Over the years, Apple always had a competitive edge over its peers and consistently maintained high margins through massive bargaining power. With Samsung’s aggressive play in the smart phone market and several new entrants now may not allow Apple Inc. (NASDAQ:AAPL) to enforce such power on its suppliers like before. This will eventually lead to shrinking margins for many of its product categories going forward.
Potential Impact on the Stock Price
In 2012, Apple consciously made a move to diversify its supplier base due to Samsung’s rapid growth in the smartphone market. It was evident to the iPhone maker that in a scenario of supply shortage, Apple could be left wanting with Samsung first fulfilling its own requirements. The ongoing patent dispute between the two giants already provides enough incentive to Samsung to cut Apple from the source. It is noteworthy; Samsung is an exclusive provider of microprocessors needed to assemble iPhone and iPads. The microprocessors contribute more than 25% to the total manufacturing cost for both iPhone and iPads. Hence diversification in the supplier base will allow Apple to hedge the supply risk and continue to enjoy high margins.
With the growing smart phone and tablet market, it will be imperative for all players to have a wider supplier base in order to satisfy demand. The impact on the stock price could be realized by Apple, if going forward Samsung’s stake in Sharp results in shrinking margin for the iPhone. Apple currently enjoys a healthy 53% gross margin on iPhone. With the iPhone being the driving force behind Apple Inc. (NASDAQ:AAPL)’s success, if the margins were to fall below 50% then there could be a heavy downside in the stock price.
The article Samsung’s Stake in Sharp: Sharp Move originally appeared on Fool.com and is written by Ashit Gulati.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.