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Margin compression at Apple (AAPL) is long-term strategy, not a sign the company is losing its...
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Saturday, November 17, 2012, 9:15 AM ETMargin compression at Apple (AAPL) is long-term strategy, not a sign the company is losing its competitive edge, writes Kopin Tan in a bullish front-page Barron's article giving the iPhone maker the nod in its battles with Samsung (SSNLF.PK). "Samsung is running ads spoofing the cult of Apple. Samsung knows what it's like to have an image problem."
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Bought back in again on Friday adding substantially to my holding. Still had a lot of money spare which I have put into mReits which are also on sale at the moment.
Apple will be at least $800 by spring!
Based on what?
And if you look at the big dogs, like Soros and Buffett, they have been wrong 40% of the time so those guys are not always right either.
When the market get bullish again on Apple it will snap back.
http://bit.ly/ZPt2lP
In the longer term I am an AAPL Bear who thinks the stock's glory days are in the past, I think we've seen the top and a rally back to 630-ish in the 1st Q of next year could put a 12 month Head and Shoulders pattern on the stock.
If Apple raises its ad spend, that will a tell-sign that the company is facing margin declines.
iPhone buyers are actually younger and much, much more affluent than Samsung buyers.
"Sorry, Samsung, iPhone Is Not Your Mother's Smartphone"
http://bit.ly/XRB7a4
iPhone more popular among younger people than Android
"Does Android skew towards a younger demographic? The numbers might surprise you. According to comScore, 52.4% of all Android users are aged 35 years or older. That is five percentage points higher than the iPhone. Near 55% Android tablets users are also older than 35." How is this surprising? Younger people tend to be more brand-conscious, and there's no denying that the iPhone is still perceived as cooler than Android phones. Also note that the cited figures are for the US, Apple's strong home market. I think the figures will look very different for Europe.
If true that would be rather bearish as that demographic is pretty small. I suppose that isn't the point you were trying to make but...
Hey, Kopin Tan, got a bit of news for you, that is an incorrect statement.
Samsung ads are just killing Apple, those hit home so hard to all the apple folk.
that is correct. they need to get more sales to avoid android taking over. if they have to drop prices and lose margin it is ok. i am not sure though that is what they are doing. the margin drop is in ipad mini not the phone.
but price action on friday was good.looked like a capitulation low.
You are right though, they can't let Android take over. This is no different than Walmart selling insane amounts of low and zero margin products, not with the intention of making a huge profit, but merely to suffocate their competition.
For the last 3 decades we've had Windows PCs and Macs and even Linux, etc - they've moved in ups and downs, but there has always been room for many players.
The mobile market is no different. Many providers can co-exist; even with their ecosystems the market is big enough to support them all.
Mobiles come subsidised on contract every year or two, the apps (if you even bother) are dirt cheap and mostly cross platform by design, all the content can be easily transferred. So despite all the blather about ecosystems, switching platforms is easy. There isn't the lock in you get with a PC. The result being mobiles are fashion items easily changed and fashions swing wildly (fads).
Last time I looked, Android devices were about 75% of the market worldwide.
If Apple grows only 3% next three years. It will have a PE of 3 with current stock price. Current Apple growth is 45%.
By the way I got 600 shares at $527. Next order for 400 shares is on Monday opening price. I know I am fool since only foolish people enters the order at opening. Smart people enters order at 10 AM.
Android having larger market share implies Apple has more room to grow. So sacrificing margins to improve sales and achieve that growth is a reasonable strategy for Apple.
On the other hand, the larger volume, lower margin retailer (Samsung) has already played that card. Given that it is less profitable than Apple, it appears Samsung hasn't made 'it' up on volume... 'it' being profit, of course.
http://seekingalpha.co...
The main difference is that Samsung fabricates many parts. This is the scale and lower margin realm, especially with memory components. In comparison, Apple is mainly a design company reliant upon other companies for parts and assembly. In further contrast is Google, who are a data mining and software company with high margins.
When the 5S is released the supply chain will only need minor changes, as form factor will remain the same (most likely). The next iPad will need a new chain, but the screen should be the same as in the iPhone 5. iPad mini will get the same retina display that the iPhone and larger iPad have.
