to a trillion dollar company in the next 3 years, but it will remain a dominant, technology company that happens to be a cash cow!  As long as their products are competitive and they continue to innovate on the product experience, they will remain a very big company generating a ton of free cash.  Cheers!

 

Keep watching  :)

[boilermaker75]

Lets hope the stock price stays low for more buying from me and Apple.

 

I'll second that wish!

[Guest valueInv]

Oh no! iPhone ASP declined by 3%. Competitive pressures are eroding margins !Run for the hills!

 

;D ;D ;D

[txlaw]

Oh no! iPhone ASP declined by 3%. Competitive pressures are eroding margins !Run for the hills!

 

;D ;D ;D

 

Yeah, but look at the slowdown in YoY unit and revenue growth for iPhone.  That's the more troubling aspect of their quarter, at least with respect to iPhone.  (Edit: And, yes, I realize that the headline YoY figures are lower because of channel inventory bump last year.  Even adjusting for this, there's quite a slowdown.)

 

Could the slowdown be because they haven't dropped ASPs enough for the older iPhone models?  Tim Cook noted that Apple "recently made [iPhone 4] even more affordable to make it even more attractive to those first-time buyers [in China] and so we’re hopeful that will help iPhone sales in the future."  We could see greater ASP drop going forward -- whether revenue growth will compensate for that remains to be seen.

 

CC transcript:

http://seekingalpha.com/article/1364041-apple-s-ceo-discusses-f2q13-results-earnings-call-transcript

 

I'm troubled by this quarter.  It looks to me like competitive pressures are, in fact, taking a toll in a way that makes it far less certain that unit sale growth will compensate adequately for ASP and GM decline.  That means that folks are betting on the pipeline to provide earnings maintenance. 

 

I may have to rethink whether I want to hold onto my small position in AAPL.

[Parsad]

Oh no! iPhone ASP declined by 3%. Competitive pressures are eroding margins !Run for the hills!

 

;D ;D ;D

 

Yeah, but look at the slowdown in YoY unit and revenue growth for iPhone.  That's the more troubling aspect of their quarter, at least with respect to iPhone.  (Edit: And, yes, I realize that the headline YoY figures are lower because of channel inventory bump last year.  Even adjusting for this, there's quite a slowdown.)

 

Could the slowdown be because they haven't dropped ASPs enough for the older iPhone models?  Tim Cook noted that Apple "recently made [iPhone 4] even more affordable to make it even more attractive to those first-time buyers [in China] and so we’re hopeful that will help iPhone sales in the future."  We could see greater ASP drop going forward -- whether revenue growth will compensate for that remains to be seen.

 

CC transcript:

http://seekingalpha.com/article/1364041-apple-s-ceo-discusses-f2q13-results-earnings-call-transcript

 

I'm troubled by this quarter.  It looks to me like competitive pressures are, in fact, taking a toll in a way that makes it far less certain that unit sale growth will compensate adequately for ASP and GM decline.  That means that folks are betting on the pipeline to provide earnings maintenance. 

 

I may have to rethink whether I want to hold onto my small position in AAPL.

 

It is going to slow down, there is no two ways about it.  There isn't only more competition, but the competition is better...and the business is becoming very commoditized.  No different than any other business...whether it's operating systems, laptops, search engines, advertising, etc. 

 

You will never completely outlast the competition...you can only extend your longevity.  And that's where I think people are wrong.  Apple has gone from will grow to a trillion to will be demolished by the competition...the pendulum has swung too far the other way now.  I think Apple can last many years, with very modest growth, and pay out alot of capital to shareholders over that time.  No different than INTC, DELL, MSFT, etc.  Cheers! 

[Guest valueInv]

Oh no! iPhone ASP declined by 3%. Competitive pressures are eroding margins !Run for the hills!

 

;D ;D ;D

 

Yeah, but look at the slowdown in YoY unit and revenue growth for iPhone.  That's the more troubling aspect of their quarter, at least with respect to iPhone.  (Edit: And, yes, I realize that the headline YoY figures are lower because of channel inventory bump last year.  Even adjusting for this, there's quite a slowdown.)

 

Could the slowdown be because they haven't dropped ASPs enough for the older iPhone models?  Tim Cook noted that Apple "recently made [iPhone 4] even more affordable to make it even more attractive to those first-time buyers [in China] and so we’re hopeful that will help iPhone sales in the future."  We could see greater ASP drop going forward -- whether revenue growth will compensate for that remains to be seen.

