Apple Final
While we cannot give specific stock advice you can run through the numbers laid out here and get an idea of how to think about an investment in Apple. There are only two key points to look at when you consider investing in Apple. Product Sales and Margins. While the current spotlight stands on capital allocation policy ($3.05 quarterly dividend and $60B repurchase authorization) at the end of the day what matters for the Company is its long-term revenue and earnings growth.
Product Sales: Simply put, are Apple products becoming commoditized? Blackberry and Nokia have suffered similar fates where growth degrades as the product becomes similar across all brands. In addition, if the products are similar, the only thing that matters would is cost. To simplify the question, are Apple products still differentiated? If you believe so this is a positive if you believe that it is not then this leads to price competition… Which leads to point number two.
Margins: A commenter asked for a gross margin profile, this is actually quite a difficult exercise given the product categories, but should make for a decent discussion point.
iPod: This product line continues to decline as people purchase iPhones and iPads instead of iPods. However given that the product has no connection to subsidies and is likely becoming more and more commoditized, we can conservatively assume a 25% gross margin profile.
Mac: This product line also likely runs below corporate average due to the commoditization of PCs. In addition the latest Apple products have historically had yield issues (noted during Apple conference calls). We can place a 25% gross margin profile here.
iPhone: You can triangulate that this has company leading gross margins due to carrier subsidies. In addition the iPhone has lower component costs (screen is smaller). This is the most important product line to gross and operating margins. If we build a bottoms up model, you can assume a 45% margin profile.
iPad: Given commentary from Apple “Under corporate average margins”, we can assume closer to 30% for the line. However, this product is driving year over year revenue growth. While this is a drag to the corporate profile it is a positive boost to point one – product sales.
iTunes, Software and Services: The truth is that all software should be labeled near 100% GMs but the model will be difficult to track with a 100% flow through. Instead we peg this at the 40% water mark that the investment community has been eying for the past several quarters.
Accessories: Similar to Mac’s and iPods, the products here are likely cheap and run at low margins. Again the higher margin is coming from a software/subsidy perspective and reoccurring streams. So if we place a 30% margin here, it seems reasonable.
Conclusion: Interestingly, during the Mar-qtr the company stated margins for iPads were impacted by higher sales of the iPad Mini. If we deduce this means the margins for this product are a tad lower we can run the aforementioned numbers through the model and it balances. We’ll have to wait until next quarter to see how this plays out but it should be interesting nonetheless.
For the previous model click here.
