Why Price Cuts are Actually a Good Thing for Apple Inc. (AAPL)

There are many arguments for why Apple Inc. (NASDAQ:AAPL) has struggled so mightily since November.  Poor supply chain management by Chief Executive Tim Cook, the loss of innovation after the passing of former CEO Steve Jobs, and increased competition from the likes of Samsung have all been attributed to Apple Inc. (NASDAQ:AAPL)’s dramatic decline.  Whatever the reason, it’s certainly been a rough ride.  After briefly trading over $700 per share, the company now exchanges hands for $460—a 35% collapse.

One particularly interesting argument among these is that because the company decided to cut prices on certain products and release lower-priced items, the stock drop is likely to continue.  The theory goes that since margins are everything to a technology firm, lower margins mean lower profits, and a lower stock price to follow.  But is it really that simple?  Or, on the other hand, is there more to the price-cutting story—including a revolutionary catalyst involving China Mobile Ltd. (ADR) (NYSE:CHL)–that so many are missing?

Margins are everything, but shouldn’t be

It’s true that Apple Inc. (NASDAQ:AAPL) is cutting prices on certain products and is likely to release less expensive items in the future.  To illustrate, after releasing its 13-inch ‘Retina’ MacBook Pro four months ago, the company cut its price tag from $1,699 to $1,499.  Investors bearish on Apple might jump to the conclusion that the company simply isn’t as popular with consumers as it once was.  They’ll say that Apple Inc. (NASDAQ:AAPL) now has to resort to cutting prices to keep selling their products, which will only serve to exacerbate the company’s problems.

Other tech firms have succumbed to similarly poor fortunes recently.  Investors in Intel Corporation (NASDAQ:INTC) rushed for the exits when the company reported its fourth-quarter and full-year results.  Most damning for the company was that Intel’s gross margin contracted almost seven percentage points from last year’s fourth quarter, and the stock dropped 6% on the day of the announcement.  Furthermore, Intel announced it would spend roughly $13 billion on capital expenditures next year, leaving an even less pleasant taste in the mouths of margin-obsessed Wall Street analysts.

Like Intel, the market wasn’t pleased with Apple Inc. (NASDAQ:AAPL)’s most recent reported results.  Fiscal first-quarter 2013 revenue rose more than 17% over the prior year’s first quarter, but earnings were relatively flat.

Overall, fiscal year 2012 was still a fantastic year for Apple Inc. (NASDAQ:AAPL) financially. The company’s revenue increased 45% versus 2011. Amazingly, earnings per share have increased at a compound annual growth rate of almost 60% over the last four years.