Sunday, January 27, 2013

Apple-plexy, or the irrational fear of reality

You probably know that Apple released its Q1 FY 2013 financial results last week, and even though the company had its best sales quarter ever, including the highest number of iPhones sold in a quarter by a fairly wide margin, Apple's stock price lost more than 10% immediately and, as of this writing, is priced around $440 per share. Some analysts were expecting Apple to sell 50 million or more iPhones in the quarter, but the company actually sold 47.8 million. In the real world, that's not all that big of a difference, but in the world of financial analysts and institutional shareholders, a less than 5% miss on optimistic forecasts is a big deal indeed. Analysts and investors also took note of a significant year-over-year decline in Apple's profit margins, from 45% in Q1 2012 to 38.6% in Q1 2013.

Apple's iPhone sales miss and profit margin declines are causes for concern, but in my opinion, they're totally expected. There are several reasons why:
  • Apple's competitors for both the iPhone and iPad are a lot better than they've ever been. If you haven't already bought into Apple's iOS infrastructure and have a big investment in apps and content, there are many more devices to choose from, including some with bigger displays and faster processors. Apple's competitors aren't locked into a once-a-year update model, so it's increasingly common for competitors to have newer, better devices available when mobile customers come off their contracts.
  • More competition ends up driving everyone's gross margins down. It's going to be increasingly hard for Apple to maintain its margins as both the functional and perceptual differences between Apple's devices and those of its competitors decline.
  • The U.S. smartphone market is reaching saturation, and the best growth opportunities are now in developing countries, where customers simply can't afford to pay as much for smartphones--and carriers can't subsidize as much of the cost of devices.
  • Apple's cannibalizing its own products--the iPad mini is taking away sales from the full-sized iPad, and both iPads are cutting into Mac sales, which missed estimates for the quarter by almost 20%. Tim Cook says that's he's happy to cannibalize sales from his own product line instead of losing those sales to competitors, but the cannibalization will inevitably result in lower revenues per sale and lower profit margins.
Yes, there are reasons for concern in Apple's financial results, but most of them are them are the result of a healthy, evolving market and improving competition--overall positive signs, not negative ones. 
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