Apple's 2 Core Problems

Apple's 2 Core Problems

Reports of questionable repute are constantly being released about Apple's latest product, but after reading "5 Rumors on the Next iPhone: Fact or Fiction?," consumers should expect a cheaper iPhone this fall. Unfortunately, if this rumor holds true, investors should expect an Apple with two problems at its core.


"Innovation distinguishes between a leader and a follower" -Steve Jobs

At the core of Apple's business lies innovation. But the company known for revolutionary inventions hasn't released a new product to consumers since the iPad in 2010. Consumers and investors alike are getting antsy. If Apple wants to return to the glory days of a $700 stock price, it needs to share its innovations with consumers. Ironically, Apple should take note from the inventor of the dual core: Intel .

Phone and tablet producers Apple and Google are stealing customers from the PC market at an alarming rate. The PC market has long been Intel's private cash cow, and a smaller market means lower profits. Intel's earnings in the second quarter fell 29% to $2 billion, down from $2.83 billion a year earlier.

The company has to innovate in order to right its ship. Intel released a new line of micro-processors (Haswell) for the growing tablet market, and has made a dedicated effort to appear in the newest smart phones. The latest product you can find its chip in is the new Samsung Galaxy Tab 3.

Intel has learned its lesson from the tablet/smartphone takeover and wants to be ready for the next big market trend. CEO Brian Krzanich believes that the future lies in wearable products. Whether it's Google Glass, or the "iWatch," Mr. Krzanich has made it clear that the company is ready to be a part of that future.

A cheaper iPhone is not an innovation; it's a sign that creativity is running dry at Apple. Apple needs to return to its roots and release a new product.


Apple's lack of innovation is only half the problem. While a cheaper iPhone doesn't necessarily mean that Apple won't release a new innovative product, it does point to lower margins.

Selling an in-demand product, like the iPhone, allowed Apple to sell it at a high price, which supported margins. Just one year ago, Apple had a gross margin of 42%. In the company's most recent annual filing, Apple revealed that number has fallen to 36%.

The smartphone market is quickly becoming saturated. Almost two thirds of Americans now own a smartphone, and unless Apple keeps their products in demand, consumers will not pay a premium. Apple's current iPhone 5 is made of anodized aluminum and ceramic glass. Even if Apple can lower its cost by making new iPhones out of plastic, the crowded smartphone market is full of low cost competitors that can afford lower margins.

While Apple has been the standard for high margins in years past, it appears they have lent their high margins strategy to fellow technology stalwart, Oracle . In its last earnings report, CEO Larry Ellison explained that the company has, and would continue to expand its "cloud" services. The company's "cloud" offerings have proved profitable in the past and are high margin products. Oracle's gross margin has risen from 76% three years ago; to 83% in the most recent quarter as "cloud" computing becomes more important to corporate clients. In line with a higher gross margin, Oracle's net income rose 10% year-over-year. Higher margins mean higher profits. A lesson that Apple once taught, it must relearn.

Two problems, one solution

The solution for Apple is simple: release a new product. If it's as good the company's past innovations, consumers won't have a problem paying a premium and boosting Apple's gross margin. A cheaper iPhone will only display the company's lack of innovation and lower margins. I don't like rumors, and I won't like Apple if they release a cheaper iPhone.

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This article was written by Joshua Sauer and edited by Chris Marasco and Marie Palumbo. Chris Marasco is HeadEditor of ADifferentAngle. None has a position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Oracle.. 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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