If margin compression were a result of Apple lowering prices or releasing low margin products, that's one thing. But even the iPad mini looks like it's GM will be about equal to that of its larger brother.
Investors really need to stop reading the tape and thinking that it implies the "truth" about a company. AAPL was up at 700 based on greed, now it's close to 500 based on fear. Neither of these is in any way discounting the company's performance. Margin compression has nothing to do with it, the lesson here is: be fearful when others are greedy and greedy when others are fearful.
I'll also point out that we had peak earnings across the S&P earlier this year. Earnings are heading down from this point forward so we aren't anywhere near peak fear yet on APPL or anyone else.
e.g.
http://bit.ly/106lDxK
I'd wait a bit.
Have you ever seen a phone advertised and promoted more than the Galaxy III?
Apple on the other hand hardly advertises but sells all they can build. And make a ton of money doing it.
Google and Amazon have deep negative numbers, fwiw :)
Where the margin gets hurt is manufacturing ramp up and channel fill for 8 new products that were just introduced. A non-repeating reduction. Apple will burn through those start up related margin numbers and be back to their usual numbers by next quarter.
Nobody analyzes AAPL correctly because we've never seen anything like it before. This is now a game of mastering the supply chain. That's why Steve wanted TC as CEO. China and India are huge potential markets for growth. The supply chain just needs to catch up. That's why we've seen expansion into SA.
The biggest fear is margin compression with Apple. I agree. As a firm become more mature and growth slows and more intense competition arises this is usually the case. However, I believe margin compression and slower growth is already priced in to Apple's current value.
Mobile phone sales have slowed during the last two quarters but long-term they have and should continue to grow with population growth, say at a low to mid single digit rate. In addition only 40% of mobile phone sales worldwide are smartphones, showing their is still room for older models to be replaced by smartphones over the next several years. As I would expect this percentage to move up to 50% and then 60% and then 70%, etc...over the next several years. This leaves an ample growth opportunity for Apple. Certainly slower than before when smartphones sales were a much lower % of total mobile phone sales, but still significant nonethless.
Global tablet sales have risen past 100 million in 2012. They are expected to rise to over 300 million within the next 3-4 years. Forrester estimates the potential installed base at nearly 800 million. The iPad should continue to be one of the world's premier tablets the next few years, thus Apple tablet sales should continue to experience solid growth.
Most important is the Apple ecosystem comprised of apps, itunes, ibooks, etc...it continues to be an attractive selling point for Apple hardware and is a big reason why consumers upgrade their devices every 2-3 years as well as why they buy more than 1 Apple product.
Taking all this into account what is Apple's valuation compared with a normal publicly traded mature company?
Apple is currently selling for about $530 per share (last trade in after hours) and has about $128 in net cash plus investments per share (would be slightly lower if adjusted for a repatriation tax). This means you pay about $400 per share for the operating business, translating to a multiple of just 9x trailing earnings (based on $44.15 in diluted EPS), which is way below a normal market multiple for a mature company of 15x earnings. Let us assume earnings grow 10% this year, which is slightly less than the average analyst estimate. This equates to diluted EPS of $48.57 for fiscal year 2013 and to a multiple of just 8.3x earnings! I would say that at this price their is a margin of safety for margin compression and slower earnings growth.
Valuing Apple based on 15x trailing earnings plus net cash/investments yields a fair value of $790. As such I think Apple has 50% upside from its current price.
However at this point I am thinking of jumping in. Looking cheap.
A significant part of the sell-off has been fueled by speculation about margin compression, emerging competition, etc. The actuality differs from the speculation. Apple will sell at least 45 million iPhones this quarter and 25 million iPads. If true, that's reality. Speculation of what could happen in 2, 3, 4 years is just that. There's this presumption that Apple customers will migrate en masse to Samsung, Nokia, Microsoft, Amazon. The reality is that Apple has a far lower churn rate than any of these contenders and it's more likely that they'll pick up share rather than vice versa. Not my opinion, just based on pure numbers.
The best thing a company can do is to manage each phase (maximize the effect of the initial burst of demands; prolong the competitive advantage through marketing, legal means or patents, new niche or sectors, and other manuevers; appropriately position the aging product within the portfolio, and the final disposition of the remaining product during the wind-down phase, to compliment the next wave of the new products.