Crucial Times Coming for Apple
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The holiday quarter is economically important for calendar reasons, and that has its implications on the yearly figures of every company. In Apple´s (NASDAQ: AAPL) particular case, it’s much more than that. The company is preparing a series of all important new products, and this could be a defining moment in Apple´s history.
The biggest company in the world will likely be launching a new iPhone, its biggest product in terms of sales, and a new and smaller iPad is expected before year end. Apple is also rumored to be launching new Macs and iPods, in what could be a complete presentation of next generation products.
After the death of Steve Jobs in October of last year, this will be the first big and important move made by the company without its visionary leader. Investors and stock analysts will be watching these products like hawks, trying to find out if Apple is still an innovative company with superior quality standards, or if that talent has died with Steve Jobs.
Apple is betting really big on the holiday quarter; the company increased certain items on its balance sheet which are quite telling. Component prepayments increased notably to record levels in the last quarter, both in absolute terms and in relationship to sales. This means that Apple is securing supply, and it looks like they are planning to buy a lot.
They are doing the right thing by planning for big demand: Apple has many loyal customers, and even true fanatics around the world, this guarantees a considerable level of interest. On the other hand, this can be a double edged sword, planning for big production increases costs per unit when sales are below expectations.
So, if you are too optimistic on sales, you are probably too optimistic on margins too. A double hit to earnings. Could things go wrong for Apple?
Google (NASDAQ: GOOG) will probably keep gaining market share with its Android for smartphones over the following months, as iPhone customers hold back waiting for the next product. But Apple can still do really well in the smartphone business if it keeps its premium positioning, it doesn´t need to be bigger than Android to continue growing nicely.
The smaller iPad is a move which seems aimed at attacking Amazon´s (NASDAQ: AMZN) Kindle products. Amazon has managed to capture the low priced segment of the tablets markets, achieving considerable growth with the different versions of Kindle. If Apple can enter that segment successfully, it could attain a total dominance in tablets.
But the smaller iPad will probably cannibalize the traditional version of the device, and it will likely have lower margins in order to compete in the low price segment. Amazon doesn´t disclose precise margins for the Kindle, but they are admittedly low. The smaller iPad could still have a negative effect for overall profit margins for Apple even if it’s a commercial success.
It will ultimately depend on the quality – including image and differentiation – of the products. If Apple delivers solid products over the next months, it will likely show a blockbuster holiday quarter. In that scenario, the stock could have a considerable upside potential considering its trading quite cheaply at a forward P/E of 11.5.
If Apple can bring a next generation of products worthy of the company´s stature, the stock could rise strongly in the following months. On the other hand, there will be little or no tolerance for any disappointments, not for Apple after Steve Jobs.
Over the rest of the year we will see many important moves from Apple, and they will have big implications both in financial terms and when it comes to investor´s sentiment about the stock. We should certainly pay some close attention to Apple over the following months.
acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.