Apple's Margin Issue Isn't Going Away

Apple (AAPL) shares closed down 2.5% Tuesday after the company reported a quarter with modest upside but soft guidance, especially as it pertains to gross margin. Although the stock has bottomed for now, and while although volumes of the iPhone are OK -- at least in the wake of the iPhone 5 launch -- I do not believe the margin issue is going away. I first made the case for long-term margin degradation 11 months ago in "Shed a Tear for Apple," in which I laid out the case for increasing price pressure on the iPhone:

The unsubsidized iPhone is simply too expensive for average people at $500 to $700. The alternative Android-based phones may not be perfect substitutes, but they are "good enough." Intense competition from a Softbank-backed Sprint (S), which wholesales bandwidth to third-party "carriers" like Virgin (VMED) Mobile, will result in eroded pricing power for the major carriers that are providing most of the iPhone subsidies.

This was a long-term call, and one year later we see it playing out, with little hope for a change in trend. I think Apple's gross-margin caution is a reflection of the reality that unsubsidized sales will become increasingly relevant in the years ahead, and that the price points will have to come down. The gross margin has been ticking down steadily for the last few quarters, from 38.63% in the December 2012 quarter to 37% most recently. (Ironically, Apple is not a wildly profitable company. The absolute earnings are large, of course, but this is due to volume. Thirty-seven percent gross margin is very middling. Compare that with a standard-issue software company like Oracle (ORCL), which books an 80% gross margin!)...249 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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