Why Apple's shares rose as its market share shrank
On Wednesday, Gartner Research reported that Apple's (AAPL) share of the U.S. computer market, which topped 9% in calendar Q3 last year, dropped to 7.4% in Q1 2009 — putting it in fourth place behind HP (HPQ), Dell (DELL) and Acer.
The next day, Apple's share price rose nearly 2% to finish Thursday at $121.45, its highest close in six months.
Why the disconnect? Chalk it up to the ASPs.
As Gartner's Mikako Kitagawa notes, sales for Apple's competitors are being driven by the explosion of interest in low-cost netbooks — not just among penny-pinching consumers, but in the professional and education markets as well.
As result, Gartner estimates that average selling prices (ASPs) for computers sold in the first quarter may have fallen as much as 20% across the board — cutting sharply into PC makers' revenues.
Except at Apple. Despite rumors that its engineers may be working on some kind of device with a 10-inch screen, the company has so far shown zero interest in duking it out with the likes of Acer and Asus in the bargain basement mini-notebook market.
So even as Apple's market share shrinks, its margins and gross revenue are likely to have held up better than any of its competitors.
Moreover, while Gartner's Ms. Kitagawa is seeing signs of channel inventory restocking at other companies — evidence that the global PC market has not yet hit bottom — she singles out Apple's "deft control of inventories [which] limited its shipment decline."
All this — and a flood of deferred iPhone earnings — may help explain why analysts are scrambling to raise their Apple price targets (and talking up the stock) in advance of the company's fiscal Q2 earnings report next Wednesday, April 22.
Below the fold: Gartner's preliminary estimates of domestic PC shipments for Q1 2009.
The reason iPhone deferred revenue IS a BIG DEAL is threefold:
1. Apple gets the purchase price up front (nearly 600 per iPhone, 199 from consumers and the rest from upfront payments from carrriers).
2. Deferred revenue has accumulated to nearly 10 billion, parts of which are being realized in ever larger numbers per quarter.
3. The POSITIVE cash flow each quarter is between 2 and 4 billion dollars, far more than the net profits shown, and mostly because of UPFRONT cash payments for deferred revenue products like the iPhone! This means that Apple's cash will grow to well north of 40 billion sometime in early 2010!
What other company can you name with a setup like this?
The reason iPhone deferred revenue IS a BIG DEAL is threefold:
1. The get the purchase price up front (nearly 600 per, 199 from consumers and the rest from upfront payments from carrriers).
2. Deferred revenue has accumulated to nearly 10 billion, parts of which are being realized in ever larger numbers per quarter.
3. The POSITIVE cash flow each quarter is between 2 and 4 billion dollars, far more than the revenue shown, and mostly because of UPFRONT cash payments for deferred revenue products like the iPhone! This means that Apple's cash will grow to well north of 40 billion sometime in early 2010!
What other company can you name with a setup like this?
The deferred revenue seems to me to be a way to help avoiding unwanted heating-up/cooling-off of the stock. If Apple suddenly starts making an avalanche of new cash, the frenzy around the stock, while maybe good for some, will only lead to added riskiness. Deferred earnings at least help pain the picture of steadier growth, not landslide windfalls. There may be a bit of smoke and a mirror or two, but as others have said, Apple really is raking in a lot of money.
On another site, someone who has had some accuracy predicting Apple's past growth foresees a possible future when Apple may be one of the the biggest company in the world. It matters little to me whether this is true, but it's a shocking turn of events that the discussion could even be had, considering how Apple seemed to be falling apart in the 90s.
Go Apple! The future is bright, it seems!
They have been talking so much about revenue from iphone sales and they haven't even made it to the 8th quarter yet from the deferred revenue. The iphone profits are only going up if you look at the growth of the iphone sales in the past that haven't been taken into account yet. With the exponential growth of iphone sales if in the next quarter they don't sell 1 iphone on earth it is still possible that they could make more profit in the next quarter than the previous. It is still the same profit no matter how you divide it up but gives apple more flexibility in their numbers if they have a bad quarter or makes their numbers look more solid if they have a good quarter.
I just bought my kids netbooks. They are solid state and have Wireless G and bluetooth. They weight about 2 pounds and their battery life is 3 hours real use. I got them on sale for 300 a piece. Yeah, Apples are nice. They are also big, high in inertia, high in price, and no longer leading edge.
Steve sad quite well a while ago:
"Apple & Dell are the only ones in the pc industry making money. The make it by being like WalMart. We make it through innovation and great products"
'Nuff said 
if you think of netbooks as junk you certainly havent tried the hp netbook. my house has 4. 3 running xp and 1 running ubuntu.
as for apple, give them credit for making a quality product.
as for iphone sales – they deserve every dollar. hell of a product and the leader in the space as far as quality.
Mr. T Evanson – two minds with the same thought! Note that our posts came within one minute of each other!
