Friday, September 27, 2013

Apple's Record-Breaking Launch

Apple (AAPL) sold nine million iPhone 5S and 5C smartphones over this last weekend topping the former first weekend record sales of five million for the iPhone 5.

Or did they?

Apple's 9 million weekend

Some are arguing that the numbers are inflated while others maintain that the nine million number is a sound one (and maybe even understated).

Apple analysts and the nine-million iPhone kerfuffle

The company also separately announced that revenue and gross margin would be near the high end of their previously provided range.

So, I guess, it'll take some time for the dust to settle on this. I'll happily leave that for others to sort out. Whether they sold a bit more or less than nine million that's an awful lot of business -- rather profitable I might add -- in one weekend.

Eventually Apple's cumulative product execution will matter massively, of course, but the company's intrinsic business value and how it may change certainly can't be figured out based on one product launch.
(Though this reality no doubt won't stop some from trying to make short-term bets on price action based upon perceived the success/failure of a particular launch. Nothing wrong with that, of course, but my interest in that sort of thing happens to be effectively zero.)

If the nine million turns out to be a reasonably good number then that's, give or take, more than $ 5 billion in just one weekend. This assumes something close to the $ 581 price per iPhone from the previous quarter roughly holds up.
(The unsubsidized/unlocked price is, of course, much higher than the suggested retail price with a two-year contract.

iPhone Price and Specs

The question is how many upgraded phones were purchased and the related product sales that might have occurred.

The 16GB iPhone 5S sells for $ 649. The 32GB and 64GB versions each sell incrementally for $ 100 more.

The 16GB iPhone 5C sells for $ 549 with the 32GB version selling for $ 100 more.

With that pricing in mind the $ 581 per iPhone assumption doesn't at all seem a stretch.

This is especially true considering that the 5S apparently outsold the 5C by more than 3x.

Consider that $ 5 billion plus sold in one weekend, if correct, in the context of Apple's sales history. For some perspective, Apple's sales across everything it was selling back in 2003 was $ 6.2 billion over the course of a full year.

So, during a product launch, they can now nearly sell in a bit more than a few days what roughly a decade ago would have taken all year.

Keep in mind that what they are selling has far more attractive margins -- at least for now -- than what they were selling a decade ago.

In fact, Apple was barely turning a profit back in 2003.

Who knows how well the newer smartphones will perform long-term, but whether they're sustaining price, attractive margins, and high returns on capital is far more important than unit volume.

As the negative reaction to the pricing for the 5C reveals, some don't necessarily agree with this premise.

The reaction is unsurprising but enlightening.

Shares of Apple slide, analysts cut targets in disappointment over iPhone 5c pricing

It's, in part, a belief that not so profitable growth early on will lead to big profits later; a belief that market share is king.

That is a strategy (and sometimes maybe even the right one).

So is making sure your product earns then maintains a premium position in the market. It is not easy getting price back once you've given it up. It's not easy to get back a premium image once you've sold something for cheap.

I'm not suggesting I know the correct way to go for Apple. I certainly do not. I'm suggesting it's not a straightforward call and they may just be doing the right thing. Time will tell. Those who confidently assert Apple needs a lower priced iPhone should probably at least be a little less confident.

It's not easy to maintain price in the business they are in. I'm more than a little bit amazed they can do it. I'll be surprised if they pull it off longer term.

Still, if anyone can it's probably going to be Apple.

Market share matters to an extent, of course, but so does profit share.

Apple takes 53% of smartphone profits, Samsung at 50%, remainder lose money

This article has a useful chart on how mobile phone operating profits have changed in the past five years or so through the end of 2012.

Apple has roughly half the profit share with just 13.5% market share. Half the profit share might be impressive, but that is down compared to the previous quarter and where it was in 2011 and 2012.

As I've said on prior occasions, I'll just never be very comfortable with tech stocks as long-term investments.*

Occasionally they become interesting in small doses if they're selling at a very large discount to my own conservative estimate of per share intrinsic value.**

Essentially it has to be a price where nothing particularly great has to happen to get a good result.

Prices like that don't emerge everyday but they do occasionally emerge.

It's patience and discipline followed by decisive action.

While I admire the way a business like Apple can change the world, as an investor I'm just no fan of businesses that reside in such a fast-changing and competitive industry landscape -- a place where the core economics can change quickly. When, over roughly just five years, the distribution of industry profits can change as dramatically as the article and chart above shows, it should make no investor comfortable about the next five or ten years. The best businesses reside in industries they dominate with no such profitability dynamics.

Some businesses that change the world end up being wise investments; some do not.

I mean, what's been better for the world, airlines or tobacco companies?

Yet just compare their long-term returns.

The price that's paid (margin of safety) and whether durable advantages exist (to protect attractive core economics) should mostly determine long-term investment outcomes. An investor has to judge future prospects and value well then pay a smart price considering the risks.

I'm not suggesting that product announcements are irrelevant. I'm suggesting that the next product announcement -- even a relatively important one -- should matter a whole lot less than the bigger picture. Some may find the obsessive hyperactive focus on near-term events in combination with betting on how the stock might react to be an entertaining exercise.

Well, hopefully it is entertaining because for most, if not all, it seems unlikely to produce great results over the long haul.


Long position in AAPL established at much lower than recent prices

* Though I'm not suggesting all tech businesses are somehow poor long-term investments or are created equal. It's just that technology businesses tend to have a wider range of outcomes. Some of those outcomes will be phenomenal even if often difficult to reliably predict beforehand. Some are no doubt very good at judging the long-term prospects of tech businesses while others might be overestimating their ability in this regard. I try to avoid making the latter mistake whenever possible.
** Of course, my estimate of value -- especially with a tech stock that tends to have a wider range of outcomes -- could easily be wrong. That's where the larger margin of safety requirement comes in. Sometimes the future is so difficult to figure out that no margin of safety is sufficient. Eventually the investment process needs what is effectively a go/no go gauge.
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