Apple Inc. (NASDAQ:AAPL) showed analysts something exceptional in yesterday’s earnings report, and it wasn’t the company’s iPhone sales, which were pretty great by themselves. The firm’s gross margin for the third quarter of 2014 came in at above 39%, and the company is expecting margins to stay high well into the future. The firm is continuing to break the narrative that smartphone commoditization is inevitable, and it’s ready to keep doing so.
In its earnings report Apple Inc. (NASDAQ:AAPL) said it was expecting gross margin to hit 37%-38% in the next quarter. Gross margin is usually one of the major victims of a new iPhone launch, and the iPhone 6 launch appears destined to shave a few points off of the number, but not enough to justify worrying. Katy Huberty, of Morgan Stanley, said that the company’s revelation “removes the margin bear case.”
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Apple throws its iPhone 6 weight around
Samsung has tried almost everything to set itself up as a competitor to the Apple Inc. (NASDAQ:AAPL) entrenched position at the top of the smartphone world, but release after release has resulted in collapsing margins and withering profits. Apple Inc. (NASDAQ:AAPL) is the only company seemingly able to keep its margins respectable.
There are several ways in which the company does this, and they are mutually reinforcing. The likely dominance of the iPhone 6 in the smartphone world is one of the company’s greatest strengths. Leveraging the projected sales of the iPhone 6 has allowed the company to negotiate brutally with its suppliers, killing their margins while padding its own. there is another major factor that Apple Inc. (NASDAQ:AAPL) has in its favor, however.
Apple builds a moat
Coca-Cola has managed to keep its margins pretty high over the last hundred years, and Apple Inc. (NASDAQ:AAPL) appears to be following in its footsteps. The wider soft drink market has, of course, been massively commoditized with the margin of a bottle of store-brand cola likely edging toward zero on a good day. Coca-Cola’s margin was above 60% in 2013.
Apple Inc. (NASDAQ:AAPL) has built an incredible brand, attached it to an entire product ecosystem, and provided great customer service. The company’s future has been secured by this almost inescapable trifecta. The company’s moat may not be quite as strong as The Coca-Cola Company (NYSE:KO)’s but its efficacy in recent years means it might live to be.
Apple Inc. (NASDAQ:AAPL) makes computers, but its branding operation is involved in something closer to the work that’s been done at Coca-Cola. Apple has done its best to make Americans think of its brand as synonymous with quality and great design as well as the very idea of mobile computing. The company’s success can be seen in its gross margin numbers, and in the relative earnings the company garners from its app store.
Apple Inc. (NASDAQ:AAPL) appears to have gotten over any panic about its margin. Most competitive industries are eventually commoditized, and it’s true that this happened to the PC industry and the non-iOS mobile industry very quickly. Apple Inc. (NASDAQ:AAPL) has, however, built a moat that keeps it safe. It’s not unassailable, though Samsung executives who’ve been targeting it for years may think so.