Click to Skip Ad
Closing in...

Smooth sailing is over for Apple

Published Jan 7th, 2013 10:15AM EST
iPhone Margin Analysis

If you buy through a BGR link, we may earn an affiliate commission, helping support our expert product labs.

Apple (AAPL) is sailing into choppy waters that will put an end to the sky-high iPhone margins the company has enjoyed for more than half a decade, according to a recent analysis. Following up his report suggesting Apple is in for a rude awakening as rivals gain ground on its market leading mobile devices, Sector & Sovereign Research analyst Paul Sagawa again suggests Apple is in need of a major shift in strategy as the smartphone market evolves and applies increased pressure on Apple’s iPhone margins.

In a research note published on Sunday, Sagawa offers an unsettling look at Apple’s iPhone business, which is largely responsible for making Apple the most successful consumer electronics company on the planet.

Apple’s record profits have been driven by unprecedented margins on its popular iPhone lineup, but Sagawa believes that as the smartphone market continues to change, so too must Apple’s strategy if it hopes to stave off rivals like Samsung (005930). Even then, Apple’s record growth is seen slowing as the company is forced to price the iPhone more aggressively.

“Seeing smartphone competitors achieving similar market scale to Apple’s flagship iPhone model and platform rivals willing to subsidize device sales to build their installed base for lucrative web applications, leaves me skeptical that the high margin status quo approach can be sustained for more than a few more years, and even then, I see inherent margin pressures that are not reflected in consensus estimates,” Sagawa wrote.

He continued, “The more aggressive strategy seems the better one from a long term perspective, but will entail substantial cultural change, a significant re-investment of capital, and a more certain and certainly more painful hit to profitability.”

Even though Apple’s stock has taken a huge hit over the past few months, Sagawa doesn’t think investors fully appreciate the seriousness of Apple’s current predicament.

“I don’t believe that this Sophie’s choice of a strategic dilemma is well appreciated by investors nor do I expect them to react well to future negative surprises, disappointing guidance, or downward estimate revisions,” the analyst noted. “Apple may not be expensive, but it is hardly cheap with that potential overhang.”[bgr-post-bug]

Zach Epstein
Zach Epstein Executive Editor

Zach Epstein has been the Executive Editor at BGR for more than 10 years. He manages BGR’s editorial team and ensures that best practices are adhered to. He also oversees the Ecommerce team and directs the daily flow of all content. Zach first joined BGR in 2007 as a Staff Writer covering business, technology, and entertainment.

His work has been quoted by countless top news organizations, and he was recently named one of the world's top 10 “power mobile influencers” by Forbes. Prior to BGR, Zach worked as an executive in marketing and business development with two private telcos.