Apple Inc. (NASDAQ:AAPL)'s iPhone margins may have much further to fall according to a new report. A Trefis Research analysis shows that the ratio migh fal below 40%.
Apple Inc. (NASDAQ:AAPL) shares are still reeling from its less that impressive earnings report for the fourth quarter of 2012. One of the worries of the analysts following the release of that report was the compression in the company’s margin on the iPhone 5. That ratio fell to 53 per cent in the last three months of 2012, but might have much farther to fall in the years to come.
A behemoth of a report from Trefis Research looks at the iPhone 5 gross margin, and projects that it is on a downward trajectory. According to the report’s predictions the iPhone 5 margin might fall to less than 40% by 2019. Though that number might scare some investors, the Trefis analysts view the trend as natural in an increasingly competitive market.
Margins on the iPhone 5 have fluctuated in the last five years, starting at 57 percent in 2007 and hitting a high of above 60 percent in 2009. The ratio is not expected to increase going forward, however, meaning that Apple Inc. (NASDAQ:AAPL) will make less money on each iPhone 5 it sells, and less again on each subsequent iPhone model.
The reasons for the decline in margins is simple enough. Average pricing for the iPhone has fallen because of the huge increase in competition in the market. When the iPhone was initially released, it was competing with very few devices, and none which offered the same set of features. Now it’s competing with several devices that are very close in design.
That has put a downward pressure on the average pricing, and therefore compression in the margins. A second pressure on the company’s margins is the discounting of the company’s older iPhone models. The current price of the iPhone 4, when priced into the company’s total iPhone margin, reduces the overall margin.
Despite the trend, the Trefis Research analysis does not find anything particularly damning for Apple Inc. (NASDAQ:AAPL)’s future. Apple Inc. (NASDAQ:AAPL) is likely to improve certain parts of its margin make up, and those parts are more important for the company’s future. Component costs, along with the costs of other inputs, are expected to fall as manufacturers improve production technologies.
The smooth decline in the company’s margin decline is probably unlikely year-to-year. The company is likely to suffer uneven declines from year-to-year, and there will likely be some years in which the company increases the margin. The real declines will come when the firm introduces expensive new technology, like it did with the introduction of LTE on the iPhone 5.
Even though the iPhone gross margin is expected to decline every year according to the analysis, Trefis Research still expects the company to grow. Trefis estimates that the company is worth around $650 billion. the market currently values the Cupertino firm at just over $450 billion.
The company sees the iPhone segment as responsible for 50% of Apple’s stock price. Apple Inc. (NASDAQ:AAPL) will, according to this report, continue to grow its earnings until 2015 when profits are predicted to slacken off. Revenues are projected to level off in the smae year at around $245 billion.