The new paradigm of the Pocket Computer is born!
Randy B.: If you pay attention to Apple's non GAAP earnings results, you'll see how significant the deferred revenue/earnings are for Apple (which is around 10b of deferred rev now on B/S). In last year's Jul-Sep quarter, Apples' earnings were 1.1b. If they reported iPhone sales/earnings at point of sale, it would have been 2.4b. The iphone would have realized more earnings in that quarter than the whole rest of the company!! That was $1.43 EPS just for that quarter attributable to the iPhone. Compare that number to their usual quarterly earnings. And remember, that was one quarter….albeit the best iPhone quarter….but the other quarters also add signicant deferred rev/earnings. In the last quarter, the deferred revenue had gross margins of 61%.
Perhaps market share should be measured in dollars, not units shipped.
Dollars is the real measure of market share.
My amateur's guess is that there's a sizeable backlog of potential mac customers out here waiting, like me, for the various new offerings to come out in June, or whenever. I'll then either order at least two of the following: a MacBook Pro, to replace my beloved Pismo; a 20-inch monitor IMac to replace my G4 Yikes desktop; a Mac Mini, for use to service my HDTV. I'll also make the move, finally, to Wireless. After ten years of complete satisfaction with Macs, I'm practically salivating. I suspect I'm not alone in this.
@Randy, about those deferred revenues and earnings. There's nothing smoke and mirrors about it. That money is in the bank. Did you look at Apple's free cash flow numbers? Can you explain the huge difference in FCF from Income? That's your deferred revenue and earnings. It's a HUGE number.
iPhone sales and revenues do NOT account for "less than 7% of sales for Apple". That's because you are NOT factoring in deferred revenues. The ASP for an iPhone is what? $600 to $660. They sold about 4.4M iPhones last quarter. What's that total out to? $2.6 to $2.9B.
What did Apple sales amount to last quarter? $10.2B including iPhone sales. Back out the recognized amount of iPhone sales and you get less than $10B. So, what percent is $2.6 to $2.9B on less than $10B? Yeah, somewhere north of 30%. So, your "less than 7% of sales" is far from the mark.
It seems to me that most people, especially so-called analysts, are totally missing the point.
These people think of the iPhone as "just another smart phone", albeit one that appears to have begun a new fad or some such in smart phone design.
But then how do you explain the iPod Touch? Leaving Skype aside, it's emphatically not a smart phone, and yet it's both immensely popular and UNMATCHED by competition.
The fact is, the iPhone and the iPod Touch are something brand new on the scene. I call them POCKET COMPUTERS. Some of us are old enough to remember when "pocket calculators" came out, and the revolution they represented.
Well, this revolution makes the pocket calculator revolution pale in comparison! How else to explain the phenomenon of the Apple App Store, with well over 20,000 applications written in LESS THAN A YEAR!
And who has had a virtual lock on Pocket Computers for the last two years? Apple.
I suspect that on some level this reality is becoming increasingly obvious to potential purchasers of Apple stock. And THAT'S why the stock is going through the roof – and will CONTINUE to go through the roof for years to come.
PC's are all about buying the cheapest junk possible. It's no wonder Netbooks are hot sellers. But if you really want to DO something with your laptop– that's where Apple's market is. Not a bad place to be. I'd hate to be MSFT; many netbooks skip buggy Windows and go with LINUX. Also, Apple's iPod touch is in sweet spot– it does many things a netbook will do, but for less money–AND it fits in your pocket.
Here's something I just wrote on MDN, about this topic:
What's ironic is the the PC industry for so many years convinced people that they needed faster and faster CPUs, measured by Ghz, and bigger and bigger screens, and newer and newer software.
Now, with Vista and netbooks, all of those years of brainwashing the consumer is gone. Vista has shown people they don't need newer and newer software. Netbooks have shown people they don't need faster and faster CPUs to read email or browse the internet, or bigger screens.
The PC industry, feeling the pinch, and seeing netbook sales starting to grow, committed hari-kiri. They know there's little to no profit in netbooks, but just to keep the numbers going, they decided to jump in the race to the bottom anyway. So, their UNIT sales are up. So, their market share is growing. At the expense of revenues, as average selling price is collapsing, and at the expense of profits, as the margins on netbooks is negligible. What a business!
If you measure the market by units shipped, the rise of netbooks looks bad for Apple. If you measure the market by revenues or profits, then things look rather good for Apple. The question is which way is the best way to look at how a company is doing in a market?
This is probably a good place to break out the famous 2×2 matrix that Steve used to illlustrate what computer segments they would sell in. Back then it was Consumer laptops and desktops, and Professional laptops and desktops. You can apply the 2×2 matrix in another way. Profit on one axis and market share on another. Ideally, you'd have market share and huge profit, like Dell did at one time. Now, it appears noone has huge share and huge profit, but HP and Dell have huge share and small profit. Apple has small share and huge profit. The question is which quadrant would you rather be, which is better?
