The Only Number Apple Investors Need to Know

Later today, Apple (NASDAQ: AAPL  ) will announce earnings. While the Street awaits with bated breath, it is important as individual investors to understand what analysts are looking for. Investors in the know understand there is one number that analysts are looking for.

More than just earnings
Earnings announcements are more than just earnings; anybody that's seen an investment drop like a rock after beating consensus earnings estimates can tell you that. Earnings are a rare opportunity to get a glimpse into company operations and see if they are addressing analyst concerns. Right now, the main concerns for Apple investors are lack of innovation and "iteration fatigue." Nowhere is this more apparent than in Apple's gross margin percentages.

  2012 2013
Fiscal Quarter Q2 Q3 Q4 Q1 Q2 Q3
Gross Margin Percentage 47.4% 42.8% 40% 38.6% 37.5% 36.9%

As you can see, Apple's gross margins have fallen over a thousand basis points, or roughly 22%, since the second quarter of 2012.

What's behind this drop?
The story behind the drop is often that Apple is losing its innovation edge against competitors, notably Samsung (NASDAQOTH: SSNLF  ) and other competitors using Google's Android OS. Samsung recently reported its flagship phone, the Galaxy S4, has sold 40 million units and recently wrestled away the title as the most profitable smartphone maker from Apple. Regardless of the product, the fear is that Apple cannot continue to price its products at premium pricing and maintain high sales figures.

Also, concerns about Apple's innovation gap persist. The familiar refrain is that while Apple is incrementally improving its products with each new iteration, would-be buyers are not seeing the benefit and are instead looking at previous year, lower-cost versions. This results in a downward drag on gross margins. The most apt analogy here is a gas station; it would prefer you not to spend your money on low-margin gas, and instead spend your money on higher-margin convenience items.

Why is the number 37 so important?
Apple can answer this criticism by reporting the number 37. That is $37 billion in revenue and 37% gross margins. First, it would be a powerful signal that Apple can continue to price its products at premium levels. Plus, it would be an increase in revenue over last year's quarter and sequentially, 4.7% and 2.8% respectively. The September quarter is typically a slow quarter for Apple, but beating both comparables will instill confidence.

In addition, Apple would really give investors a reason to cheer by hitting or exceeding 37% gross margins. As the above-referenced visual shows, investors are looking for Apple to reverse the gross margin slide that had dogged the company for the greater part of two years.

Here's how it will do both
Apple responded to its amazing iPhone 5c and 5s launch by issuing an update on its guidance for both revenue and gross margins. The company now expects for revenue to be on the high end of its $34 billion-$37 billion guidance and that margins will be at the high end of the 36%-37% range.

That's understandable. Apple continues to command a large gross margin from the iPhone and sold a whopping 9 million units in its first weekend. Also, lost in the negativity concerning the 5c's sales figures was this gem -- the case saves Apple nearly $42 and the bill of materials is 12% less expensive than the model it replaced. So you can see how in both revenue and margins, these are fantastic developments.

Foolish final thoughts
This quarter it is important for Apple to change the narrative. It had a successful iPhone launch that should aid this quarter in both revenue and gross margins. Reporting 37% gross margins and $37 billion in revenue will reassure investors leading into the busy December quarter.

Margins and revenues are only one part of the story
It is imperative to understand how products play into Apple as an investment. It's time to learn how Apple continues to innovate in the face of increasing competition. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


Read/Post Comments (9) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2013, at 1:14 PM, lkmd98 wrote:

    I like a company that is building new stores, hiring more people, building a new headquarter, 150 billion in the bank, great products, hiring great people. Im tired of media focus on noise!!!!!!!!!! iPhone c cuts, margin percentages, market share, WHO CARES

    Only day traders care about the news of the day!!!!!!!!!!!!!!!!!!!!!!!

    Apples future is AMAZING, battery tech, windmill tech, metallurgy , and now with the new head of retail we will see real wearable tech. Not goofy watches from Samsung......

