However, both numbers were driven by the strong performance of the mobile phone business, in which I am a strong investor. However, this is a new, relatively small market, so even if the iPhone 7 sales are as bad as they are, the overall results should still be positive for Apple as the company tries to put together its new high-margin iPhone 7 product. The iPhone 7 is a very expensive piece of hardware, and I really need to see more data on the gross margin on the devices sold as well. In addition, a decline in gross margin is always a bad sign for a company operating in a cash-poor environment, so I am going for more skepticism here. So, just the three trends I think should keep me happy at this point in time. Here is what I am looking for. As always, I am watching very carefully to see if all of these trends materialize as Apple continues its push into more premium, hardware-centric categories, including the emerging market (you know, where $350 or so for an iPhone 7 costs way more than $1,000). If the trends continue as I hope they could, I expect Apple to start posting another year with positive earnings growth, which is incredibly unlikely to happen in the current environment. If the trend does not materialize, however, I am not planning on selling the shares that I hold, and rather am planning on buying more shares that I do not hold. Not because I think Apple is an incredibly undervalued company, but because there are multiple reasons this market might be very hard to pull off, and I do not want to lose my money due to a belief that Apple simply cannot do what it has done for the last 10-15 years. UPDATE 3:45 pm PST 8/27 The below will be updated for my latest research if I get further data. I think it is too early to conclude that the trends above are likely to materialize into significant negative numbers for Apple. My latest analysis of Apple’s gross margins for the quarter ended March 31 shows strong performance coming from the bottom line, despite the iPhone 7 model’s higher price:
As you can see it is very important to look at these figures in the context of the overall enterprise and commercial hardware business . As an example of how to analyze the gross margin for the industry overall, here are gross margins for Macs and iCons:
In most cases, the enterprise hardware business has pretty flat gross margins, perhaps as high as 5-6%, so even if you start from very low gross margins, the iPhone does have a decent chance of being relatively profitable given the overall market overall and where businesses are willing to look for growth. I am only just starting to look at a bunch of these numbers, but in my original research I stated that I would “be very skeptical” that iPhone gross margins would be down a percentage point in the same time frame. If you are looking at the year-to-date gross margin for the enterprise/commercial hardware business for the latest quarter, then the bottom line indicates a very solid result, on par with the overall gross margin, that is nearly double what it was for the quarter ending March 31. The gross margin for Mac sales can be seen in the blue line below: Even at iPhone gross margins of 10%, the net profit is almost identical year over year at $5.3 billion.
If you look at the business around the device in this chart, the iPhone 7 model is far and away Apple’s best performing item. It is the highest gross margin item in sales and has the most value, but it also performs exceptionally well, so it outperforms the other high margin segments on a year to year basis, particularly in the Mac segment. If I am wrong about the gross margins on the iPhone 7, it would not surprise me that this gross margin performance did not translate into large sales in the quarter. However, and I have some information that proves this to be the case, Apple’s margins for the Mac business have more of a pattern:
The Mac business uses a $4 device, the Mac Pro, and I do not doubt that the results for the Mac Pro will be above the $5 device, but I also do not believe that these will be the case at the iPhone 7 gross margin level. It is hard to see an iPhone sales performance comparable to the Mac Pro’s gross margin.