Apple Vs. Dell: Bad Markets and growth prospects

So Holy crap is the world ending or what?

Fannie Mae, Freddie Mac,  Lehman Brothers, AIG, Bear Stearns.  All out of business.  Goldman Sachs, Morgan Stanley and Washington Mutual teeter on the brink.  

Does Wall Street think Apple is an investment bank?   (PS they have more cash)

Here is an interesting factoid.

YTD Dell and Apple stocks have performed identically (Down 30%), This is nearly meaningless but it makes a nearly meaningless point. (The irony is not lost on me)

Dell is the largest (sometimes second largest behind HP) manufacturer of personal computers in the world.  They are a formidable company that makes a lot of hardware.  But heres the thing.  They sell commodity boxes with a median price point between 6-700 bucks and despite a ridiculous 16.4 Billion in Sales last quarter made $746 Million   That sounds like a lot but here is the take home message.  Their margin is 17% and their Net per share 3.5%  

Apple on the other hand despite being only 4th and making a fraction of the unit and dollar sales of Dell maintained a margin literally DOUBLE 34.8% and net earnings more than 4x Dells. (14.3%).  Apple  Netted 1 billion dollars on 7.4 Billion in sales in the 2nd (their 3rd) quarter.  

Much of the price of a stock is the prospects for future earnings that investors believe the firm has  So what are the prospects of these two firms?  Maybe the sense is that people will buy a Dell instead of a Mac because of the impending foreclosure on the family home? After all Walmart's sales are up this year at the expense of more expensive retailers. Steve Jobs health (why do we say health when what we mean is death?) is a continuing issue, maybe investors are not convinced that the iPhone is the game changer we think it is?  

Dell

Dell has nowhere to go.  They are the price competitor the "low cost manufacturer" that can sell for less than you and still make money.  NO MORE.  Dell is not the low cost manufacturer as evidenced by the fact they are selling manufacturing facilities world wide.  So here is why that matters The price competitor has to be the low cost competitor or.... well you get the idea.  Dell's sales are growing at a pace with or slightly behind the industry as a whole.  Dell cannot and will not become a high margin competitor and by the very nature of the fact that they are at the commodity end of the business cannot grow faster than the industry.

Apple

Apple on the other hand is the innovator, they sell computers that sell for an average price of well over a thousand dollars.  In fact as recently as the second quarter Apple computers represented 66% of ALL computers sold for more than one thousand dollars.  The computer business represents about 45% of their total business and is growing at between 35-50% per year currently.  Their iPod business is flat but very profitable and the iphone business is growing exponentially (but will remain marginal for the next couple of quarters)

Now after having said all this if you had to buy ONE of these stocks which one do you think will have higher returns over the next 5 years?  One more Question... If you were the commodity manufacturer and were looking for a new market to grow into do you think you would want to build computers that could run the Mac OS? Like say Psystar? 

Author is long Apple, this is not advise but you really should call your mother.

iPod Touch on Sale $1455 less than iPhone

Shawn Wu is wrong about this  

American Technology Research analyst Shaw Wu last night warned that Apple's recently-revealed iPod touch price cut may not go far enough, saying: "While we are pleased to see lower pricing, we are concerned that price points may remain too high given the tough macroeconomic environment and relative to the 3G iPhone at $199 and $299."

The iPod Touch is an entirely different product than the iPhone.  Regardless of price which I will get to in a moment, the product is used differently by the person who buys it.  The "price out the door" does not begin to tell the price difference.  If the iPod Touch died after 24 months of use it would cost $1455 (69*24)-199) less over that period.  So you could buy say an iPod Touch AND a really bad used car for less.

Assuming he is thinking of unit sales and he was expecting iPods to be part of the Margin Crushing trend that Apple has told us about I suggest that iPhone Accounting and broader channel Sales of Macs are margin crushing enough.

Repeat after me.  iPods are the CASH COW! ...iPods are the CASH COW!

Squishy Margins: Apple Lower Margins Explained

Apple announced a their last earnings conference call  that they expect Gross Margins to be lower at the company for this quarter and into next year.  Here is a list of Margin squeezing forces that may be squeezing Apples margins.  