  • Report this Comment On October 28, 2013, at 1:24 PM, dogmatica wrote:

    Hi,

    Jamal, all of the info I've seen on Samsung's S4 sales indicates poor sales. Would you please direct me to the article stating the numbers you reference? Also, you mention "sales" not "shipped." Samsung consistently uses the "shipped" metric, I believe, so are you also sure about that. Thanks!

    SeeeeeYaaaaa!

  • Report this Comment On October 28, 2013, at 1:31 PM, TMFJCar wrote:

    Dogmatica,

    Per the CEO: http://www.ibtimes.com/samsung-galaxy-s4-hits-40-million-sal...

    Thanks for reading,

    Jamal Carnette

  • Report this Comment On October 28, 2013, at 2:06 PM, lucasmonger wrote:

    Based on the iPhone 5S shortages along with plenty of availability for the iPhone 5c models, I think Apple's margins are just fine. Certainly, looking at number from the last 3-6 months is useless as many were waiting for the Sept new-phone rollout. Similarly when Samsung rolls out its new flagship phone at a different time than the iPhone, their numbers begin to look better. The bottom line here is Apple has rendered prior phone leaders Motorola, Blackberry, and Nokia irrelevant as well as putting the pressure on Microsoft and Google. Microsoft is still holding onto an old model of selling software and OS upgrades while Google and Apple are now giving it away for free in exchange for stickiness to their ecosystems. Poor Mr. Softy needs to change dramatically, and their current direction of marketing the heck out of Surface 2 probably isn't going to do it.

  • Report this Comment On October 28, 2013, at 2:14 PM, dogmatica wrote:

    Hi again,

    You're welcome; thanks for replying! Two more things. 1) do you know Samsung's Gross Margin?

    2) Will Apple sell more 5S's (16 and 32 gig) then Samsung's S4 by the end of March 2014?

    Take a shot! Thanks!

    BuhBye!

  • Report this Comment On October 28, 2013, at 2:42 PM, TMFJCar wrote:

    dogmatica,

    Samsung's gross margins during that period range from 37% to 40.6%. Of course, comparing the two may not the the best comparison. They have a different product mix--Samsung sales everything under the sun tech-related Apple's product mix is more focused.

    As far as the other question goes, the iPhone 5 eventually sold nearly 90 million units--more than twice Samsung's current total.

    However, I'm not for sure about only the 16 and 32 gig only. Apple doesn't beak down product mix (and sizes) leaving us to only consider third-party data (that may not be reliable). So I can't give you a great take on how many of those will be 5s and how many of those will be only 16 and 32 gig.

    However, Apple sold nearly 48 million iPhone 5s last December quarter alone. If they can replicate that (the vast majority of those will be the 5c and 5s) then it looks like Apple will beat Samsung's current total number.

    Samsung's sales are also slowing, and that should probably continue.

    I wish you the best in finding those numbers.

    Best,

    Jamal Carnette

  • Report this Comment On October 28, 2013, at 2:47 PM, TMFJCar wrote:

    <<However, Apple sold nearly 48 million iPhone 5s last December quarter alone. If they can replicate that (the vast majority of those will be the 5c and 5s) then it looks like Apple will beat Samsung's current total number. >>

    In that comment, the "s" in the initial iPhone 5s mention denoted the plural form of the iPhone 5--not the newest iteration of the iPhone (the 5s).

  • Report this Comment On October 28, 2013, at 3:49 PM, bellpa wrote:

    Good article with concise premise.

    Can someone please tell me how to rec an article.

    I can never find a corresponding icon to click.

  • Report this Comment On October 28, 2013, at 4:24 PM, TMFJCar wrote:

    @bellpa,

    Thanks for the kind words. To the left of my picture (and the llama's) is a rec button. Push it and you've recc'ed the article. Thanks for doing that!

    Better hurry, the announcement will be out soon!

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