 

CC transcript:

http://seekingalpha.com/article/1364041-apple-s-ceo-discusses-f2q13-results-earnings-call-transcript

 

I'm troubled by this quarter.  It looks to me like competitive pressures are, in fact, taking a toll in a way that makes it far less certain that unit sale growth will compensate adequately for ASP and GM decline.  That means that folks are betting on the pipeline to provide earnings maintenance. 

 

I may have to rethink whether I want to hold onto my small position in AAPL.

 

What price did you buy it at?

[Guest valueInv]

Oh no! iPhone ASP declined by 3%. Competitive pressures are eroding margins !Run for the hills!

 

;D ;D ;D

 

Yeah, but look at the slowdown in YoY unit and revenue growth for iPhone.  That's the more troubling aspect of their quarter, at least with respect to iPhone.  (Edit: And, yes, I realize that the headline YoY figures are lower because of channel inventory bump last year.  Even adjusting for this, there's quite a slowdown.)

 

Could the slowdown be because they haven't dropped ASPs enough for the older iPhone models?  Tim Cook noted that Apple "recently made [iPhone 4] even more affordable to make it even more attractive to those first-time buyers [in China] and so we’re hopeful that will help iPhone sales in the future."  We could see greater ASP drop going forward -- whether revenue growth will compensate for that remains to be seen.

 

CC transcript:

http://seekingalpha.com/article/1364041-apple-s-ceo-discusses-f2q13-results-earnings-call-transcript

 

I'm troubled by this quarter.  It looks to me like competitive pressures are, in fact, taking a toll in a way that makes it far less certain that unit sale growth will compensate adequately for ASP and GM decline.  That means that folks are betting on the pipeline to provide earnings maintenance. 

 

I may have to rethink whether I want to hold onto my small position in AAPL.

 

It is going to slow down, there is no two ways about it.  There isn't only more competition, but the competition is better...and the business is becoming very commoditized.  No different than any other business...whether it's operating systems, laptops, search engines, advertising, etc. 

 

You will never completely outlast the competition...you can only extend your longevity.  And that's where I think people are wrong.  Apple has gone from will grow to a trillion to will be demolished by the competition...the pendulum has swung too far the other way now.  I think Apple can last many years, with very modest growth, and pay out alot of capital to shareholders over that time.  No different than INTC, DELL, MSFT, etc.  Cheers!

 

1, Samsung spends 4x Apple on marketing. Yet Apple can easily afford to spend 10x Samsung but doesn't. Why doesn't Cook increase marketing to juice up growth?

 

2, Apple spend $10B in capex last year. What did they spend it on? Would they spend it if they weren't looking at growth?

[boilermaker75]

Lets hope the stock price stays low for more buying from me and Apple.

 

I'll second that wish!

 

We may get our wish; AAPL is done $10 in pre-market.

[DCG]

The biggest disappointment with the conf call to me is that is sounds like there may not be any new product releases/updates until the fall.

[racemize]

The biggest disappointment with the conf call to me is that is sounds like there may not be any new product releases/updates until the fall.

 

This is typical though--were you expecting something sooner?

[boilermaker75]

The biggest disappointment with the conf call to me is that is sounds like there may not be any new product releases/updates until the fall.

 

This is typical though--were you expecting something sooner?

 

So APPL can spend all summer buying back stock at around $400 and then hit us with the new stuff in the Fall!

[Cardboard]

What is your upside target on this company?

 

I see a lot of discussion about product development, that cash flow will remain or not and all that, but not much about its value as an investment relative to other ones available.

 

To me, I have a very hard time seeing a double with Apple unless they can keep cash flow stable to growing and do some trick with reducing share count by a meaningful way. That means that the stock itself is not very interesting to me: 50% potential gain and some dividend yield while dealing with all the risks being discussed?

 

That is why I am considering more the LEAPS. Less capital employed, more upside per dollar invested. It is only 1 year and 3/4 in duration, but I figure that if the stock has not moved up by then or moved down that you are likely looking at a permanent loss of capital anyway due to real intrinsic value destruction. If the market goes into a bear market then it may kill that logic, but the stock is already cheap enough to reflect such negative IMO.

 

Cardboard

[watsa_is_a_randian_hero]

What I don't understand, is why Apple bought back 0 shares last quarter.  Thats what it appears to me from comparing the statement of cashflows for the 6 months ended this quarter to the statement of cashflows for the 3 months ended last quarter.  $0 spent this quarter.

 

If they think the stock is such a great deal, why are they not buying?  A $50 billion buyback approved doesn't really mean anything UNLESS THEY ACTUALLY ACT ON IT!

 

Were there any regulations preventing them from buying last Q?  Like 10k needed to be filed?