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Margin compression at Apple (AAPL) is long-term strategy, not a sign the company is losing its...

Margin 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."
Comments (64)
  • The last few weeks have been like Christmas come early for me. I knew from past experience that Apple stock falls on the day the new iPhone is released so I sold my complete holding on September 21. Nothing could have prepared me for the 'fiscal cliff' fall in the stock that has followed.

     

    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!
    17 Nov 2012, 09:26 AM Reply Like
  • "Apple will be at least $800 by spring! "

     

    Based on what?
    17 Nov 2012, 09:30 AM Reply Like
  • $550-600 maybe, $800 - no way.
    17 Nov 2012, 10:53 AM Reply Like
  • Then why are many of the biggest holders continuing to sell AAPL relentlessly now? Would not be so sure it does not go quite a bit lower yet.
    17 Nov 2012, 12:03 PM Reply Like
  • Big sellers and buyers is not always a good indicator. Probably the biggest holders of all stocks are mutual funds. If the "retail" (IRA/401k etc) investor starts pulling out, those funds have to sell stocks. A small percent rise in fund liquidations can mean 10's of thousands of shares.

     

    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.
    17 Nov 2012, 12:17 PM Reply Like
  • I wish I was you! Damn!
    17 Nov 2012, 02:24 PM Reply Like
  • Best first quarter in the 36 year history as a company! Complete and utter success of the iPhone 5 and iPad Mini.
    17 Nov 2012, 02:28 PM Reply Like
  • @untrusting. Price closed up with 2.5 times the average volume. That means consensus buying, not selling.
    17 Nov 2012, 02:59 PM Reply Like
  • $800 is probably a stretch, but Apple continues to build cash at a fast pace even with the dividend and the stock buy back. I think the dividend will be increased in 2013 and we will see China Mobil come on board in the first half of 2013.

     

    When the market get bullish again on Apple it will snap back.
    17 Nov 2012, 03:07 PM Reply Like
  • I bought on Friday as well. Looks like good technical support here to me. But I'm buying for a short-term bounce only.

     

    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.
    17 Nov 2012, 07:34 PM Reply Like
  • Margin compression goes against everything Steve Jobs was about. Another bad sign from AAPL. Samsungs ads hit the spot, some of the best mobile ads I've ever seen, and I'm an AAPL shareholder.
    17 Nov 2012, 09:37 AM Reply Like
  • I agree. They have found a very creative mind. The Samsung ads are ones I actually watch and don't fast forward through.
    17 Nov 2012, 01:05 PM Reply Like
  • I really enjoy the spoof of the young hipsters being going to Samsung while the old clueless parents getting the iPhone. Sure it is just a marketing ploy but the expression of the other people in line is priceless. I am in the market for a new phone and the galaxy s3 is 2nd on the list
    17 Nov 2012, 02:50 PM Reply Like
  • The Samsung commercials are very entertaining, but touching phones to share playlists with your friends and lovers isn't going to get me to buy a phone.
    17 Nov 2012, 04:41 PM Reply Like
  • Until Apple incorporates NFC in a future iPhone, then you will want that. Both Mastercard and Visa are already bringing out paypoints that use NFC technology. Just as Apple was able to wait for 4G LTE they will wait for roll-out of NFC, and then incorporate the technology.
    17 Nov 2012, 04:59 PM Reply Like
  • Apple spends $500m a year on US advertising. Samsung spent $9.5bn on global advertising in the last year.
    If Apple raises its ad spend, that will a tell-sign that the company is facing margin declines.
    17 Nov 2012, 09:24 PM Reply Like
  • Funny ad, but unfortunately it is a lie.

     

    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.
    18 Nov 2012, 01:48 AM Reply Like
  • "iPhone buyers are actually younger and much, much more affluent than Samsung buyers."

