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Apple's margins predicted to change & improve with the seasons

post #1 of 33
Thread Starter 
Apple's lower gross margins ? and, subsequently, its lower stock price ? could be largely attributable to cyclical drivers such as capital expenditures and component pricing, paving the way for a significant improvement with the launch of a so-called "iPhone 5S," a new analysis argues.

Morgan Stanley's Katy Huberty pointed out on Monday that Apple's quarterly stock performance and gross margin both peaked in March of 2012. Thereafter, capital equipment investments in preparation for the launch of the iPhone 5 and higher NAND flash prices knocked margins down 900 base points.

Apple Stock Forecast


Huberty expects that Apple will follow its previous patterns and release an "iPhone 5S" that will not likely require much in the way of significant hardware changes. She also expects Apple to grab better deals on NAND components going forward, a trend possibly foreshadowed by the release of a 128-gigabyte iPad.

Huberty's take stands in opposition to some pessimistic investors, who have expressed concern that Apple's volatility in gross margin could be as a result of structural issues with the company. But she believes that lower capital equipment purchases and potentially more favorable NAND flash prices could result in improved margins toward the end of 2013.

As evidence, Huberty pointed to Apple's 10-Q filing, in which the company revealed that its purchase commitments for the current quarter are just $904 million. That compares to $4.5 billion just two quarters ago, when the company invested in new in-cell touch displays for the iPhone 5 launch.

For its part, Apple's own guidance projects that the company's fiscal year 2013 gross margin will fall short of its peak of 43.9 percent in fiscal year 2012. Morgan Stanley's models call for Apple to see gross margins of 38.7 percent in fiscal 2013.

Apple Stock versus Gross Margins


Morgan Stanley lowered its price target for AAPL stock to $630 last month, but has retained its overweight rating for the company. Huberty did caution that she believes near-term catalysts for the company are limited, as Apple faces tougher comparisons in the first quarter of calendar 2013.

The investment firm's price target falls in the middle of a range of possibilities seen: The "bull case" sets a 12-month target of $980, based on the possibility of Apple releasing a new iPad and lower-cost iPhone this summer while reaching an agreement with China Mobile. The bear outlook for the stock targets $400, with Apple losing share to Windows 8 and Samsung in mature markets and lower-priced options in emerging markets.
post #2 of 33

You don't say! 

 

I have lost track of how many times I have seen the ole 'reduced margins' spin to knock AAPL down after a product refresh.

post #3 of 33

The study of AAPL shows us almost everything that is wrong with the stock market and the psychology of "investors" in the U.S.. Companies know they'll likely be "punished" for making R&D or capital investments because all "investors" are interested in is the bottom line (although, sometimes, that's even giving them too much credit), just like AAPL is punished, ignoring the blatant manipulation, for decreased margins. So, for years, American companies didn't, and foreign companies are now eating their lunch. Just one of the many negative consequences of running a company with a focus on "maximizing shareholder value", rather than making sound business decisions.  

post #4 of 33

I've written this before, but if margins are such a big deal, then why doesn't Apple jack up it's prices? I don't give a crap if some people can't afford Apple devices, too bad for them. Frankly speaking, life isn't fair, and if somebody can't afford a new Apple device, then go buy something else, problem solved, just please don't whine about it. And also, why does Apple keep expanding into new markets? Why not cut down in some markets? Keep a presence in key markets and then there will be enough supply, and Apple can maintain their big margins. It's the same story over and over again. Apple releases something new and there are often delays because they are not able to meet the initial demand. And there's no good reason or excuse behind these delays. It's not like a natural disaster or an act of nature occurred. These are man made delays and somebody is surely to blame.

 

It seems to me that certain people wish to turn Apple into junk, and for no good reason. A cheaper iPhone? Why? What's that going to do for margins? Even if Apple were to sell 117 million phones in a quarter, then that probably won't be good enough, because some crackhead on Wall Street predicts 118.4 million.