No one release, product, or strategy is the culprit here.  Do the MATH  a 2% narrowing of Apples gross margin will translate into almost a billion dollars a year in lower earnings (thats why we care)  That is more money than many new products will do in sales.

iPhone Accounting.  

Apple is accruing the income from iPhones over 24 months.  The expense created to enable the development, manufacture and sale of that phone is written off in the quarter it occurred in.  Apples manufacturing partner is currently rumored to be manufacturing 800,000 phones a WEEK.  The expense for this will show up in the next 90 days.  The income will not be completely realized until September of 2010.

Retail Sales Mac/iPhone

Mac sales are growing like crazy, much faster than the industry.  In order to maintain that growth, Apple has partnered with additional retailers, most notably Best Buy to sell their products.  For recent history Apple products have been sold primarily directly by Apple. 

Broad market competition

The larger Apple gets, the more price sensitive their next marginal customer is... Apple will be lowering their prices on iPods, Macs, iPhones in order to get them into more peoples hands because as has been shown is that if you buy one Apple product you  are MUCH more likely to buy another.

Product X

Product exists as does product Y and Z .  These products will have narrow gross margins on release but I think it is a red herring hiding as the product BY IT SELF will not be large enough a force to lower the margins as Apple has indicated.  All of these forces together are conspiring to lower the margins.

More to come

Apple Everywhere… Margins, Growth and Pervasive Appleness

In the 4th quarter last year Apple earned 904 million dollars on 6.2 billion in income with a Gross Margin of 33.6%. They are predicting 905 million in income on 7.8 billion in income with Gross Margins of less than 32%.  (and 30% for 2009)  Apples Margins may be coming in but they are going to earn more than a 1.00 per share in the 4th quarter this year ( July-Sept 2008 )

Apple has freaked out all the analysts by changing the “Code” they use for what their earnings predictions mean.  Apple is a large multinational company with a large range of products and  sales in 100 countries (yea I made that up) predicting how many for how much and at what cost is a crap shoot at best.  So the “Code” becomes a way for the analysts to come up with a nice safe prediction (safe because it will be close to all of the other predictions.  It is hard to get fired/sued if you have the same prediction as everyone else) that will also be safely leapfrogged by actual results.  

That said Apple has made it clear that they are changing the game in the coming quarters and Gross Margin is expected to suffer as a result.  I have written before Hereand Here about some of the forces at work narrowing margins for Apple.  Apple is not introducing A (meaning one) product that is going to narrow margins.  They have a long range plan to take over the world Grow their business. 

Apple everywhere is a strategic, systematic broadening of Apples scope while simultaneously increasing the barriers to entry for their competitors.

More and lower priced computers, more and higher priced computers more and lower priced phones, mobile computing devices …. Apple is going to meet the market where they are and spend a little less time enticing the market over to them.  How long until the retail price of an iPhone hits $50 bucks? (subsidy still FAT)

RBC today predicted sales of 3 million Macintosh computers in the quarter.  Why not.  The back to school market has shown huge growth (50% Plus over the last couple years) and Apple increased their annual back to school iPod offer to include not a $150 nano but a $300 iPod Touch.  Narrower margins…

Hard to say what comes in the short term but I suspect more computing options for less than $1,000.  Some very competitively priced portables, and more iPhone and iPod options.  The name of the game is Network externalities and Apple knows if you have any one of their products the chances of your taking a chance on another one go up exponentially (yea I made that up too but it goes up a lot) 

iPhone Bonanza

iPhone Sales continue to impress as rumors of 800,000 iPhones per week production numbers in China are stunningly huge. Todays news that the iPhone will be sold at Best Buy locations is another example of Apples now clear strategy of an iPhone in every pot.

Up until recently Apple has been a niche competitor in a very large pool of consumer electronics. They have decided for structural reasons particularly for the iPhone that they want to sell to the broadest possible market in order to create network externalities that will give them a sustainable advantage in the market for years to come. Steve Jobs alluded to it the other day when he mentioned that he sees the long term advantage the iPhone will have will be the software available for it.

In order to execute on that vision Apple has broadened both its sales channels and markets. Selling through third parties however will nessesitate narrower margins