Apple (NASDAQ:AAPL) has lost its shine. This isn't just conjecture but I believe a proper statement of the current Apple culture. This new Apple culture leads to my position that Apple is a long term value stock where the value is in the dividend. It should be no secret that Apple has faced increased competition and pricing pressure from Samsung in established markets and has had difficulty successfully entering growing markets like India and China due to the premium cost Apple commands for their products. Samsung has emerged as both market share and mind share leaders in these markets. In this article, I will shed some light on Apple's performance and the decisions Apple has made for their solid dividend generating future.
Apple introduced the iPad Mini last fall to amazing results. The 7.9-inch product quickly began to outsell the larger, more expensive 9.7-inch model. Followers of Apple might recall former CEO Steve Jobs surprise appearance on Apple's Q4 conference call, and his utter annihilation of the 7-inch tablet format. Jobs famously said that 7-inch tablets were DOA. The reality is that consumers found compelling products like the Kindle Fire, Nexus 7 and Samsung's Galaxy Tab offerings and Apple's tablet market domination was being eaten away little by little. This didn't stop Apple's profits from continuing to soar. Apple decided to release the 7.9-inch iPad Mini to head off competing offerings.
This wasn't part of the plan, it was a defensive move. The result is that Apple delivered a product that could more effectively compete with the budget Android offerings. It did so at the expense of gross margins. This was the first sign Apple had begun to value market share over margins. Apple's iPad Mini has cannibalized sales of existing Apple product lines and caused an erosion of gross margins. No cannibalization is good. There is also no need for Apple to cannibalize itself as they are still showing sales growth. The regular iPad has an average selling price of $590 and gross margin of 47 percent. The iPad Mini has a gross margin of 43%. The margins do improve on higher storage options. This is lessened by the fact the most popular storage option sold is currently the base 16GB Wi-Fi option.
Apple has now allowed vendors to drastically discount their products to stimulate sales. Today, Walmart announced permanent price cuts to the 16GB iPhone 5 and iPhone 4S. The iPhone 5 will now be $129 (down from $190), the iPhone 4S $39 (down from $90). Brief sales around holidays aren't unusual on iPhones but the permanent price reduction should be seen as a guidepost that the product mix of iPhones will continue to lean toward older models well into the future and during the fall when a new device is expected to be announced. This growing percentage of older models in the product mix continues to drive gross margins downstream. The new iPad Mini expected to be announced this fall still has not had a Retina display confirmed for the device. This is a needed feature to keep pace with competitor's Full HD offerings that are soon hitting the market. It also will give justification for Apple upselling the new device at a premium cost.
Apple has managed to gain market share in growing markets. Price sensitive markets such as India has long been a source of difficulty for Apple. Apple has doubled their effort to win market share in multiple ways. They have contributed more resources to the country and they have slashed prices to increase market share and visibility. Apple CEO Tim Cook calls this taking a short-term tradeoff for long term potential. This is the sentiment that leads me to believe Apple has lost its shine. Apple has started to participate in the race to the bottom. They have started to succumb to the Samsung onslaught. The thing they need to realize is that those who value Apple's fit and polish do so knowing they will pay more for their devices. In exchange they expect a premium experience.
A sign that Apple has lost its way in the innovation department can be found in both the recently debuted iOS7 and Mac Pro. iOS7 is full of features and aesthetics heavily borrowed from Android and Windows Phone 8. The move to take iOS7 to a flatter design language has been brought on by the success of Android's recent software offerings. Windows Phone led the way to a pre digital design language and Android followed up with an impressive offering of their own. Apple has been forced to redo their tried and true interface with a fresh coat of paint and heavily lauded features from competitors. The new Mac Pro and the company believing this signifies innovation is damning to the current leadership. "Can't innovate anymore, my foot."-those were the words of Apple's Senior Vice President of Worldwide Marketing Phil Schiller boasted as he discussed the Mac Pro during Apple's Worldwide Developer Conference earlier this month. This updated version only innovates on the designs previous to it. It pushes the industry ahead in no way at all and has not been well received by the designers and developers who it is intended to satisfy.
I fully expect Apple to continue to announce enormous sales figures and continue to be market share leaders in the mobile technology experience. This will come at the cost of margins which investors take special care to watch. The iPhone is Apple's highest gross margin product. The growing mix of older models sold at discounts will continue to erode the near 60% gross margin Apple enjoyed a years ago on the product line. The iPad Mini has continued to erode the gross margin of the iPad product line and as sales momentum continue to grow going forward expect to see this trend continue. Apple will see continued strong profits and generate significant dividend payout but the shine enormous gross margins bring continues to be dulled. The new Apple isn't Apple at all. They are the commoditized, vision lacking corporation that is a safe long-term value pick. At the time of this article Apple is trading at $413.68. I do not see any new product arriving in the near term to justify a significant and sustainable stock price increase. Dividends will remain strong as Apple's recent measures continue to help generate significant sales and revenue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.