 

Instead of making cheaper phones for people who live in mud huts, I'd like to see Apple go in the opposite direction. Release something like a limited edition iPad! Make it look irresistible and have it come with some awesome features, with a price tag to match. Raise the margins instead of lowering them by making ghetto iPhones for ghetto people.

post #5 of 33
Quote:
Originally Posted by AppleInsider View Post

As evidence, Huberty pointed to Apple's 10-Q filing, in which the company revealed that its purchase commitments for the current quarter are just $904 million. That compares to $4.5 billion just two quarters ago, when the company invested in new in-cell touch displays for the iPhone 5 launch..

Apparently, understanding something about business finances is not necessary to become an analyst.

Purchase commitments do not affect the gross margin when they are made. Rather, the gross margin is affected when the parts are actually used (or scrapped).

Let's say that Apple sells $20 B of product every quarter and their gross margin is 40% so COGS is 60%. For simplicity, let's say that this is $10 B of component purchases per quarter and $2 B of overhead and assembly cost). So in a year, Apple would buy $40 B of components.

From a gross margin standpoint, it doesn't matter if they buy $800 M per week or if commit to buy $10 B at the beginning of each quarter or even if they commit to buy the entire $40 B on January 1. It would make no difference at all in terms of gross margin.


(It does, however, matter, particularly on the balance sheet. If they prepay, it reduces their cash by that amount. A purchase commitment might also become a liability if they commit to paying it regardless of whether they need the product or not, but, of course, we don't know if they made that kind of commitment, anyway).

Sorry, Katy, but you're just plain wrong. Of course, anyone who has followed your prognostication for years already knows that.
"I'm way over my head when it comes to technical issues like this"
Gatorguy 5/31/13
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"I'm way over my head when it comes to technical issues like this"
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post #6 of 33
Minor fluctuations aside, component costs tend to drop over time.
Apple product prices, however, don't drop much at all over time.
The result: better Apple gross margins over time.

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post #7 of 33
They tend to pre-pay to lock-in capacity at key suppliers.
post #8 of 33
Have we learned nothing?
post #9 of 33

Problem is a 5S is not what apple needs right now.  Unless it is paired with a larger iphone model Apple is going to have a very difficult 2013 as larger phones take more share.  If Cook digs his heels in and refused to do a larger model iPhone things will only get worse.  If they do a larger one they will have the same supply constraint issues and margin issues.  So it almost seems they can't win completely.  They have to choose the lesser of the evils.  Make the bigger form factor iPhone and serve the customers that want it before they go somewhere else

post #10 of 33
Originally Posted by mvigod View Post
Unless it is paired with a larger iphone model Apple is going to have a very difficult 2013 as larger phones take more share.


Why?


If Cook digs his heels in and refused to do a larger model iPhone things will only get worse.

 

Why?


If they do a larger one they will have the same supply constraint issues and margin issues.

 

Why?


They have to choose the lesser of the evils.  Make the bigger form factor iPhone and serve the customers that want it before they go somewhere else

 

Screw 'em. We've seen how many customers actually like their phones compared to the ones that buy the iPhone. They think they want something unusable, they can go buy something unusable. I'd rather Apple keep making good products rather than cater to people whining about things they don't understand. 

Originally Posted by Marvin

The only thing more insecure than Android’s OS is its userbase.
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Originally Posted by Marvin

The only thing more insecure than Android’s OS is its userbase.
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post #11 of 33
Quote:
Originally Posted by Apple ][ View Post

I've written this before, but if margins are such a big deal, then why doesn't Apple jack up it's prices? I don't give a crap if some people can't afford Apple devices, too bad for them. Frankly speaking, life isn't fair, and if somebody can't afford a new Apple device, then go buy something else, problem solved, just please don't whine about it. And also, why does Apple keep expanding into new markets? Why not cut down in some markets? Keep a presence in key markets and then there will be enough supply, and Apple can maintain their big margins. It's the same story over and over again. Apple releases something new and there are often delays because they are not able to meet the initial demand. And there's no good reason or excuse behind these delays. It's not like a natural disaster or an act of nature occurred. These are man made delays and somebody is surely to blame.

 

It seems to me that certain people wish to turn Apple into junk, and for no good reason. A cheaper iPhone? Why? What's that going to do for margins? Even if Apple were to sell 117 million phones in a quarter, then that probably won't be good enough, because some crackhead on Wall Street predicts 118.4 million.

