Apple, Wall Street and Schizophrenia

October 30th, 2013

As usual, Apple must play by a different set of rules when it comes to Wall Street. You would think a company’s profits would actually make a difference, but that expectation would be wrong. So even though Apple’s margins, though somewhat lower than before, are the envy of the tech industry, it’s just not enough. Well, at least as far as Apple goes.

So we see the peculiar situation where a Wall Street darling, Amazon, hardly runs a profit and usually runs a slight loss. The usual excuse is that the money is being poured back into the business, to fuel future growth. It’s also true that there are more and more Amazon shipping centers around the U.S., with more employees being hired to work with them.

Of course, there’s the conspiracy theory that Amazon hopes to put smaller merchants out of business by undercutting them on price and services. After that, prices will climb, and so will profits.

To be sure, Amazon offers really good service. If you are a member of “Prime,” a $79 annual program that gives you free two-day shipping on most items, plus instant videos and other benefits, you may really make out ahead if you’re a regular customer. Sometimes it’s even faster than two days, as it is in the area in which I live, Phoenix, because Amazon has a shipping center in the area. Some items, particularly from third-party merchants, don’t qualify, and getting guaranteed next day delivery may deliver a horrendous surcharge.

The Kindle e-book readers have garnered favorable ratings, and they are cheap. Indeed, Amazon doesn’t appear to make much or any profit from them; the profits supposedly come from the items purchased through Amazon’s storefront access on those tablets. But Amazon doesn’t make profits from those sales either. It’s all about cash flow.

Regardless, Amazon’s stock maintains a pretty good growth curve.

Apple? Well, the financial community isn’t able to deliver a consistent set of recommendations. So we have the peculiar situation of the company’s stock price being battered because of lower profits. Why are profits lower? Because the product mix has moved towards lower priced gear, which deliver slimmer margins. This makes perfect sense. Indeed, Apple CEO Tim Cook has said yet again that the entry-level iPhone, which is now the 4s, will be pushed to emerging countries, and it’s clear there will be flexible pricing. No, the 5c was never intended to be cheap.

This is actually a good thing. I owned an iPhone 4s, and it was a great smartphone. Sure, it’s not as fast as the iPhone 5 series, particularly the iPhone 5s, but most people won’t see it as necessarily slower. The 3.5-inch screen may be a negative to some who cherish five inches or more, but it’s perfectly comfortable for normal one-handed use. In fact, at one time the iPhone’s original display configuration was actually considered large.

When it comes to the iPad, the mini garnered what appeared to be a larger-than-expected share of the market. Since profits were lower, it negatively impacted Apple’s margins, as did the front loading of lots of new gear last year, a situation that has somewhat repeated itself this fall. Understand that Apple’s double-digit margins are, once again, much higher than that of other companies, which often report profits in the single digits, if profits are indeed being earned.

Now we have the situation where the financial community continues to admonish Apple to build cheaper gear, to expand the market against the encroachment from Android, and particularly Samsung. Although Apple has only rarely dominated markets for any length of time, and the iPod is a rare example, the Street wants the company to change or face the prospects of becoming irrelevant. But when Apple does build lower cost gear, which naturally impacts profits, that’s the wrong thing to do.

Indeed, if anything, it’s clear that Apple is more and more sensitive to price. Take the Mac. Sales are down somewhat, though not quite as much as some of the PC industry biggies, but you’ve seen new models at lower prices, and the decision to make OS X, iLife and iWork free. By making some software free, Apple deferred $900 million of earnings for arcane accounting reasons, but this is part of a long-term strategy to keep the Mac platform viable and deliver greater value to customers.

So would those alleged financial wizards prefer that Apple increase the price of Macs, and charge $129 for Mavericks? It’s clear that Apple does offer savings strategically, rather than across the board. But if somewhat lower profits mean that Apple expands markets in meaningful ways, with quality gear rather than cheap junk, it certainly works to the benefit of the company. It also helps customers, because Apple can continue to invest in cutting-edge gear.

I mean, how many smartphone makers figured out a user-friendly way to add a fingerprint sensor? Compare Apple’s solution, Touch ID, which mostly just works, to the convoluted, confusing version from HTC. Does HTC really believe that sticking the sensor in the rear, below the camera, is a better solution? Apple also added 64-bit processing ahead of the industry who, after saying it wasn’t necessary, were only too happy to promise their own solutions.

So we have Wall Street at once wanting Apple to sell more lower priced gear yet, at the same time, increase profit margins. You can’t have it both ways.

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2 Responses to “Apple, Wall Street and Schizophrenia”

  1. AdamC says:

    I wonder how these analysts will feel if they are paid on future earnings.

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