So What's Wrong With Apple, Again?

"5 warning signs that Apple (NASDAQ: AAPL  ) has lost its magic"
-- Forbes 

"Apple loses some of its magic touch with iOS 7"
USA Today

"Is Apple Out of Ideas?"
-- Newsweek


Image: Apple.

It seems there's a popular perception that something is wrong with Apple. With the company's share price still sitting about 25% below the all-time high it hit last September and the company's growth slowing, at least some portion of the media and analyst communities believe Apple's days are over.

However, when you dig past the headlines and into the numbers, you'll find Apple's business model is as strong as its ever been.

Losing the growth game
Before we get too far ahead, I admit I'm fully aware that Apple faces a growth problem, especially in emerging markets. However, I also reject the notion that Apple faces some kind of existential problem by not catering to many of the smartphone market's fastest-growing spaces.

The idea that the competition is catching up to Apple is simply erroneous. Only Samsung  (NASDAQOTH: SSNLF  ) sells more smartphones per year than Apple. The rest of the competition still meaningfully lags Apple's smartphone sales prowess.

Smartphone Shipment Data. Source: IDC Q2 2013. All figures in millions of units.

Samsung has held the top spot in terms of global smartphone shipments for some time now, selling more than twice as many smartphones as Apple in the second quarter of this year. It has several successful lines of devices that cater to both high-end and low-end users. The breadth and depth of the product portfolio has made it a truly formidable force versus Apple in this space.

However, Apple and Samsung only directly compete in one area of the smartphone market -- the high end. And given some recent statements on the part of Samsung's CFO, there's now reason to think that Apple might have a leg up on Samsung at the high end of the smartphone market.

In sizing Apple's place versus the rest of the field, it still towers over every other smartphone maker. LG, Lenovo, and Huawei have all focused the majority of their efforts on winning at the low end of the emerging-market space, where handsets typically sell for less than $200. In pricing its "low-end" iPhone 5c at $499 off contract, Apple simply isn't willing to sacrifice profits for growth. And that isn't a bad thing at all.

Winning where it matters most
Although dividing out the actual numbers comes with its fair share of difficulty, it's generally agreed that Apple consistently rakes in the most operating profits in the smartphone industry. Here's one recent estimate from the operating profit breakdown in the smartphone market during the second quarter of this year.

Source: Canaccord Genuity. All figures measured in millions of USD.

I'd argue that this chart matters a whole lot more than the preceding units-shipped chart.

Although Canaccord accounted for all the noise in the numbers, Apple doesn't break out its operating costs such as R&D to specific product divisions, which makes a calculation hugely challenging. There's also plenty of currency noise, since only Apple and BlackBerry report their financials in U.S. dollars -- but again, Canaccord also accounted for all necessary currency adjustments.

However even if the figure in this chart isn't dollar-for-dollar precise, it should still be adequate enough to illustrate the overall dynamic at work here. Apple and Samsung are the only companies that actually make money with their smartphone businesses. And for Samsung specifically, it's also widely believed that the bulk of its smartphone operating profits come from its high-end smartphone franchises such as the Galaxy product line.

Which would you rather have?
So for all the hubbub that Apple is losing its steam, it appears almost the opposite is true. Apple is one of the only two companies that even make money from selling smartphones.

This casts its refusal to move into a low-end, emerging-market strategy in an entirely different light..

In a time when Apple is somehow perceived as lagging the competition, when viewed in terms of profits, it turns out the opposite it true. Apple's profit machine is as healthy as ever.

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Read/Post Comments (3) | Recommend This Article (7)

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 November 12, 2013, at 10:17 PM, thethreestooges wrote:

    Samsung has no respect of patent law and they copied and overtook Apple on smartphone market. Now, the court will decide what the damage is, and many more lawsuits pending against Samsung while Samsung try to twist everyway to rewrite the rules.

  • Report this Comment On November 12, 2013, at 11:15 PM, thethreestooges wrote:

    So, what's wrong with APPLE?

    I don't own APPLE products because I can't afford them.

    I don't own APPLE stocks because I can't afford them.

    That what's wrong with APPLE! If they sell their products at a loss or if their stock is penny stock, then I will love them and buy them and nothing will be wrong with APPLE!

  • Report this Comment On November 13, 2013, at 12:05 AM, PMTP wrote:

    It is good to see an article that doesn't proclaim that Apple must become Samsung to win. As you point out, they are already winning by some pretty important metrics. For all the secrecy around Apple, there is one thing that is not a secret. Paraphrasing, their goal is to produce extremely high quality products that delight their customers. It really is that simple. Like them or not... like their products or not... like their stock or not, that is what they say they want to be. If you keep that in mind, most of their moves make sense. If you forget that, most of their moves don't make sense.

    I have owned their stock for over 5 years. In that time, over any short-term period, neither the behavior of their stock nor most of the articles I read about them have appeared rational. Over the long-term, they have done what they said and have performed very well. I have been rewarded handsomely as an investor.

    So I am rewarded by their performance and entertained by many "serious" articles that I mostly find humorous, simplistic and out of touch. It seems their are many out there with a keyboard that think they are smarter than Apple. Perhaps some are. Clearly most aren't.

    Thanks for writing an article that calls into question some of the silliness out there.

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