Amidst Market Turmoil, Apple Has Unique Opportunity

I’ve recently come to grips with where this economy is headed, with or without the bailout. And there is no doubt that a bailout bill will stem the imminent collapse of our global financial system. But this bill is not a panacea. The fundamental economic and financial problems will still be there. What the bill will provide us is a temporary perch from which we’ll get a good look at where we are going. And from that perch we’ll get the opportunity to plot a sensible path.

From an Apple (AAPL) fundamentals point of view, retail sales will likely suffer in the coming quarters. The reason is simple - consumers are faced with mounting pressures that affect all manner of consumer spending. With climbing unemployment, declining consumer spending, and more restrictive consumer credit, people will be purchasing fewer PCs and personal devices like MP3 players and smart phones.

At the same time, I believe this is an unique opportunity for Apple. With zero debt, Apple will be able to capture market share in a way that would be fundamentally impossible for other companies of lesser means. Perhaps this has been the underpinning to Apple’s hint of a ”future product transition,” during its last earnings conference call by Apple CFO Peter Oppenheimer that will reduce profit margins, but will have features and be at a price point that will make it impossible for others to compete. 

Oppenheimer  - Apple expects 31.5 percent gross margins in the fiscal fourth quarter, impacted in part by a future product transition that “I can’t discuss today.” But the new, unnamed product will continue to have “technologies and features that others can’t match.

Was Apple prophetic? Did it see and plan for this economic calamity? Was its cash hoarding strategy the first step in the master plan? And then once the economy slips, is the plan to introduce a family of low margin, compelling products, that will simply blow away the competition? With nearly $30 billion in the bank, it would seem Apple will be uniquely positioned to grab significant portions of both consumer and enterprise PC markets.

Disclosure: None.

Comments

[User 271813:]

We hear often enough of Apple's cash horde of $21 billion. But is this really protected cash? A few years ago I recall Apple's taking a large profit in Akami stock, so that had been invested money. The question is how much of this "money in the bank" was invested by Apple's investment arm in stock which may have lost a huge amount of value, or was wiped out? Or cash in Washington Mutual accounts over $100,000, for example. Or other "investments." Will this "cash horde" still be worth $21 billion or so by the end of the year?

2008 Sep 28 05:37 AM

[PK de C'ville:]

Zach,

$30B? I've only heard an estimate of $21B. (Did they invest in gold at $600?).

2008 Sep 28 06:06 AM

[David Lentz:]

Zach, the bailout bill does NOTHING to halt the driver of the meat-grinder that is laying waste to our credit markets. ARMs will continue to reset, and homeowners will continue to be driven into bankruptcy and foreclosure, and houses will continue to pile up in inventory. We are only about halfway through the mortgage mess, with the foreclosure rate accelerating.

While Apple is in a unique position, that position is only to survive, not to prosper. As America (and dragging much of the world with it) slides into depression, with unemployment soaring and the consumer economy contracting at near-light-speed, any companies that have even small amounts of debt will expire. Apple will not.

I look for this Christmas season to be the worst in living memory, with only the future making it look good by comparison. About the only thing that will be moving in volume through the Apple Stores will be iTunes gift cards. People will be unwilling to plunk down coin for new Macs or high-end iPods or iPhones. Unless this mysterious new product comes out undercutting existing products that perform the functions it does by a significant margin, it is not going to be a blockbuster. Perhaps a revamped AppleTV, with a builtin tuner, to serve as HDTV set-top converter boxes, for $99 or so might get a bump from Joe Sixpack being forced to converting next February -- but in my own sampling of that market, most of those conversions have already happened.

But I really, really doubt that Apple's new unnamed product will be prices at anything like $99 a pop. And anything priced higher is unlikely to sell very well, with the financial Grim Reaper outside everyone's door.

However, as Apple WILL survive, given its substantial cash cushion, I see owning Apple shares as something akin to stuffing one's mattress with cash. Yeah, the stock price will decline, as the PE implodes, pushing the stock price down to under $100 (which will be one of the great buys of this century), but the company will retain all of its creativity and vigor for when we eventually emerge from the depths in a decade or so. And following an initial small contraction in sales volume, the rising iPhone revenue that has been pushed out via subscription accounting will kick in to support the stock, even as Mac and iPod sales shrivel a bit.

But some competition will still be out there. Microsoft will likely still be a major player (but with most of new Windows sales occurring on foreign PCs, as Dell disappears and HPQ struggles with its debt). You are correct, that Apple will have some significant opportunities to expand into other markets, possibly (warning: entering fantasyland) buying Akamai, or picking up a struggling cellular phone company (Sprint?), or entering the more prosaic consumer electronics field, by producing a smart big screen HDTV coupled to an expandable disk array while merging with Disney (OK, that's far enough into the Twilight Zone).

Yup Apple has potential, but in a different future than the one you see.

2008 Sep 28 10:50 AM

[mollytjm:]

in any economy there are always people with $ to spend. Mac buyers are generally more well heeled than some and we're at a point where people born after 1970 just won't be without their tech stuff. Apple is quite capable of turning out products so innovative and seductive that people will buy them anyway. APPL is a great buy for those who hold.

i agree about housing and financials. if we're lucky, we're half way through it, but don't count on it. Regular people will be buying used smaller cars, freeing up some $ that went for gas in big guzzlers. We'll become more like Europeans in that people won't buy houses so quickly...or buy ones so big. But Americans are more tech addicted than anyone on the planet except the Japanese. That won't change and Apple will be there to happily provide the products and make the profit and not only survive, but do it in style.