 

Instead of making cheaper phones for people who live in mud huts, I'd like to see Apple go in the opposite direction. Release something like a limited edition iPad! Make it look irresistible and have it come with some awesome features, with a price tag to match. Raise the margins instead of lowering them by making ghetto iPhones for ghetto people.


Your stuck-up thinking goes counter intuitive to the very essence of capitalism.

 

Apple will be in a dire hurt if they indeed listen to what you have to say. What you are wishing for the company is the very opposite of what an Apple fanboy should be demanding. You are basically appealing for its destruction.

 

It is inevitable for Apple to follow what the consumers are asking for. Too bad it will be an uphill battle for them as Samsung has a very large lead in that area and its only gaining prescence the more time Apple spends its time twiddling its fingers.

 

Too bad for you, Apple has already taken notice and is already implementing the solutions by rounding up suppliers who can provide a cheaper version of their products. The management team knows it, their accountants certainly do so perhaps its time for the so called fanboys to line up with Apple. No?

 

It's certainly a harsh reality to swallow having to let down your egos and pride to face the harsh reality of life.

 

Look at the reality and stop dreaming.

"Like I said before, share price will dip into the $400."  - 11/21/12 by Galbi

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"Like I said before, share price will dip into the $400."  - 11/21/12 by Galbi

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post #12 of 33
Quote:
Originally Posted by jragosta View Post


Apparently, understanding something about business finances is not necessary to become an analyst.

Purchase commitments do not affect the gross margin when they are made. Rather, the gross margin is affected when the parts are actually used (or scrapped).

Let's say that Apple sells $20 B of product every quarter and their gross margin is 40% so COGS is 60%. For simplicity, let's say that this is $10 B of component purchases per quarter and $2 B of overhead and assembly cost). So in a year, Apple would buy $40 B of components.

From a gross margin standpoint, it doesn't matter if they buy $800 M per week or if commit to buy $10 B at the beginning of each quarter or even if they commit to buy the entire $40 B on January 1. It would make no difference at all in terms of gross margin.


(It does, however, matter, particularly on the balance sheet. If they prepay, it reduces their cash by that amount. A purchase commitment might also become a liability if they commit to paying it regardless of whether they need the product or not, but, of course, we don't know if they made that kind of commitment, anyway).

Sorry, Katy, but you're just plain wrong. Of course, anyone who has followed your prognostication for years already knows that.

 

I don't think the analyst is saying that purchase commitments is directly tied to the gross margins.  I think she's saying the reduced purchase commitments are an indicator of minimal hardware changes in a possible iPhone 5s model.  This model, together with stable end user prices but falling NAND prices, would improve margins.  I think the issue may be how this article is written, not the analyst's logic.  Without reading the analyst's original commentary, it is difficult to know for sure.

post #13 of 33

Unthethered Jailbreak for iPhone 5 and iOS 6.x!!! All Apple sites have this news except Apple Insider.

post #14 of 33
Quote:
Originally Posted by Galbi View Post


Your stuck-up thinking goes counter intuitive to the very essence of capitalism.

 

Apple will be in a dire hurt if they indeed listen to what you have to say. What you are wishing for the company is the very opposite of what an Apple fanboy should be demanding. You are basically appealing for its destruction.

 

 

My idea certainly isn't socialism.lol.gif That's what making a cheap iPhone sounds like. Not everybody in the world needs or deserves an iPhone.

 

And I don't wish for Apple's destruction, but as I've written in the past, I don't really care if Apple becomes smaller. I was happy using Apple's products for a long time, long before they ever became as big as they are today. If Apple were to shrink to half it's size, then I'd still be happy, using all of my Apple products like I've always done.

 

And if I recall correctly, you are not exactly a fan of Apple, so if you don't like my idea, then it just might be a good one.1smoking.gif

post #15 of 33
Quote:
Originally Posted by Tallest Skil View Post


Why?

 

Why?

 

Why?

