An Apple Quandry: More Products or High Margins

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Just one full trading day remains before Apple (NASDAQ: AAPL) releases what could be one of its most crucial earnings reports in recent years, so to say the natives are restless is an understatement.

While waiting for the release so far this week, the market has been bombarded by news of several more Apple products that could hit the market by the end of the year. It leaves me now to ask a very common question now nagging Apple, and that is how will it deal with decreasing margins if it wants to roll out cheaper products?

iPhones of all sizes

There are rumblings that Apple is making a smaller version of the iPad mini (is that possible without calling it an iPod?) and a smaller iPhone. Also, it was reported Monday that Apple is testing a new version of its operating system called iOS 7.

One of the devices is said to have a 4.8 inch screen, which is larger than the iPhone 5’s screen size. Noteworthy is that the larger screen size is the same size as Samsung’s wildly popular Galaxy SIII.

These rumblings seem to fly in the face of reports last week that Apple was cutting its component supplies for the iPhone 5. Still, adding and diversifying its pipeline of products would help it compete, especially when it comes to smartphones. Remember, the smartphone market will get a little more crowded when Research in Motion unveils its new BlackBerry 10 on Jan. 30. Its operating system has long been touted as a top choice among its corporate clients. RIM’s new device has the potential to dampen market share growth for both Apple and Google Android-powered devices.

Also, look out for Mr. Softy as I noted in a story about Apple’s first quarter earnings report of the year. 

Proving high valuation

Apple may have a time proving to investors and analysts that it can continue to maintain the high profit margins it once achieved as it produces cheaper devices. If you’d asked me a year ago if Apple was capable of doing this, I’d eagerly say yes. Now, not so much, as I continue to be enamored by the many of products being rolled out by Apple’s competitors.

Consider this. As Apple rolled out all those products last year, its profit margin declined. Its gross profit margin fell from 47.37% in March to 40.04% in September. Its profit margin fell from 29.66% to 22.56% for that same period.

The onus will be on the company to show that it can continue to earn record profits on products that have price points that are considerably lower than its premium products. Apple must also show that it can do this as it faces higher manufacturing costs that pressure its margins.

If your mindset about Apple makes you completely indifferent to any opinion that it has margin challenges, I turn you to the company’s last earnings report. In October, when it reported fourth quarter results for 2012, it issued guidance that was troublesome.

Apple CFO Peter Oppenheimer acknowledged that margins on the many new products that Apple rolled out last year are lower than their predecessors. In addition to the new iPhone and new iPads, Apple also unveiled new Macs and iPods, too.

Still want a bite at the Apple?

If you thought that the iPhone 5 and iPad were enough to make Apple a stand out among its peers, you are dismissing and not giving credit to the booming sales of its peers. Even the company seems to be joining the fray, making variations of products in its pipeline that are similar to its competitors. Take the iPad, for example. The 10-inch screen on the device was at once thought to be ideal. However, manufacturers like Amazon proved that theory wrong with the unveiling of 7-inch screens for their tablets. Despite Apple icon Steve Jobs at one point saying that such a smaller screen would be pretty much useless, Apple last year rolled out the iPad mini.

With all of this being said, I think investors are justified if they worry the company’s stock rise may be affected by it offering a suite of products with lower margins. A screaming headline that went viral on Apple on Tuesday is that the challenges it faced over the past year may lead to its first reported profit decline in a decade.

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TwillyD has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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