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Why Margins Matter to Apple

11/12/2014

 
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Every business student has one thing that is drilled into them from day one of stepping foot onto the college of business. The sole purpose of the corporation is to serve the stockholders. You may love Company A, but make no mistake, you are not its master. The stockholders who bought and paid for every asset shoulder all the risk of loss, and they will enjoy the return of all profits. As a young accounting student in my first year at the great Harding University in the early 90’s, I remember getting slapped down by my accounting professor when he asked who the corporation served, the customer or the shareholder. I chose wrongly and have never forgotten the lesson. 


These stockholders are the real owners of the company, and they will band together and elect their “Board of Directors”. As Steve Jobs found out, what the board wants, the board gets; and no one in the company is above their authority. 

So what does this have to do with gorgeous cylinders of power like the Mac Pro or 5k displays that Willy Wonka’s Mike Teavee himself could jump into? Apple is forced to balance the interests of its market, which demands value, with the interests of its shareholders, who demand a return. Together they form a beautiful partnership where each provides what the other wants. But when one side gets out of balance, the other partner will leave for greener pastures. Everyone understands the consumer side of the deal: if they perceive the price as being too high for the value received, they will vote with their wallets and buy from someone else. 

But most consumers don’t really understand the shareholder side. Money is like water, and it flows downhill. Apple is in competition for shareholder dollars not only with Samsung or Sony but also with all investment opportunities. Gold, oil futures, refrigerators, or Volkswagens are all places that shareholders can vote with their wallets. If they decide that the value of their Apple stock is unacceptable, they will sell their stock and go elsewhere.

Tim Cook must stand before the board on a quarterly basis and speak to Apple’s results for the period. The current price of Apple Stock, $111.25 at closing today, is the present value of all future earnings divided by all shares. The higher the net income margin, the greater the estimate of future earnings, and the higher the price of the stock. If Apple meets expectations, then the board will handsomely reward the executive team. If they fail to meet expectations and are perceived as not having a viable plan to meet future goals, then they are replaced. 

Tim Cook has recently stated that there are lots of products that Apple could do if they wanted to. But unlike Samsung, they carefully vet their opportunities and expend their resources only in the directions that they believe hit that sweet spot of returning value both to the customer and the shareholder. In fact, they’ve done a spectacular job of hitting this target, one of the primary reasons for my fascination with Apple. As a numbers guy who has to advise management on a number of issues, I’m intrigued by a company that seems to make all the right decisions.

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    Robert Perez

    Manufacturing and distribution analysis since 1993.

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