 

Screw 'em. We've seen how many customers actually like their phones compared to the ones that buy the iPhone. They think they want something unusable, they can go buy something unusable. I'd rather Apple keep making good products rather than cater to people whining about things they don't understand. 

+1:)

post #16 of 33
Even a high school accounting student knows that capital expenditures have little immediate effect on margins because they are (duh!) "capitalized", that is, recorded as "assets" and recognized as expenses only gradually over the estimated useful life of the asset. It is pretty alarming that an analyst with a major investment firm doesn't know this basic principle.
Edited by cws - 2/4/13 at 11:05am
post #17 of 33
Quote:
Originally Posted by mvigod View Post

Problem is a 5S is not what apple needs right now.  Unless it is paired with a larger iphone model Apple is going to have a very difficult 2013 as larger phones take more share.  If Cook digs his heels in and refused to do a larger model iPhone things will only get worse.  If they do a larger one they will have the same supply constraint issues and margin issues.  So it almost seems they can't win completely.  They have to choose the lesser of the evils.  Make the bigger form factor iPhone and serve the customers that want it before they go somewhere else

 

I call bullshit on your entire post. 

post #18 of 33

Meanwhile Amazon has NO margins to speak of (1-2%), lost money, and it is the darling of Wall Street.

post #19 of 33
Quote:
Originally Posted by Galbi View Post


It is inevitable for Apple to follow what the consumers are asking for.

You mean like netbooks?
post #20 of 33

I really think whatever Apple does these days, it's screwed.  Wall street is still making money shorting it.  I don't want a cheaper or bigger phone.  I just want Apple to do a big share buy back, reduce the number of shares available so that only retail investors who love the products will hold it.  Unfortunately, a lot of retail investors have panicked in this 30+ share price fall and sold off.  Many had their retirement savings in Apple and couldn't risk any more losses.

post #21 of 33
Quote:
Originally Posted by Apple ][ View Post

And I don't wish for Apple's destruction, but as I've written in the past, I don't really care if Apple becomes smaller. I was happy using Apple's products for a long time, long before they ever became as big as they are today. If Apple were to shrink to half it's size, then I'd still be happy, using all of my Apple products like I've always done.

It is about software. Apple needs to be growing its marketshare to stay relevant. Major developers need a huge user base to make their apps profitable. Apple needs the likes of Facebook and Twitter and other major developers to retain and grow their user base on iOS. On the Mac they also need to increase their marketshare to continue to attract and retain major publishers such as Adobe and AutoDesk on the platform. Remember in the 90s when the Mac became just a niche platform? Adobe and others nearly abandoned their support and delayed release of Mac versions due to diminishing users. We certainly don't want to become second class citizens again in the software department. Apple needs to have a presence in the emerging markets. It doesn't mean they should necessarily make cheaper products but they do need keep them affordable in those new markets, especially China.

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post #22 of 33
Quote:
Originally Posted by NelsonX View Post

Unthethered Jailbreak for iPhone 5 and iOS 6.x!!! All Apple sites have this news except Apple Insider.

Other sites also spell- and grammar-check their articles, but you don't see AppleInsider doing that either...

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post #23 of 33
Quote:
Originally Posted by lkrupp View Post

Meanwhile Amazon has NO margins to speak of (1-2%), lost money, and it is the darling of Wall Street.

That's what I don't understand -- why AMZN stock is flying high, whilst AAPL stock has been stagnant for almost a year now.

post #24 of 33
Quote:
Originally Posted by Galbi View Post


Your stuck-up thinking goes counter intuitive to the very essence of capitalism.

 

Apple will be in a dire hurt if they indeed listen to what you have to say. What you are wishing for the company is the very opposite of what an Apple fanboy should be demanding. You are basically appealing for its destruction.

 

It is inevitable for Apple to follow what the consumers are asking for. Too bad it will be an uphill battle for them as Samsung has a very large lead in that area and its only gaining prescence the more time Apple spends its time twiddling its fingers.

 

Too bad for you, Apple has already taken notice and is already implementing the solutions by rounding up suppliers who can provide a cheaper version of their products. The management team knows it, their accountants certainly do so perhaps its time for the so called fanboys to line up with Apple. No?

