1 Major Challenge for Apple in 2013


As we head into 2013, Apple investors have been fretting lately over the prospect of margin contractions. Declining margins are never a good thing, but at the same time investors need to take a step back and look at the bigger picture.

Addressing investor concerns over margin pressures will be one major challenge for Apple this year.

The vast majority of the metrics that the Street and investors track primarily cover periods of one year. Year-over-year and sequential comparisons are the norm, but one shortfall there is that investors tend to lose sight of broader historical contexts.

For Apple in particular, its 2012 performance was simply unreal. It was almost too good to be true, which is why shares were boasting year-to-date gains of more than 70% at one point. We're talking about gross margin peaking at 47.4% in the first quarter, thanks in large part to strong demand for the iPhone 4S that was well on its way down the cost curve, since it only received incremental internal upgrades instead of a whole new design.

Operating margin similarly peaked during the same quarter at 39.3%, as operating expenses continue to decline as a percentage of revenue. Those figures are simply unheard of for a company with substantial hardware businesses.

Those incredible levels will be hard to reach again, especially within the context of aggressive new product launches that put downward pressure on margins. That's going to make year-over-year comparisons in 2013 look unfavorable, but we're not talking about bad figures, just less good numbers. It's like standing next to the tallest person in the room -- it makes you look short regardless of how tall you actually are.

Sources: SEC filings and earnings conference calls. Calendar quarters shown.

Guidance still calls for both gross margin and operating margin to decline in the current quarter. Both metrics remain under three-year averages, but again those averages are positively skewed due to 2012 performance.

If we look at gross profit and operating income in absolute dollar terms relative to the past three years, the picture is more encouraging.

Sources: SEC filings and earnings conference calls. Calendar quarters shown.

While profits are expected to decline seasonally in the current quarter, they're still continuing along a longer-term upward trajectory. Apple's business is far from broken.

Apple's growth story is far from over, and the company still has massive opportunities ahead. We've outlined them right here in The Motley Fool's premium Apple research service, and it may give you the courage to be greedy when others are fearful. If you're looking for some guidance on Apple's prospects, get started by clicking here.

The article 1 Major Challenge for Apple in 2013 originally appeared on Fool.com.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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