Apple Stock: Among the Nutty Theories, a Legitimate Worry

Any tech investor can name lots of reasons for the repeated sell-offs in Apple (AAPL) shares lately, and to some extent, they’re probably right about all of them. But when you cut out the hysteria and look at the real numbers at hand, the most reasonable worry boils down to this: that Apple’s profit margins will shrink substantially, even if its products remain top dogs in its markets.

There’s a rising tide that believes Apple products, priced higher than competitors in every category, are losing appeal as cheaper competing products gain in quality. Supporting the theory are sales gains in Android powered smartphones, which have outstripped iPhones 3-to-1 this year. Unlike iPhones, Android phones come in a huge variety of price points. Tablets from Amazon.com (AMZN) and Google (GOOG) also eat into Apple’s market share. A lot of investors blame this rising competition for Apple’s recent share price weakness.

AAPL Chart

AAPL data by YCharts

The theory goes that Apple will be forced to lower iPhone prices or to create cheaper versions at lower prices, as it did with the iPad mini and further back, the iPod Shuffle. Those sorts of add-on products typically are less profitable and could ultimately depress Apple’s famously stellar profit margins.

AAPL Gross Profit Margin TTM Chart

AAPL Gross Profit Margin TTM data by YCharts

At the moment, however, it looks like Apple’s competition has some ways to go before it can force seriously low-priced products out of the company. The relatively expensive iPhone still accounts for about 17% of all smartphone shipments, and there are still gazillions of smartphones yet to be sold in the world. Four out of five mobile phone users still own dumb phones. T-Mobile just signed on to sell iPhones at full price ($650 to $850), which will likely add several million users to the Apple family. iPads are shipping three times faster than iPhones did at this stage of their adoption. Nearly half of American kids aged 6-to-12 have asked Santa for an iPad this year, according to Neilsen. (Kindle Fire, 19%). All in all, it’s looking like a pretty good Christmas for Apple, regardless of what Google and Amazon are selling.

That’s not to say Apple won’t see margin pressure in the near future, as it would be the typical cycle for any product, and particularly for those like Apple’s that create new industries. In the past, Apple has kept its overall profit margins aloft by rolling out another revolutionary device just as excitement over its last one began to wane -- the iPhone after iPods saturated the market; and the iPad as competition caught up to its smartphone.

Apple TV, anyone?

Dee Gill, a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.

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