 

It's certainly a harsh reality to swallow having to let down your egos and pride to face the harsh reality of life.

 

Look at the reality and stop dreaming.


Apple executives consistently state that their goal is to make the best products possible. As a shareholder, I'm glad that they also manage to be very profitable, too. If they can continue to accomplish these two things, I will be very happy, as will a lot of other people.

 

Rather than striving to "follow what the consumers are asking for," they have typically chosen to anticipate what consumers will most appreciate. There is an important difference here. Consumers wanted an LTE iPhone several years ago, and Apple could have given it to them sooner, but the result would have been crappy battery life (and perhaps lower margins). So they waited, and some people like my sister bought what they thought they wanted from another vendor, and eventually learned to hate their phone. Larger screens are another example of something that some people would like but there are drawbacks there too--harder to type on with one hand, less compact/portable, screen size can impact battery life, etc. Apple lets other manufacturers compete by targeting the minority that wants something other than what will best serve the majority. Sales of competing products are lower on a per-model basis, and as a result their margins are also lower on a product of comparable quality (although I would argue that "comparable quality" is rarely seen from the competitors).

 

Since they do often have trouble keeping up with demand for their hottest products, I can see the logic in thinking they should raise their prices and that may be true, but the only real problem is the ridiculous expectations of some analysts and investors. In Apple's most recent "disappointing" quarter, their profits in this one quarter were more than 2.5x greater than the total of all of Amazon's profits since Amazon first started doing business. So, "looking at the reality" by any normal measure, Apple is doing pretty well, and I've seen no hard evidence that Samsung has a "very large lead" in profitability, product quality or customer satisfaction, which are the things that really matter.

post #25 of 33
Quote:
Originally Posted by Apple ][ View Post

I've written this before, but if margins are such a big deal, then why doesn't Apple jack up it's prices? I don't give a crap if some people can't afford Apple devices, too bad for them. Frankly speaking, life isn't fair, and if somebody can't afford a new Apple device, then go buy something else, problem solved, just please don't whine about it.

What does the fact of you "don't give a crap" have anything to do with anything?!...under what perspective are you even spewing from?  Certainly not from a share holder/owner/board member type perspective.   Can you imagine leaders of Apple not giving a crap?  Thankfully they do.  And while they know it's not feasible, they DO GIVE A CRAP... that there are some markets that they can't reach.

 

Listen, I share your frustration with share prices/margins/units sold/etc....but to then go over board and say that Apple should just jack up prices is quite ridiculous.  Jacking up prices would dramatically decrease their market presence.  And I'm not sure what your opinions are of critical mass, but it's an important factor in the hardware and software computing business.

 

Should Apple have high end hardware?...absolutely!  It can do that while also offering products on the lower cost scale as well.

 

But I don't think it has to be Mercedes, known ONLY for the affluent.  No, no no.

post #26 of 33
Quote:
Originally Posted by Retrogusto View Post


Rather than striving to "follow what the consumers are asking for," they have typically chosen to anticipate what consumers will most appreciate. There is an important difference here.

Yes, yes, yes.  Good post.

 

Apple][ take note.  This is probably the direction your post should be targeted towards, not merely jacking up prices.

post #27 of 33
Quote:
Originally Posted by wubbus View Post

I don't think the analyst is saying that purchase commitments is directly tied to the gross margins.  I think she's saying the reduced purchase commitments are an indicator of minimal hardware changes in a possible iPhone 5s model.  This model, together with stable end user prices but falling NAND prices, would improve margins.  I think the issue may be how this article is written, not the analyst's logic.  Without reading the analyst's original commentary, it is difficult to know for sure.

Read what the article says:
Quote:
But she believes that lower capital equipment purchases and potentially more favorable NAND flash prices could result in improved margins toward the end of 2013.

As evidence, Huberty pointed to Apple's 10-Q filing, in which the company revealed that its purchase commitments for the current quarter are just $904 million. That compares to $4.5 billion just two quarters ago, when the company invested in new in-cell touch displays for the iPhone 5 launch.

