According to several reports, Apple has already beaten its 2008 sales goal of 10 million iPhones. The big question for Apple investors (full disclosure, I am one) is how much the economy will affect the company’s numbers over the next 6-12 months. While it’s almost impossible for them to go unscathed during a massive downturn in consumer spending, there is significant reason to believe that Apple may be far better insulated than the market is currently assuming.
Most of the analysis I’ve read seem to be missing a few key points:
1) iPhones Are Cheap:
While the iPhone only represents a fraction of Apple’s earnings, it is a significant driver of new income (and free cash flow). What’s interesting is that only 1/3-1/2 of it is actually coming directly from consumers in upfront costs; the remainder is being fronted by AT&T. So while there are a slew of new smart phones entering the market, the iPhone is not only the best one available (arguably, I guess), but also one of the cheapest.
Now, there’s an argument to be made that this initial discount is more than made up for in the ongoing service costs. This may be true, but the reality is that the cost for voice/data plans amongst the two biggest carriers (AT&T and Verizon) are very comparable. So while some cash strapped consumers may flee to discount carriers (Sprint, T-Mobile), the iPhone is still very price-competitive with just about any smart phone on the market.
There’s also some concern that consumers will trend away from smart phones in the next few months, opting for less expensive traditional phones. But this doesn’t take into account that smart phones are now as cheap as traditional phones were, going back even a year or two. With the added productivity smart phones bring, its unlikely that consumers or businesses will reverse this transition.
2) Apple Computers Are Also Getting Cheaper
Apple’s primary earnings source is, of course, its Mac business. Analysts are concerned that margin compression, combined with a macro-induced slowdown in computer purchases, will ultimately tear into Apple sales.
As I’ve written before, though, Apple seems to be making manufacturing efficiency one of their core competitive advantages. Over the last two years, the company has made Macs more price-competitive (essentially in line with comparable PCs) without impacting margins. Rumors about their new “Brick” manufacturing process seem to be leading down this same path. Of equal importance, as the #3 computer manufacturer, and #1 portable manufacturer, Apple has an increasingly unique ability to leverage economies of scale. Combined, these factors offer significant hedges against margin deflation, even against a backdrop of declining prices.
3) Apple Will Probably Introduce a Sub-$1000 Laptop Later This Month
While these are certainly just rumors, there seems to be increasing consensus that the new MacBooks will begin at a price point under $1000. This, obviously, is a key space to compete in during a downturn. If the rumors are indeed true, Apple will likely not only prevent consumers from “trading down” to other manufactures, but they may actually accelerate sales volume in segments they previously have not competed in.
Long story short, Apple is offering some of the best products, with what could be the best cost efficiency in the industry. For the last five years, they have grown exponentially as more and more people become aware of the benefits of their products. There is no reason to believe that this trend is over. While the market may continue to hammer the stock, there are plenty of compelling reasons to believe that Apple will continue to deliver stellar performance, and be one of the few tech companies that is well-suited to handle the recession.
UPDATE: Piper Jaffrey today apparently seems to concur with much of the above.
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