Apple Inc. (NASDAQ:AAPL) shares have plummeted to borderline irrational lows. At just 8.2 times forward earnings, investors now have the opportunity to get their hands on a great company at a great price. But two major issues keep many investors glued to the sidelines: slipping margins and increasing competition.
Slipping margins, or a well-executed product mix shift?
Apple Inc. (NASDAQ:AAPL)’s gross margin is down significantly. In Apple Inc. (NASDAQ:AAPL)’s first quarter, it decreased to 38.6%, from 44.7% in the year-ago quarter. But does this mean Apple Inc. (NASDAQ:AAPL)’s lower margins from the first quarter are the new norm? Not necessarily.
First, Apple Inc. (NASDAQ:AAPL)’s product mix during its first quarter was very unusual, as Apple Inc. (NASDAQ:AAPL) CEO Tim Cook pointed out during the company’s first-quarter earnings call. More than 80% of revenue during the quarter came from new products. “The number of ramps were unprecedented in the fact that we had new products in every category is something we had not done before,” Cook said.
Second, Apple Inc. (NASDAQ:AAPL) clearly explained that the iPad Mini gross margin is “significantly below the corporate average” and that the new product mix from the cannibalization of full-sized, higher-margin iPads by iPad Minis is a shift management eagerly chooses. “I see cannibalization as a huge opportunity for us,” Cook explained. “Our base philosophy is to never fear cannibalization. If we do, somebody else will just do it and so we never fear it.”
So far, it looks like choosing lower margins is helping Apple Inc. (NASDAQ:AAPL) bring in a lot more dollars in revenue, even if it’s collecting less profit on each unit it sells. Apple Inc. (NASDAQ:AAPL)’s iPad segment, for instance, was the company’s fastest-growing segment in the first quarter, with iPad unit sales increasing 48% from the year-ago quarter. Furthermore, estimates from Canalys suggest that “Apple would surely have lost ground to its competitors” without the launch of the iPad Mini; according to Canalys’ estimates, the iPad Mini made up over half of Apple Inc. (NASDAQ:AAPL)’s total tablet shipments during the quarter.