We have authored several articles about Apple’s margins over the past few days. Here is a brief summary: the talk about Apple is going to be all about its gross margin guide for Q1FY13 at 36%, with bulls and bears (not many) fighting it out on whether or not we have already seen the peak gross margin in the stock in FY12 (i.e. Q2’s level in the high 40% range).
Adnaan Ahmad, an analyst at Berenberg Bank has an interesting take on the topic. He issued a report today titled ‘The talk is all about the gross margin guide.’
In summary he notes that ‘Apple’s time to turn from a tech titan into a dinosaur will come’, but he thinks that we are at least a year away from Apple’s more worrying moment: a slowdown in its iPhone business. This is important, as the iPhone is still the highest gross margin product, and it grew by 58% yoy this quarter. Not bad for a product segment that is over five years old!
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The concern is obviously that with a high teens market share in the smartphone space, its share gains (like this quarter) will tap out given the high price points.
This quarter, for example, ASPs were $636, which compares to $55 ASPs at Nokia, $150 ASPs at Samsung and $200-250 ASPs at HTC and RIMM. For Apple Inc. (NASDAQ:AAPL) to gain wider share of the smartphone market, it will need to offer “customised” products at lower price points (i.e. pre-paid iPhone), rather than continue with its current strategy of dropping price on a one- or two-year old product.
This will have similar margin ramifications to those that the mini has had on the iPad segment, and if Apple decides not to have customised lower-end iPhones, then growth will well and truly tap out once the China Mobile deal is signed (likely in H213). Outside of Samsung playing a price war game against Apple Inc. (NASDAQ:AAPL), this slower growth trajectory of the iPhone business is Apple Inc. (NASDAQ:AAPL)’s single biggest concern.
On the Supply Chain and companies which do business with Apple
Perhaps Apple’s gross margins have peaked, or perhaps not. But he asks ‘would you want to own Apple’s supply chain?’
The most-asked question Berenberg Bank faces is which suppliers of Apple to own – their usual response is none! Look at it this way: if an 800lb gorilla is having some margin issues, how is its supply base going to fare? To say that Apple Inc. (NASDAQ:AAPL)’s volumes are going to be great this quarter may work as a channel check – but as an investment, it rarely does.