Wednesday, September 19, 2012

Apple's iOS vs Google's Android: Who's Winning?

According to this article, Google's (GOOGAndroid is Winning. At a minimum, the latest worldwide market share numbers for the Android operating system were rather impressive during the 2nd quarter.

But is Android really winning?

According to Gartner, mobile devices using Android captured roughly 64 percent of worldwide market share.

Apple's (AAPL) iOS-based iPhone captured more like a bit under 19 percent. 

Now, as this article points out, consider that it was a quarter where Apple's iPhone purchases had "paused" in anticipation of the iPhone 5. Of course, that's not going to close the huge market share gap but is still relevant.

There's also a huge difference in economics.

This article compares Apple's profit share to competitors and also provides a useful chart.

It turns out that Apple had 77 percent of the mobile industry profits in the 2nd quarter. Who wins from here? I don't know but you have to define what winning is. If market share is your objective, then Android seems to be winning. If profit share is the objective, then it's iOS that's winning.

In my book it's whoever has an approach that ends up sustaining high return long-term profitability.
(As opposed to chasing low return market share, indefinitely. Going after market share for a while can be a smart, but only ultimately makes sense if it ends up generating high returns on capital for shareholders.)

Naturally, the current numbers can't reveal what's going to happen over the long haul, but Apple's profit share is rather exceptional. That doesn't mean Google (and competitors that rely on Android) aren't also doing what's right for themselves.

So the company's fortunes is now firmly driven by that phone more so than other other products. It's not just because it makes up such a large percentage of revenue. It's also because the margins on the iPhone come in something like 2x that of the iPad. According to this article, the iPhone has had gross margins in the 49 to 58 percent range while the iPad is more like 23 to 32 percent going back to 2010 (April 2010 for the iPhone and October 2010 for the iPad).

Healthy margins in both cases, at least for now, though still difficult to gauge just how that might change over time.
(Also, consider that the iPhone was likely held back by the anticipation of a new release.)

Nearly 80 percent of Apple's total revenue during the quarter was from products based upon iOS. Products based on iOS include the iPhone, iPad, and iPod Touch. What's worth noting is just how much of Apple's revenue and profits come from just the iPhone. According to this 8-K, revenue from products based on iOS was $ 30.5 billion for the quarter with $ 22.7 billion coming from iPhone. Based upon the gross margins noted above and the revenue mix, the iPhone likely makes up a bit less than two-thirds of Apple's profits.

Apple's blended gross margin were 42.8 percent and net margin more like 25.2 percent.

All very impressive especially since the company's return on capital is currently just spectacular by any measure (though it'd be nice if they'd do something more productive with all their cash and investments).

What happens to those margins over time is worth watching closely. There's enough moving parts to make it not easy, at least for me, to judge what Apple's likely to be worth several years from now.

I invested in Apple quite a while back and continue to own it. I did that because of its extreme low valuation then and an incredible balance sheet. Well, it still has an incredible balance sheet and, in fact, it has become only stronger. Valuation is a different story. It's certainly not plainly expensive. Not at all. Still, unlike some other investments, it's just not easy to judge what its intrinsic value is likely going to be over a longer time horizon.

I'm not going to be surprised if the stock does just fine. As always, I never have an opinion about near term or even longer term price action of any stock. The company could easily continue to roll like nothing else ever has.

Tough to bet that they will not.

Whether there really is sufficient margin of safety to buy it for the long-term near the current valuation is a whole different question.

Though I admire the company (and Google for that matter), all I know is I won't be buying more shares anytime soon.


Long positions in Apple and Google established at much lower than recent prices.

Reuters: Apple margins for iPad about half of iPhone
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.