Clearly, Huberty is saying that the lower purchase commitments are the cause of the improved margins.

The only other possible interpretation is that she might think that spending less money on capital investment changes the margins. That's not directly true, either. (Indirectly, more capital investment can increase margins if it improves productivity or decrease margins if it does not - but only if the company includes depreciation in COGS which not all companies do).
Quote:
Originally Posted by Galbi View Post


Your stuck-up thinking goes counter intuitive to the very essence of capitalism.

You actually have it completely wrong. The person you were responding to was suggesting (at least partially tongue in cheek as near as I can tell) that Apple should raise the prices to improve margins. That is capitalism at work. There is a direct link between the price you charge and the margins (although volume and COGS can complicate it).

The opposite of capitalism would be socialism - or the idea that Apple should lower its prices enough so that everyone could afford it regardless of how little profit Apple might make. So, essentially, you have it exactly backwards.

In reality, Apple's job - as a capitalist company with legal responsibilities to the shareholders - is to maximize its profits and/or return on investment. If raising the price does that, then that's what they should do. If lowering the price gets enough additional volume to make up for the loss of margin, then that's what they should do.

In the end, no one has a better grasp on the price elasticity and volume effects on manufacturing cost than Apple does.
"I'm way over my head when it comes to technical issues like this"
Gatorguy 5/31/13
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post #28 of 33
Quote:
Originally Posted by jragosta View Post


Read what the article says:
Clearly, Huberty is saying that the lower purchase commitments are the cause of the improved margins.

Before deciding for certain what she meant why not look at exactly what she wrote rather than AI's interpretation of it.

 

"Lower planned purchases of production equipment sets up for higher iPhone 5S margin. The 10-Q discloses $904M of commitments for equipment purchases compare to $4.5B just two quarters ago when Apple invested in new in-cell touch displays for the iPhone 5. The decrease is likely due to iPhone 5S not requiring significant hardware changes, therefore iPhone GM could be much higher in C2H13."

Read more: http://www.businessinsider.com/the-next-iphone-will-look-just-like-the-current-iphone-2013-2#ixzz2JxlV8ckw

 

Now you don't have to guess. It's not what you thought she meant.


Edited by Gatorguy - 2/4/13 at 12:46pm
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post #29 of 33
Quote:
Originally Posted by wubbus View Post

 

I don't think the analyst is saying that purchase commitments is directly tied to the gross margins.  I think she's saying the reduced purchase commitments are an indicator of minimal hardware changes in a possible iPhone 5s model.  This model, together with stable end user prices but falling NAND prices, would improve margins.  I think the issue may be how this article is written, not the analyst's logic.  Without reading the analyst's original commentary, it is difficult to know for sure.

Well done Wubbus. You hit it on the head.

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post #30 of 33
If your sick of all the manipulation of Apple stock (and other public companies as well) do something about it! Send a copy of the letter at this URL to your Senators and Congressman:

http://stop-stock-manipulation.blogspot.com

And you can also sign the petition located here:

https://www.change.org/petitions/stop-the-manipulation-of-stock-prices-by-hedge-funds

No point in just moaning about, we have to actually do something about it... I did 1smile.gif
post #31 of 33
Quote:
Originally Posted by NelsonX View Post

Unthethered Jailbreak for iPhone 5 and iOS 6.x!!! All Apple sites have this news except Apple Insider.
What other apple sites?
post #32 of 33
Originally Posted by skleiniv View Post
What other apple sites?

 

You know, Apple.com, Patently Apple, Scoopertino… "all" other Apple sites.

Originally Posted by Marvin

The only thing more insecure than Android’s OS is its userbase.
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Originally Posted by Marvin

The only thing more insecure than Android’s OS is its userbase.
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post #33 of 33

Apple should always try to build the best devices in the world.  That is its DNA.

 

With that said, they should launch an "iPhone Pro" along with the iPhone 5S later this year.  The Pro model will have a 5" screen and comes with the best bluetooth headset ever.  Apple will standardize the use of bluetooth headsets for the masses.  The Pro model will be more expensive.

 

Apple also needs to focus on iOS 7.  The gap with Android is becoming too close.

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