Can Apple Live With Squeezed Margins?

The fall in Apple’s (NASDAQ:AAPL) profit margin to 39 percent from 45 percent a year earlier means that unless Tim Cook unveils a revolutionary new gadget with premium pricing, the company’s shares will remain under pressure. That assessment was made by Bloomberg, which found that with increasing competition and the pressure to deliver quarter after quarter, Apple was suddenly under tremendous performance pressure.

Gross margins are also projected to decline in the current fiscal year, according to the company’s January 24 filing with the U.S. Securities and Exchange Commission. Investors’ worries over falling margins have helped in the company’s shares’ 33 percent fall from a record closing high of $702.10 on September 19.

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“They need to do something eye-opening, but nothing is going to have as high a margin as the iPhone,” Victory Management’s Erick Maronak told Bloomberg, adding that the company’s margins may sink as low as 35 percent soon.

The biggest challenge is represented by the iPhone, traditionally the company’s strongest product. The smartphone currently accounts for 56 percent of the company’s revenue, but with rivals such as Samsung (SSNLF.PK) and HTC introducing cheaper devices based on Google’s (NASDAQ:GOOG) Android, Apple’s hold is weakening. The iPhone maker is also working hard on attracting new customers in China, where premium prices don’t go very well with the cost-conscious customers.

According to David Yoffie, a professor at Harvard Business School, Apple should learn to accept lower profits to keep growing revenue and market share. “If they want to maintain or build market share, they can’t sustain prices that are in the neighborhood of 100 percent higher than rival products,” Yoffie told Bloomberg. “Apple’s goal should not be to maintain their margins, but to increase sales and increase profits,” he said. “Apple allowed expectations to get way out of line. They let people think it could grow as it has in the past.”

Revenue is projected to rise 17 percent to $182.9 billion in the current fiscal year and if Apple were to maintain this rate, the company would reach $400 billion in annual revenue by 2020. This would let it earn more real dollars in profit, even if margins fall, Yoffie said.

Anand Srinivasan, a senior analyst at Bloomberg Industries, had another idea: start a payments system that would let the company keep an extra cut of every device. Another option was to do what Apple has already tried this month, that is, introduce more loaded configurations of existing products, such as the recently launched 128 GB iPad, Srinivasan said. Whatever it takes, it’s clear that Apple’s perception as a company is set to change for good.

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