Stop your worrying. That’s the message from one Wall Street analyst trying to calm investors’ concerns over Apple announcing smaller margins. A wave of worrying erupted last week when company executives announced the iPad mini comes with an unwanted add-on: tighter profit margins. Deutsche Bank analyst Chris Whitmore called such concern “overblown,” saying the lower-than-expected margins are “nearly entirely cyclical and not structural” as Apple ramps up production and perfects the manufacturing process. After all, we’ve seen this before…
“We believe this step down in margins is nearly entirely cyclical and not structural”, Whitmore told investors Monday (via AppleInsider).
Last week, Apple’s finance chief, Peter Oppenheimer said the iPad mini’s gross margin is “significantly below the corporate average”. As a result, investors saw each share of Apple earning $11.75 this year, compared to $13.87 at the start of the previous fiscal year.
Whitmore recalls Apple’s gross margins dipped after the iPhone 4 was introduced in 2010. Although Apple advised investors the company’s gross margins would fall to around 35 percent, margins rose quickly as more iPhone 4 units came off assembly lines.
The same concerns are being voiced about the iPhone 5 with analysts questioning Apple’s decision not to undercut rival pricing and Apple defending its decision to out-engineer competitors.
There are two reasons for Apple’s usually humongous profit margin to fall: the number of items the company has introduced and its insistence on not ruining its reputation by releasing a $100 Android killer.
Apple CEO Tim Cook noted last week that now is “the most prolific period in our history in product introduction and innovation”. However, Cook said he didn’t foresee costs increasing into the first fiscal quarter of 2013 – a point where Whitmore agrees.
Additionally, Oppenheimer is pledging to get better control of the costs in producing the iPad mini, saying more efficient manufacturing will be instituted. But it’s questionable how much more efficient Apple can get, given its desire to build devices that go beyond inexpensive Android alternatives.
What do you think?
Is concern over gross margins ‘overblown’ or will it affect Apple’s vision for the future?