     

    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...
    18 Nov 2012, 08:00 AM Reply Like
  • I think that also is a screaming testament to the health of Apple. Do you think that Samsung has 19 times the market share Apple does?
    18 Nov 2012, 10:34 AM Reply Like
  • I was just in the Apple store 2 days ago and there were a lot of gray heads sitting around a table getting a tutorial on something. The ad looked pretty accurate just based on that observation.
    18 Nov 2012, 03:55 PM Reply Like
  • My 70 year old dad just got a iphone 4s. It would be really interesting to see a iphone demographic breakdown. However it doesnt really matter. If Apple sells to hipsters or retirees, they are still selling units.
    19 Nov 2012, 11:03 AM Reply Like
  • Its good to have margin compression!? hahaha

     

    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.
    17 Nov 2012, 10:08 AM Reply Like
  • Margin compression can result in higher sales volume and driving out smaller competitors. Its like taking a big dookaroo- it smells awful, and looks bad, but you come out feeling like a weight has been shed, freeing you to do what you really want.
    17 Nov 2012, 04:43 PM Reply Like
  • brady,

     

    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.
    17 Nov 2012, 06:44 PM Reply Like
  • I agree. Very bullish hammer on the chart. Also the S&P is due for a short term bounce, which will mean Apple will swim with the current, as opposed to trying to fight it. Any rally this week won't hold, but once the fiscal cliff mess is cleaned up, Apple could be looking at 600+ again.

     

    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.
    17 Nov 2012, 07:01 PM Reply Like
  • Why do people keep talking about Android and Apple (and RIMM) as if one has to WIN?

     

    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.
    17 Nov 2012, 07:51 PM Reply Like
  • Don't try to relate desktops to mobiles. The economics are different.

     

    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).
    17 Nov 2012, 08:23 PM Reply Like
  • Not true. People buy smart phones for the apps, and many are not available on both platforms. And if they are many times account data can't be shared between android and iOS. If you build up a lot of data in an app that you depend on using, no way would you abandon it without a lot of pain. Plus a lot of people use apps on multiple devices, several phones and tablets. No way could you switch platforms, it just wouldn't work.
    18 Nov 2012, 01:56 AM Reply Like
  • Avoid an Android takeover?

     

    Last time I looked, Android devices were about 75% of the market worldwide.
    18 Nov 2012, 12:07 PM Reply Like
  • Here is the small statistics.

     

    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.
    17 Nov 2012, 10:15 AM Reply Like
  • Why buy on the open? That is often a "really bad idea" - better to just set a limit price for a worst case drop. Far too often I have seen big spikes on the open with an immediate fallback.
    17 Nov 2012, 10:56 AM Reply Like
  • Can go either way. Recently, Nly dropped below 14 briefly at open and quickly recovered
    17 Nov 2012, 11:33 AM Reply Like
  • Yes, I have seen that happen also, but if I am interested in a stock I will just set a limit price that is way under the last close. Orders "on the open" scare me.
    17 Nov 2012, 11:42 AM Reply Like
  • I am going on the opening price since it will keep on going up on Monday, I do not want to my next 400 shares. I am in this stock for long haul so few thousands does not make any difference for me.
    17 Nov 2012, 01:37 PM Reply Like
  • Margin compression is NEVER good for a stock. It's not part of a business model - its part of the economics of the electronics and technology business. Declining margins require more sales for the same profits. Doubtful Apple will ever see higher revenue than 2012. The caveat being another robust platform and creation of a market. Doubtful from my perspective. Good luck to longs.
    17 Nov 2012, 11:28 AM Reply Like
  • Yup. Talk about spin
    17 Nov 2012, 11:34 AM Reply Like
  • That's funny, I hear that margin compression for Apple is the strategy over at Samsung, too. The problem is that Samsung already sells more phones than Apple, globally, and Android phones make up 68% of the market, versus iOS at 17%, and are growing faster. So, the "make less on each phone, but make it up on volume" works a lot better for Samsung than Apple.
    17 Nov 2012, 11:33 AM Reply Like
  • Which is why Samsung is less profitable than Apple? Perhaps it's not working better for Samsung after all.

     

    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.
    17 Nov 2012, 01:14 PM Reply Like
  • lol...you can't spin margin compression.
    17 Nov 2012, 01:19 PM Reply Like
  • In Asian developing countries(previous name was third world countries) Samsung sells 100 phones and make some profit. To make the same profit Apple has to sell only one iPhone in developing Asian countries.
    17 Nov 2012, 01:40 PM Reply Like
  • Samsung sell the largest bulk of components in smartphones to other companies, and not just to Apple.

