Reports that Apple Inc. has slashed component orders for iPhone 5 – a sign of disappointing sales – is raising fears that the company's best, most profitable days are behind it and the stock is at risk for a Research In Motion-like swoon.
Citing the ominous "people familiar with the situation," The Wall Street Journal reported Monday that "Apple orders for iPhone 5 screens for the January-March quarter... have dropped to roughly half of what the company had previously planned to order." This is potentially a major blow to a company already struggling to maintain its lofty profit margins.
This chart compares the quarterly stock performance of Research In Motion and Apple before and after their respective peak levels of gross margins. The "0" on the X-axis indicates the point of maximum profitability, which was September 2006 for RIM and March 2012 for Apple.
Profit margins in the technology sector have always been a valuable measure of a company's market-share dominance and earnings growth. As a product takes off economies of scale steadily increase margins, turning companies into virtual cash flow printing presses. As the trend fades and competition intensifies, the company begins stretching into less profitable product areas, and margins decline.
Although the speed at which the stocks of each company reacted to declining margins – RIM stock continued to move sharply higher for two years while Apple investors reacted almost immediately – the shape of the lines is disturbingly similar. It is possible, and we say this with caution, that the chart is outlining the profit cycle template for handheld devices. This would signal a painful learning experience ahead for current Apple shareholders.
There is a limit to how far we can take the Research In Motion comparison to Apple. We are making a very big assumption – that Apple's 47.4 per cent gross margin in March of 2012 represents the high for the medium term. Apple management could prove far more successful in adapting to their current plight using existing product lines, or may begin an entirely new product cycle (the rumoured iTelevision is a possible example). But in hindsight, the margin deterioration for RIM was the first sign of trouble. The fall in Apple margins should not be taken lightly by investors.
Scott Barlow