On Apple’s tightrope walk between market share and margins

Quick post here on Apple for the daily summary. The results for the most recent quarter are in and they were under market expectations across the board: on the top line, on margins, on profit, and on handset sales. In my view, this most recent report for Apple was abysmal.

Apple is in a market share/margin quandary that was inevitable, Steve Jobs or not. As I wrote two weeks ago:

On Apple specifically, my call has been that Apple will eventually face a point where it will be forced to go for share or maintain margins. When it decided to maintain margins in the PC business two decades ago, it was disastrous. But, now Apple has a market leader status in mobile, so maintaining margins rather than share won’t be fatal. It will, however, negatively impact growth.

Mobile users with cheapie phones will switch to Android. Apple is not going to chase share in that market. But in the tablet market it could do. While Amazon is creating problems for Google by customizing Android and forking it into a non-Google dominated platform, Amazon powered hardware still requires Android software and apps and that gives Android economies of scale and network effects which will erode Apple’s dominance (see my comments from last year). Google’s entering the tablet market itself increases this more directly. The reason that Apple is suing the pants off of Samsung is because they want to stop the Android menace, not just because Apple thinks Samsung has infringed. I see Apple going down-market in tablets and we’ll have to see how well they execute and whether it cannibalises sales.

P.S. – this has nothing to do with the passing of Steve Jobs. Apple was always going to face a margin/share quandary.

What we see in the Q3 numbers reflects this quandary. It will get worse in my view. Samsung is taking share and Android has become a threat to Apple’s revenue growth. This is precisely the reason Apple is suing Samsung for patent infringement. Apple is afraid. For me, the bottom line is that Apple’s earnings growth has slowed and will continue to slow. When growth turns to contraction as it eventually will, the sell off will begin in earnest.

P.S. – Apple still makes a ton of money and is distributing cash. Apple is a great company but it is vulnerable given its high institutional holding and its lofty price.

Below are a number of good articles that highlight the quarter Apple had.

Apple Falls | ZeroHedge

In Silicon Valley, Patents Go on Trial – WSJ.com

Apple’s rivals swoop as iPhone China sales flag | Reuters

Apple in China: less froth but still pretty darn impressive | beyondbrics

Samsung Galaxy S III Shipments Hit 10 Million in Two Months – John Paczkowski – Mobile – AllThingsD

Apple disappoints analysts despite posting a 21% rise in profits | Technology | guardian.co.uk

Apple claims $2.5 billion damages in Samsung patent case | Reuters

Apple misses estimates as iPhone sales fall – MarketWatch

Apple Misses Expectations – WSJ.com

Apple revenue misses Wall Street forecasts, shares plunge | Reuters

That’s it. Here are the other links.