Are the risks to Apple's stock as serious as some investors think?
The equity research arm of Barclays just put out a report on Apple, and it has a handy chart summarizing all of the main concerns investors have with the stock right now.
The concerns are: 1) Long term operating margins; 2) competition for iPhone; 3) competition for iPad; 4) no “next big thing; 5) concerns over maps; 6) management changes; 7) production execution; 8) execution risks in vertical integration
Let’s dive into these a bit, shall we?
I think it’s safe to lump the first three items into the same category. The market is worried that iPad and iPhone competition (mainly Android) will hurt profit margins in the long run.
In the parts of the world where Apple is kicking ass the only real competition these days is Samsung. And I don’t think I need to remind you all that Samsung is not a discount vendor. Their average selling prices aren’t much lower than Apple’s. When carrier subsidies are taken into account, the price consumers pay are very reasonable. So I’d say the real risk to long term margins is whether or not carriers can continue to make money from iPhone and Samsung Galaxy subscribers. If wireless data margins take a hit, subsidies will drop and pricing pressure ensues.
Yes, there is some pressure coming from Google’s Nexus 4, and the Kindle Fire HD. But the volumes of these two products are really a drop in the bucket compared to what Samsung is selling. The Kindle Fire HD sure looks like a great tablet, but it’s essentially meaningless outside of the US, which accounts for a relatively small percentage of the global opportunity
What allows Apple to maintain its pricing power, as always, has been the beautiful integration and simplicity of hardware, OS, apps, media and services. Apple has maintained pricing power in the PC market for ages and they did it without the scale that they now have.
So why is everyone suddenly worried about profitability? Apple has all the same advantages they’ve always had, plus they are now huge. Their iOS market share in mobile computing makes Mac OS X market share (in PC land) look like a total failure.
Last quarter’s guidance of 36% gross margin has some investors concerned about profitability. But if you look back to their latest quarterly results the explanation Peter Oppenheimer gave is quite reasonable. Apple just threw the kitchen sink at us by refreshing pretty much everything they sell in a single quarter. The ramp-up effect on margins is something I’ve seen many times before at other companies. It isn’t Apple making up some kind of excuse.
The whole idea of Apple not having a “next big thing”? Honestly, how can people seriously make this kind of comment? When the iPhone was first announced, did anyone see it coming? And the iPad - yeah, people though a larger iPhone was coming but really, we had no idea just how big a deal it would be. So why, all of a sudden, does the whole world seem to believe they know what Apple won’t be doing?
What about the management changes? The loss of Steve Jobs is an obvious concern, and one that has been out there for more than a year now. Yet Apple has released some of its best products ever. I don’t think we’re going to know just how well (or poorly) Apple deals with his loss for a few more years.
The loss of their retail executive, John Browett, doesn’t bother me in the least. If he didn’t fit in with the Apple culture, they needed to cut him loose. This just doesn’t seem to have any long term implications to me.
So, besides Steve Jobs, I think the executive changes at Apple really boil down to the recent elimination of Scott Forstall. He was instrumental in the launch of iOS, but that was 5 years ago. Under his leadership, Apple has carved out a massive lead in the creation of the most powerful mobile computing ecosystem on the planet. I’d suggest that a leadership change, at this point, is less of a risk.
Finally, let’s talk about supply risks. Apple probably won’t make enough iPhone 5 to satisfy demand this quarter. Is this really anything new? I don’t think so. Apple has consistently pushed the limits on manufacturing techniques for its products. It has typically run into short-term shortages after a major release. Yet it has always caught up over a couple of quarters.
Apple is also shifting away from Samsung as a fab for its application processors. There are execution risks in making this happen, but it’s not like shooting at a target and hoping you hit. Apple doesn’t just stop making chips at the Samsung fab, move over to Taiwain’s TSMC, and pray for good yields. No. Apple has contracts in place with Samsung, and despite rumours of higher prices, I suspect they’ll have supply continuity until they complete their transition away from the Korean chipmaker. Remember that Samsung isn’t selling product to Apple.
They’re selling fabrication services. Apple owns the chip design.