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Does October 26th have anything to do with it?

Let me get this straight...

  • Pundits were "disappointed" that the iPad mini wasn't priced at $299 or below and were "disappointed" that the iPad mini may cannibalize the iPad sales.
  • Pundits were "disappointed" that Apple (NASDAQ:AAPL) beat its own estimates but fell short of their "revised lower" estimates. Why bother providing guidance and estimates in the first place?
  • Amazon (NASDAQ:AMZN), a great company that has historically operated with the slimmest of margins as you can see from the graph below...

(click to enlarge)

...amazingly continues to trade with premium multiples!

(click to enlarge)

It is what it is; this article isn't about justifying why Apple continues to be relatively undervalued and misunderstood at this level ($593) as I've written about in my article "Apple: Stop comparing Apples to Oranges" and "Apple: Why is the Cult of Mac is so misunderstood". I understand the frustration; I've stopped trying to justify the reasons why it should trade at a premium. Historically, when massive retracements like these happens, buying into the fear (in hindsight) was extremely rewarding. Is it really different this time?

As my readers would know, I like to connect the dots backwards during times of uncertainty to try to figure out my next move. A year ago, when Apple was trading at $398.62, I wrote "Apple's latest quarter: what miss?" wherein I said:

One can never discount the probability that another company may come up with a game changing device that could disrupt Apples' ecosystem. Until then, what we need to understand is that Apple has no desire to discount their premium products to win market share.

Now that Apple has released the iPad mini at $329, should we consider this strategy to be "discounting" one of their premium products? Given that neither Amazon nor Google (NASDAQ:GOOG) provides any transparency on their tablet sales, it would be difficult to compare um...Apples to Apples. Publicly, both companies have claimed that the margins on their tablets are thin. If this is correct, I am not sure why pundits would want Apple to compete at that price point and then whine about margin compression.

If the assumptions surrounding the cost to build an iPad mini ($200) are correct, it would imply that the 16GB model selling at $329 would have a better margin (39%) than the iPad 3 (36%). Given that the initial supplies of the iPad mini sold out during the first 35 hours and if the cost assumptions are close enough, it would appear that the "margin compression" fears are overblown.

You may have also noticed that Apple's YOY capex have expanded in triple digits over the past 3 quarters. New products aside, how much of that was related to ensuring their new suppliers came on stream effectively? Apple could not disclose this explicitly (i.e. diversifying away from Samsung), but start up costs will affect margins.

Apple's recent retracement from its high of $705 to the current price (as of the time of writing) of $593 (18%) provides a great opportunity to revisit my original thesis and ask the following questions:

  • Why did Apple release so many new products (new Mac Mini, new iMac, new iPad and the iPad mini) in a single event? What about next year?
  • Why release the iPad mini now?
  • Why did they release the iPad 4th Gen now?
  • Given Apple's frayed supplier relationship with its major supplier (Samsung), why risk all these moves with unproven partners?
  • Why would Apple appear to chase the tablet market downhill close to Amazon's Kindle lineup and Google's Nexus 7?

While I've expected the iPad mini to be an important addition to the iPad line up, the answer I found the timing to be very interesting. October 26th happens to be the week wherein you are able to upgrade to Windows 8 and purchase Surface. The week after October 26th also happens to be the time wherein Google would have announced their new smartphone and tablet lineup. Unless I am mistaken, Microsoft (NASDAQ:MSFT) has not released anything significant since Windows 7. Windows 8 and Surface presents the most significant competitive threat to Apple's increasing dominance in the post PC era.

Given the circumstances above, could Apple really afford to sit back and wait without doing something about it? Tim and his crew saw this coming as evidenced by their ability to introduce both the iPad mini and the iPad 4th generation despite having to extricate itself away from its major supplier (Samsung). Historically, as you can see from the table below, the unit volumes take off the following quarter after each major product launches. The only aberration to this pattern seems to be with the iPad 3.

(click to enlarge)

Ultimately, only time will tell if Apple's gambit will pay off. Until then, it is a waiting game measured in years not in quarters. If the gambit pays off, it will be difficult for any new player to gain traction in the tablet market. Is Apple sacrificing incremental short term margins in order to harvest a bigger market that it is developing over time?

Scott Forstall and John Browett are no longer with Apple. While there is no denying what Scott's accomplishments were with Apple, this move showed a lot of moxie on Tim's part. Most companies would have swept any issues under the carpet in order to appease a talented (but divisive) employee and risk the sanity of the team. Was Scott the problem or is it Tim? Remember when Shaq got traded from LA? We will never know the real story behind the drama. Scott will end up somewhere; I wouldn't be surprised if he had Apple in his sights. Talent alone does not guarantee that you can run a successful company consistently over time.

If the stock takes this news in stride, we know we may have found the bottom.

Source: Apple's Earnings Miss: Deja Vu All Over Again, Or, What Lies Under The Surface?