     

    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.
    17 Nov 2012, 02:39 PM Reply Like
  • Margin compression should be expected when you create, all in one quarter, a new supply chain for the iPhone 5, iPad 4, iPad mini, 13" Retina MBP and iMacs. It's natural flow of the business.

     

    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.
    17 Nov 2012, 03:46 PM Reply Like
  • Yeah right. Apple is such a shabby business model. You do realize that Apple, just with cash on hand, could nearly buy Samsung and burn it to the ground right?
    17 Nov 2012, 04:47 PM Reply Like
  • Not without paying huge taxes to repatriate the money :-)
    17 Nov 2012, 06:52 PM Reply Like
  • Can you spin 23% YoY EPS growth for a company with a forward PE of 10?

     

    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.
    17 Nov 2012, 07:37 PM Reply Like
  • Yeah, the past does not predict the future.

     

    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.
    17 Nov 2012, 08:37 PM Reply Like
  • Many analysts believe Samsung sells their phones at a loss when looking at marketing (ads) and distribution (generous deals made to telcos). They still make some money manufacturing the phone, but their biggest goal is to dominate market share.

     

    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.
    18 Nov 2012, 01:39 AM Reply Like
  • It wouldn't need to be repatriated. Just transferred straight to Korea.
    18 Nov 2012, 01:42 AM Reply Like
  • I fixit did a tear down of the iPad mini and margin was estimated to be 53%. In other words, pretty awesome.

     

    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.
    18 Nov 2012, 02:04 AM Reply Like
  • Stockgal, EXACTLY!

     

    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.
    18 Nov 2012, 07:55 AM Reply Like
  • Good point about the taxes, but Steve Jobs was also will to spend $40 billion (or so he said) to destroy Android. I think the taxes would be a minor road bump.
    18 Nov 2012, 10:38 AM Reply Like
  • After minimizing my position in Apple during its huge move up I decided on Friday to place a significant buy relative to my portfolio. I have for several clients as well. Here is my reasoning:

     

    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.
    17 Nov 2012, 01:11 PM Reply Like
  • Do you think the fiscal cliff will be averted? If no, why would shares of AAPL not decline more than the NASDAQ or S&P 500? If yes, do you think Friday was a bottom in the markets, and why?
    17 Nov 2012, 02:41 PM Reply Like
  • You're one of those people who drives backwards?
    17 Nov 2012, 08:41 PM Reply Like
  • Solid analysis.
    18 Nov 2012, 07:00 AM Reply Like
  • Samsung great ads great phone.
    17 Nov 2012, 01:59 PM Reply Like
  • Do unto others, Samsung.
    17 Nov 2012, 03:07 PM Reply Like
  • The statement by Kopin Tan just shows you how irrational people have become with respect to Apple. It's all part of the AAPL mania.
    17 Nov 2012, 05:03 PM Reply Like
  • You're right. It has nothing to do with engineering, innovation, customer service, quality, software, hardware, marketing, a smooth retail experience, or any of that. It's just mania.
    17 Nov 2012, 05:18 PM Reply Like
  • Apple still can't make enough iPhone5s to satiate demand, not sure those Samsung commercials are driving customers away from iPhones in droves like some of you Bears would like to believe. Tax selling going on till New Years. I'm long and hoping the Bears push it down below 500 so I can pick up more. Thanks sellers
    17 Nov 2012, 08:46 PM Reply Like
  • Simple fact the Wall Street crook used AAPL to hype the market. iPhone5, iPad does not save a hedge fund once it get margin calls.
    17 Nov 2012, 09:06 PM Reply Like
  • I was talking down Apple about 25% ago and got a lot of flack for daring to question them.

     

    However at this point I am thinking of jumping in. Looking cheap.
    18 Nov 2012, 01:35 AM Reply Like
  • I've been hearing about this Apple margin compression for about 5 years now and the margins continue to expand. Many buyers of Apple products will pay more for an Apple product because they know they can easily sell the used device in a year or so for most of its original cost.

     

    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.
    18 Nov 2012, 06:40 AM Reply Like
  • Margin compression is never a good thing, but just like aging, it is inevitable because product obsolescence caused by new product introduction and/or changes in technology and buyer trends.

     

    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.
    19 Nov 2012, 02:59 AM Reply Like
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