2008 Sep 28 11:04 AM

[winindthedust:]

While others, such as Dell, HP, RIM, M$, continue to see pull backs in their profits, with losses do to the economy, Apple seems to be immune, with continued record revenues.

When discretionary spending tightens, consumers don't stop buying, they simply spend a little more time researching their purchases, to make the most prudent decision. People want their dollar to count for the most, and Apple, somehow, has earned a reputation for providing the most value for the dollar with their products. Don't believe me? The proof is in the numbers; Apple is the only one not taking a hit, compared to their competitors... Apple is and has been on the top of the list for brands on people's shopping list.

A another case and point: While Dell is selling factories, Apple is buying & building. While M$ spends a quarter billion on advertising, Apple spends the same cash on R&D. While HP is firing, Apple is hiring. While Rim's margins are tightening, Apple's margins have actually increased.

Steve said they would weather any economic downturn, buy investing in people and R & D. Seems his strategy is working. Now, think about this... if Apple continues to innovate, while competitors pull back into caves of inaction; who will be in the best position when the economy booms again? Apple is brilliant in taking advantage of an economic downturn, to actually step up the pace.

My advice, buy Apple, and lots of it, while its still undervalued by the market.

2008 Sep 28 11:08 AM

[top_tier:]

Apple expects gross margins in the fiscal fourth quarter ending September of 31.5%, down from 34.8% in the June quarter. The company noted that the June quarter gross margin was about 180 basis points over guidance. Apple said 70 basis points of the upside related to a “one-time true up” of contract manufacturer deferred margins, while the rest stemmed from a better commodity environment, a richer product mix and leverage from higher-than-expected revenue.

Apple said three factors will weigh on margins in the September quarter: back-to-school promotions, a future product transition, which it declined to specify, the lack of the contract manufacturer true-up from the most recent quarter.

2008 Sep 28 11:11 AM

[iNeal:]

From July 30 "Business Week" : ". . . But if there is one complaint, it's the company's refusal to do anything with the $20.8 billion in cash and short-term investments it has socked away. The cash just sits there, earning little more than the average savings account". - Sounds pretty safe.

2008 Sep 28 04:38 PM

[whereismybonus:]

In the Great Depression 20% were unemployed. If we are once again on the brink of a similar event, that translates to 80% of population being prospective Apple customers. Long way to go and much profit for Apple shareholders to look forward to (financial industry with its cheap PC's be damned).

2008 Sep 28 05:26 PM

[mbonfa2:]

Throw in a the fact that 44% of all homeowner's were in some stage of foreclosure at the height of the Great Depression (in addition to the 20% unemployment rate) and you have a lot of 24 hour "news" channels with commercial time to sell.

No debt, plenty of cash, horrible market. Why not buy some cheapo companies that are taking it on the chin?

As long as Apple continues to gain market share at a rapid clip they will come out of this market smelling like roses. Who knows, maybe another 12 months, but it's going to kill $202 at some point.

2008 Sep 28 10:16 PM

[neutrino23:]

Apple certainly knows their customers better than we do. But I'll take an educated guess. The iPods and iPhones should do OK as they are not terribly expensive and they are perceived as high value items. The computers are harder to figure. I guess that they can keep or gain market share in sales to businesses though total volume might drop. Sales to consumers might continue to grow. Apple customers are wealthier than most. Perhaps they'll weather this crisis with enough disposable income to keep buying laptops?

Assuming we come out of this with our economy intact Apple will be in a great position as they will keep innovating during any downturn and will keep the engineering team intact while others, driven by accountants, will be pulling back and laying off.

2008 Sep 29 01:29 AM

[Timeline St...:]

On the latest Apple financials to be seen on Yahoo, they have about $20.7 billion in cash and short term investments. This swells to close to $30 billion if one adds Accounts Receivable assets, however that is not really accurate to add because the AR is completely offset by a nearly-matching Accounts Payable.

Apple could use some of its cash for a stock buyback, like Microsoft. $10 billion would purchase 7-8% of the outstanding shares, which would be essentially awarding a one-time dividend of that % value.

As for the doom and gloom about the economy, Apple has thus far weathered this storm and looks to post excellent earnings next month. Apple's target customer is not exactly the guy who struggles to put gas in the tank. It's products of choice for people who can afford the choice.

2008 Sep 29 08:27 AM

[turnkey:]

This guy ZACH is a liar .

His Disclosure should read: Short Seller - Manipulator. In his blog his disclosure switches from SHORT to Long almost bi- weekly.

Do not trust his guidance - he has no loyalty but to his pocket

2008 Sep 29 09:43 AM

[frdm45:]

Where are all the Apple apologists today??? Don't worry, I'm sure apple will stop cratering when it hits it's 50 week MA at about $95.

2008 Sep 29 10:49 AM

[KenC:]

If about 75basis points are due to a new product transition this quarter, which is the Fiscal 4th quarter, then it must have already been introduced. 75bp on $8B in revs is roughly $60M, right? That's not alot. Clearly not a completely "new" product, or one that has a huge revenue impact. I'm guessing this product was the iPod Touch, which at $229 for the 8Gig model is a very aggressive price, with lower margins. The last 8Gig Touch was $299. That's a $70 difference, and probably $50 wholesale. It would only take a million or so Touches to account for the drop in GM if that were the case.

2008 Sep 29 08:37 PM