Today's High-Stakes Show for Apple


Which Asian economy -- the third-largest in the world -- is beating expectations for GDP growth and growing faster than the U.S.? Surprise: It's Japan, which just revised its first-quarter GDP growth estimate from 3.5% up to 4.1%. The radical fiscal and monetary policies of new Prime Minster Shinzo Abe, a.k.a. "Abenomics," appear to be taking effect. Japanese equities, which have been highly volatile lately, reacted well, with the Nikkei 225 gaining almost 5% today.

And speaking of price swings, last Friday I wrote that volatility is making a comeback. Dow Jones' Alexandra Scaggs agrees: Yesterday, she wrote in The Wall Street Journal that the summer forecast calls for volatility. There's no such indication this morning, however, as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average are both down a modest 0.18% as of 10:10 a.m. EDT.

Apple on stage
Today marks the start of Apple's annual Worldwide Developers Conference in San Francisco. The event lasts a full week, but this morning's keynote address from CEO Tim Cook is the critical event investors are anticipating. Cook is expected to preview iOS 7, the seventh version of the iPhone operating system, and launch a streaming radio service and new Mac computers.

For Apple, the stakes are high. Assuming it does announce new products, it will have been more than seven months since the company announced the iPad mini. As the Financial Times pointed out yesterday, that is the longest gap between new products in years. Here is how Apple shares have performed since the iPad mini announcement on Oct. 23, 2012:

AAPL Chart
AAPL Chart

AAPL data by YCharts.

Apple shares are off by more than a quarter, lagging the overall market by nearly 45 percentage points. While it's impossible to prove a causal link between the wait for a flashy new gizmo and the shares' underperformance, the logic is easy to follow: Investors have come to realize that Apple is not immune to competition from the likes of Samsung, which ultimately eats away at the company's profitability. Conversely, new product launches enable Apple to differentiate itself and fight margin erosion.

According to S&P Capital IQ, for the 12-month period ended Sept. 29, 2012 -- just prior to the iPad mini announcement -- Apple's gross margin was 43.9%. That figure has fallen to 39.5% for the 12-month period ended March 30 of this year. In fact, as the following graph shows, this marks the first significant drop in trailing-12-month gross margins since 2010:

AAPL Gross Profit Margin TTM Chart
AAPL Gross Profit Margin TTM Chart

AAPL Gross Profit Margin TTM data by YCharts.

Steve Jobs was a master showman at these events; Tim Cook has his work cut out for him today. Lights, camera, action!

More on Apple
There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons both to buy and to sell Apple, as well as what opportunities remain for the company (and your portfolio) going forward. To get instant access to his latest thoughts on Apple, simply click here now.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. 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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