Apple (NASDAQ:AAPL) can sustain its high profit margins because it behaves not like a hardware manufacturer such as Dell (NASDAQ:DELL) or Hewlett-Packard (NYSE:HPQ), but like a platform company with a loyal user base, Bernstein Research’s Toni Sacconaghi said in a research note.
How Does Sacconaghi Interpret Apple’s Business?
The analyst said recent investor worries were overstated because Apple was not “handset company” that is subject to “significant commoditization and margin risk.” Instead, it was a “platform company” like Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) that will be able to retain customers over a long period of time and sustain above-average profit margins. “In many senses, we believe that [Google (NASDAQ:GOOG)] Android smartphones are the PCs of today, with significant commoditization and switching risk, given that they share a common software platform and applications store/base,” Sacconaghi wrote, according to Barron’s. That leads to migrations such as from HTC to Samsung, for instance.
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CHEAT SHEET Analysis: High Quality Product Pipeline for Future Good News
One of the core components of our CHEAT SHEET investing framework focuses on the company’s future product pipeline. According to the analyst, as a product, Apple’s mobile platform was designed to tie in users through applications, iCloud, iTunes, Siri, FaceTime, and other “commonality of interface with other iOS devices.”
In the same way that both Microsoft and IBM’s mainframe business have enjoyed sustained high profit margins and loyalty despite the presence competitive alternatives, Apple would also be able to outlast rivals. In addition, the analyst said, he saw Apple as “a high quality, branded consumer company” that attracts users with high a “repurchase intention.”
By 2014, according to Sacconaghi, 45 percent of Apple’s profit will start coming from repeat purchases.
How Could This Affect Apple’s Stock?
Sacconaghi, an Apple bull with an Outperform rating and an $800 price target on the stock, was defending the company as investors begin to question its long-term profitability. Apple’s stock has reacted to the recent pessimism around it and dropped to $505 intraday in the middle of November. It closed down 6.43 percent at $538.79 on Wednesday.
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