But some of the items I have mentioned in the past are coming to fruition, despite the analyst hand wringing. I will keep pounding the table on this (a) iPod Touch, (b) MacBooks as we move from a destop to laptop nation and (c) the reoccuring revenue stream from subscriptions from iPhone being way more important than the hardware itself. The conversion of more and more PC users to Mac users is also a long term underlying trend. The halo effect is starting to hit full stride.
Good article from TheStreet.com on the profitability of the new line of products, of which I will highlight key points below. The only fly in the ointment is news of CEO Jobs subpoena in regards to the stock options situation. Now with most companies the potential for CEO being forced out would be bad in the near term, but relatively neutral in the long run - however with Apple, Jobs is it. It could be devastating - he is the visionary. So it could cast a pall over the stock as many times the litigators like to make a small fish "turn" to catch the big fish - in this case Jobs. So that's the bad news. And it could be serious; but it's a totally unknowable variable.
So back to the good news of the business:
- For two of its hottest products, the iPhone and revamped iPod nano, Apple has taken the economic upper hand over component suppliers and partners, adding even more heft to its already eye-popping profitability.
- The company has cut 18.5% from the cost of hardware in its new 4-gigabyte nano by using new parts, according to data tracker iSuppli. Apple now pays about $58.85 for the device's innards, says iSuppli, and charges $149 for the finished product
- The new iPod nano comes with a wider screen and dramatically improved picture quality for viewing videos, but it costs as much as the older model. Even so, Apple is still exceeding its tradition of charging twice the cost of the underlying hardware, says iSuppli.
- The new pricing power has also translated to the 8-gigabyte nano, which costs $199. According to iSuppli, the bill of materials totals $82.85, about 17% less than half the cost of the device.
- iSuppli expects Apple to sell almost 55 million of all iPod models in 2007, an increase of 18%. Wider profit margins will help offset the trend toward purchases of lower-priced units that had lowered the average selling price of iPods in recent quarters.
- Since the iPhone shares components with the new iPod touch, early indications suggest that the company has negotiated lower costs for components by ordering much larger shipments, says Transamerica's Kim. This could prop up margins despite the price cut.
- But the economics of the iPhone are somewhat murky because of the fees that Apple charges AT&T (T). Apple gets a one-time "bounty" on each device sold, and it also receives a share of the service charges. This adds to the device's profitability and gives Apple's cash flow a boost through a recurring income stream.
- But Apple only books a portion of iPhone sales each quarter. By spreading the total sale over a 24-month period, Apple dampens the effect that iPhone sales have on its quarterly results.
Again, do not expect a huge 1x pop in revenue from iPhone due to the accrual nature of the revenue (spread over 24 months) but do expect more and more upside in the yearly estimates (2008/2009) as we layer in a whole new business on top of existing businesses. And this news on margins is even more encouraging.
Long Apple in fund; no personal position
