The Nasdaq slid fell back 1.29% today, dragging most large tech stocks down with it. Apple (Nasdaq: AAPL ) investors who've been watching the company's share price slide southward for nearly two months might take little solace in seeing that the company fell 1.11%, slightly outperforming the broader tech index. Yet there's no mistaking that today's sell-off was largely in line with a general market sell-off that accelerated late in the day.
While Apple's slide today appears market driven, there were some pretty interesting storylines circulating about the company. Let's look at the most interesting news surrounding Apple today.
On the margin, worries ahead
Apple's recent slide has been caused by a variety of factors. There have been executive departures, poorly reviewed products such as Maps, and increasing competition, especially in tablets. Yet on the financials side, the area around earnings that received the most attention was margins. Apple's gross margins slid down to 40% last quarter, which is a sizable drop from the 47.4% level they were at in the first quarter of the year.
That's not wholly unexpected. In the September-ending quarter of 2011, Apple's margins were at 40.3%, a figure nearly identical to this year's level. However, in the quarter ahead, Apple's profit forecast was low enough to imply gross margins down near 36%. The company is famous for lowballing guidance, but its margin predictions for next quarter were low enough to spook Wall Street into ratcheting back expectations for the current quarter to the point that Apple is now expected to see lower profits next quarter than it did in the same quarter last year.
So, margins are a major concern. If Apple's still in a period of high global smartphone adoption, while it just released the iPad Mini and tablets in general have a long growth opportunity ahead, and it can't keep expanding earnings this quarter, then bears would ask what growth opportunities remain.
Those bears got more ammunition this week, when South Korean daily Chosun Ilbo reported that Samsung had pushed through a 20% increase in costs to manufacture the central processors in Apple devices. Considering researcher iSuppli estimates that an A6 processor constitutes 8.75% the component cost of an iPhone 5, such a move could take off more than a percentage point from Apple's overall gross margin.
That's troubling, because when you're dealing with expected sales of almost $200 billion in the year ahead, a couple of percentage points can add to lost profits in the billions.
Today, reports from The Hankyoreh contrasted earlier reports by noting that such an increase wasn't part of any sort of "strong-arming" by Samsung, but rather scheduled increases set earlier in the year.
Whatever Samsung's motivation for increasing processor production prices with Apple -- and assuming the reports of the size of the increase are accurate -- the bottom line is that this incident, as well as recent other ones, show just how important Apple's supply chain management has become.
Typically, a large company can be at an advantage with suppliers. Apple's sheer size accommodates buying huge amounts of components in bulk and aggressively negotiating pricing. However, Apple's unprecedented size also creates another uncomfortable problem in that it no longer has the ability to shift suppliers without unacceptable supply chain disruptions. Excess capacity in many areas just doesn't exist to handle the sheer size of Apple, which contrarily could give suppliers like Samsung some much-needed leverage.
Apple's not without options here. Its been widely reported to be looking at Taiwan Semiconductor (NYSE: TSM ) to relieve its dependence on Samsung for production of its chips. The company also ramped up capital expenditures a whopping 95% last year, as it moves to increase control of much of its specialized manufacturing.
Whether such a move would be wise, one of the Internet's sharper minds on Apple -- Asymco's Horace Dediu -- has suggested the company go as far as buying Intel (Nasdaq: INTC ) itself. Such a move might sound ridiculous to tech watchers used to the idea of Intel as a stalwart of the Wintel world, but times change rapidly. Intel today trades for less than $100 billion while Apple has more than $120 billion on its balance sheet. The fact that we're even discussing the idea of an Apple purchase of Intel shows just how difficult managing the company's supply chain -- between not sacrificing margins and maintaining ample supply of new products -- has become.
The point being? Supply chain events might not be as sexy to Apple investors as watching news surrounding an iPad Mini launch, but they're becoming tremendously important to analyzing the company. Mere percentage points of gross margins turn into billions in profits at Apple's size, and those extra billions in profits versus Wall Street's expectations in its next quarter could go a long way in turning the company's recent slide around.
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