The fact that Apple's market share has hardly moved during these ecomonmic times while they've been the only one maintaining margins speaks volumes. Once the consumer starts buying again Apple will be a huge beneficiary of that change as they haven't destroyed their pricing structure during the downturn.
I would love to see a 'revenue share' or 'gross margin share' line superimposed over the market share numbers. It would be interesting to see that to see who have lowered APSs/margins the most to try and get customers during these times. It's hard to believe Dell has fallen so much since they do offer cheap netbooks and have lowered prices on so many models. It was that number that surprised me the most.
How is it that myriad posters on this blog and others have stated for months essentially the same thing you've written about the "analysts"? And none of the posters gets paid to produce their "estimates"? I want Katy Huberty's job. I'm curious to see if Andy Zaky comes up with anything before the earnings report.
PED, I like your explanation, but it doesn't really match the numbers.
Sure, Apple was up on Thursday, but so was the whole NASDAQ. According to Google Finance, Apple was up 3.2% on the day, with NASDAQ up 2.7%. The marginal difference was only 0.5%.
And, if we look at the two PC competitors who were probably hit the hardest by dropping ASPs, Dell and HP, their shares increaseed by 6.7% and 5% respectively. In other words, their performance yesterday, exceeded Apple's.
In other words, while I agree with your commentary that while Apple has resisted this race to the bottom with netbooks, I just don't see any reaction in the markets.
Good point and well stated. Keep in mind that its Apple, Inc. now– not Apple Computer. We will all certainly look forward to the earnings release considering the vast span of predictions.
At least somebody pointed out why Wall Street ignores Apple's deferred revenue. Investors must also see it as smoke and mirrors or maybe just smoke alone. I've often wondered why RIM shares can go up as easily as Apple's with no smoke and mirrors or cash hoard. Yet, it's easy enough to see that Apple accumulates at least a billion in cash every quarter. I'm sure that must mean something as far as profitability goes. I'm anxious to see how much cash comes in this quarter.
It's been said that investors will eventually see how strong a company Apple is. I'm very curious to see what this turning point will look like. Will they just open their eyes one day and behold some magic figure and Apple shares will just shoot up.
Anyway, it's more important for Apple to focus on profit margins than market share. Selling lots of products at a loss seems like a relatively bad business decision in the long haul. I think Nokia and Dell would prove that this is true.
iPhone deferred revenues are HUGE and completely ignored by nearly all analysts. This is ramping up, still and provides a cushion for earnings. Graduation and back to school sales will be phenomenal. Also, I believe iPhone is really breaking ground in the 20 and under market. Lots of high school and college kids are getting them. Why not, it's not that much more than a regular cell phone when you add all the texting charges, etc… of the other plans.
I don't buy that Apple's market share is 'slipping' at all. It's not what I am seeing. I realize this is anecdotal, but for the most part, so is the research being done by the financial analysts.
Good Morning Jacob,
If I purchase something from you and pay you right away, you book the revenue right away. If I purchase something from you and pay you over a two year perod, you don't get to book all of the contract at one time, you must report it over two years…I don't see how this helps Apple revenue? Also, this is such a small part of Apples revenue, how does it make any real difference?
Why is the focus on U.S. computer market alone?
Where is Apple on the worldwide market map? 3%, 4%?
And like said KB, I'd rather wait for real numbers.
So far, AAPL trend is not in sync' with fundamentals anyway.
Heck, Dell did better than that – with sales down over 16%, Dell stock was up something like 6%. Why ??
Randy, perhaps you should actually take a look at the numbers. iPhone revenues being reported over two years instead of immediately adds up to a LOT of money. NO smoke and mirrors, just cold hard cash.
Eveyone seems to be looking at the iPhone's "deferred earnings" as some sort of economic boon. iPhone sales and revenues only account for less than 7% of sales for Apple, how can deferred revenues from this product be significant. It seems to be the same as the story where the "BRIC" countries would keep the world economy going even if the U.S. economy was faltering! Sorry but the iPhone "deferred earnings" is nothing more than smoke and mirrors.
@Fred
"I just bought my kids netbooks. They are solid state and have Wireless G and bluetooth. They weight about 2 pounds and their battery life is 3 hours real use. I got them on sale for 300 a piece. Yeah, Apples are nice. They are also big, high in inertia, high in price, and no longer leading edge."
Fred, you are showing your age – "solid state" is an archaic term from the early days of electronics when not having any moving parts was a major selling point. Are you sure these aren't your grandkids?
Fred – Apple no longer leading edge? Really? Are you serious?
Fred – think about what you just said. You just bought your kids a couple of toys. They'll be nice for about a year. Then the plastic starts to crack and the letters start to wear off the keys and the display starts to fade and they begin to grow up and realize all the stuff they can't do on them, and you're right back where you started, except now with a couple of solid state bookends.