Big Margins Continue for Apple

| About: Apple Inc. (AAPL)

I could write 3-5 posts a day on Apple (NASDAQ:AAPL) as this is one of the most analyzed stocks in the universe (yes, that includes Saturn), so I try not to overdo it.

But some of the items I have mentioned in the past are coming to fruition, despite the analyst hand-wringing. I will keep pounding the table regarding the iPod Touch, MacBooks (as we move from a destop to laptop nation), and the recurring revenue stream from subscriptions from iPhone being much more important than the hardware itself. The conversion of more and more PC users to Mac users is also a long-term underlying trend, as the halo effect is starting to hit full stride.

Here is a good article from on the profitability of the new line of products. I will highlight some of the key points below. But first, I must point out that the only fly in the ointment is news of CEO Jobs subpoena in regards to the stock options situation. Now, with most companies the potential for CEO being forced out would be bad in the near term, and relatively neutral in the long run, but with Apple, Jobs is it. It could be devastating, as he is the visionary. As a result, it could cast a pall over the stock as many times the litigators like to make a small fish "turn" to catch the big fish, which in this case is Jobs. So that's the bad news. It could be serious, but it's a totally unknowable variable.

So, let's get back to the good news:

  • For two of its hottest products, the iPhone and revamped iPod nano, Apple has taken the economic upper hand over component suppliers and partners, adding even more heft to its already eye-popping profitability.
  • The company has cut 18.5% from the cost of hardware in its new 4-gigabyte nano by using new parts, according to data tracker iSuppli. Apple now pays about $58.85 for the device's innards, says iSuppli, and charges $149 for the finished product.
  • The new iPod nano comes with a wider screen, and dramatically improved picture quality for viewing videos, but it costs as much as the older model. Even so, Apple is still exceeding its tradition of charging twice the cost of the underlying hardware, says iSuppli.
  • The new pricing power has also translated to the 8-gigabyte nano, which costs $199. According to iSuppli, the bill of materials totals $82.85, which is about 17% less than half the cost of the device.
  • iSuppli expects Apple to sell almost 55 million of all iPod models in 2007, which is an increase of 18%. Wider profit margins will help offset the trend toward purchases of lower-priced units that had lowered the average selling price of iPods in recent quarters.
  • Since the iPhone shares components with the new iPod touch, early indications suggest that the company has negotiated lower costs for components by ordering much larger shipments, says Transamerica's Kim. This could prop up margins despite the price cut.
  • The economics of the iPhone are somewhat murky because of the fees that Apple charges AT&T (NYSE:T). Apple gets a one-time "bounty" on each device sold, and it also receives a share of the service charges. This adds to the device's profitability, and gives Apple's cash flow a boost through a recurring income stream.
  • Apple only books a portion of iPhone sales each quarter. By spreading the total sale over a 24-month period, Apple dampens the effect that iPhone sales have on its quarterly results.
  • Again, do not expect a huge one-time pop in revenue from the iPhone due to the accrual nature of the revenue (which is spread over 24 months), but do expect more and more upside in the yearly estimates (2008/2009) as we layer in a whole new business on top of existing businesses. And this news on margins is even more encouraging.

    Disclosure: The author is long Apple in fund, but has no personal position.