Apple Refuses to give away Computers: This investor Cheers!!

$899 computer....  

Apple said their margins were going to get squeezed over the next year and the whole world thought.  Oooohh Apple's giving away free stuff!  (However unlikely I thought it was a possibility too)

Real back of the envelope stuff here but here it is.  Apples PPU (Price per unit) on computers of all kinds fell only 80 bucks from the year ago quarter.  

If Apple dropped the price of the lowest price laptop by $200 bucks and since the product mix favors sales of the lower price laptops a $200 price drop would have an outsized effect on the average.  combine that with the falling price on the Air and average PPU could drop by $200 would mean that just to maintain revenue equal to last quarter they would have to sell 20% more computers just to maintain their 3.6 Billion in Revenue.

So here is the take home.  If the business is growing. and revenue is growing.  Don't give up margin.

Apples cost to make a less expensive (at retail) computer is only pennies cheaper than making a more expensive one.  Apples strategy has and apparently will be (until it is not) to try and add further value to convince us that we do not want a $600 laptop.  (In fact Apples average PPU will be crushed this quarter anyway because of the Back to School promo but will be similar YOY)

I will write some more later on the effect this has on Earnings Growth prospects for next year.

Here are some related links

Reasons for Narrower Margins

Earnings release next week

Apple Crushes Dell

Why Apple should pay a dividend

Is Apple stock cheap?

Writer is Long Apple and is depressed that the Red Sox cannot beat the team from Tampa.  If your depressed you may be a Red Sox Fan too.  Don't love the Red Sox it only brings pain.  Love Apple but not because of Writer OR the Red Sox

iPhone Ubiquity

The iPhone is the coolest gizmo I have ever owned.  Nothing, compares.  Not my baseball cards, my Camera, stereo high def-TV, convertible, toaster oven, None of it.  Not even my Mac Plus (which back in the day was pretty badass)

The iPhone is simply put the single most compelling computing device to hit the market since the first PCs 30 years ago. 

It is clear that the iPhone as a handset and platform are so dramatically different and better than current market offerings that sales growth will continue to be freakish.

Gene Munster Put Apple on its "Alpha"  (Piper Jaffray)List this week indicating that there is significant short term upside in the stock of Apple (AAPL).  While mentioning that he expects Apple to sell 45 Million handsets next year.  45 MILLION.  I have not seen another analyst reporting a number that big.

Reports of manufacturing runs of 800,000 a WEEK being reported by several sources.

Munster mentioned Apples Back to School promotion which gives buyers a $299 incentive to purchase a Mac  (Free iPod woo hoo).

So I did some analysis of my own.  and projected out Sales thru 2014.  It is a Projection so by definition it will be wrong. 

Assumptions

• 15-20% annual price declines
• 10-15% cost declines
  
• iPhone kabuki deferred earnings
• 30% market share in 2014 (Nokia has 40% today you think thats going to hold?)
  
• 37% tax rate
• Declining growth in the Handset market 20-7%

I project Apple with 30% of the handset market in 2014.  (I made it up)  Nokia has 40% of the market currently so it is not unreasonable to assume that one company could have a share of that size.  There will be competition from someone we don't know who yet but someone will come up with a compelling competitor to the iPhone platform.

As a thought experiment Apples earnings per share could be 12 bucks a share from iPhone sales ALONE in 2014.  Oh and BTW 23 Billion in additional deferred earnings.  

Enjoy.

Let me know.  I can send you the Excel...

The writer has been long AAPL for a long time.  The writer is not giving advice (call your mother) am not telling you to buy this stock, and think that people that don't do their own research are lazy and doomed to failure 

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