Upside Down Analysis

by John Kirk   |   November 4th, 2012

These thoughts via Business Insider:

According to estimates from Canaccord Genuity, Samsung has shot further ahead of the pack as the world’s largest smartphone manufacturer, shipping 56.3 million units in the third quarter.

Apple’s consolation is that it still takes a larger share of industry profits, despite shipping approximately half as many units as Samsung.

Today’s analysis of the mobile industry makes my head hurt because it is analysis turned on its head. In business, profits are not the consolation prize. Profits are the ONLY prize.

Sheesh.

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
  • steve_wildstrom

    If Google were building a stronger ecosystem around Android, pure market share would matter more.

    • FalKirk

      Market share has to be multiplied agains something to create profits. In a typical business model its multiplied against margins. In Google’s professed business model, it would multiply ad revenues. Isn’t happening. In Amazon’s professed business model, it would multiply store sales. Hasn’t happened yet.

      Of course market share is important. But it’s only important as a vehicle for creating profits.

  • Red

    Unless Samsung see market share as eventually destroying the competition?

    • FalKirk

      Samsung is destroying the competition, but that competition is Symbian, MeeGo, Windows Mobile, Windows Phone 7, HTC and RIM. Apple continues to increase its real sales and its actual profits. Revenue from iPhone handsets and accessories sales this past quarter was $17.1 billion during the quarter compared to $11 billion in the year-ago quarter, an increase of 56%.

      If Apple ended up with only 1% of the market share but their currently estimated 70 plus per cent profit share, they would still be winning. Profit, not market share, is the goal.

      • Matang_Lawin

        John, despite your good defense and analysis of profit share and ever
        growing sales. Explain the rationale why Apple’s stock is crumbling to the ground despite being soo profitable???t

        • steve_wildstrom

          I’ll let John answer for himself, but I will point out that the market’s pricing of Apple is totally irrational (and not being a believer in efficient markets theory, I do think markets sometimes take leave of their senses.) Lets stipulate that Apple is likely to grow somewhat more slowly in the future than it has in the recent past and that its margins are under some pressure. That cannot begin to explain why the stock is trading at a P/E a bit below IBM and a lot below Microsoft. Apple is an extremely emotional stock, and right now, for whatever reason, the emotion is negative. I do not think this is because the market knows something that we don’t.

        • JDL

          Apples share price is up +35% since 3rd of January

      • rj

        Probably not for very long. If Apple only had a 1% market share, developers and accessory manufacturers would quickly flee the platform.

        • steve_wildstrom

          It[‘[s pretty hard to see how Apple could ever have a 70% profit share with a 1% market share. But that aside, what app developers care about is their own profitability, not Apple’s or Google’s. And at least for now, the profitability equation runs heavily in favor of iOS.

  • http://www.facebook.com/profile.php?id=1573495479 Rene Stein

    Samsung does make profits on their phones, right? As a company, the numbers saw on their business was just fine. For them, increasing market share does increase profits. However, for companies that make very low to negative margins, increasing market share doesn’t help. Could you imagine Amazon doubling in size, thereby doubling its quarterly losses?

    At the scale of some of these companies, like Amazon, Google’s Android, there are no more economies of scales to be gained. They are already large companies. There is not room for exponential growth, only integer multiples, for these very large, very low margin companies. So, they need to find ways of increasing revenues from current customers if they are to grow their profits. That is not an easy task. For Google and Android, the only way to increase revenue per customer is to increase interaction with advertisements. No customer likes that. For Amazon, I don’t really know, from what I hear, almost all of their business are low margin. So, either they raise the amount they make per transaction, raising prices, or they find new businesses to be in where they can start with a higher margin. I honestly don’t see how these companies can make much more money.

    Maybe the goal is to become a near monopoly and then leverage that position somehow to turn profits.

    • FalKirk

      “Could you imagine Amazon doubling in size, thereby doubling its quarterly losses?” – Rene Stein

      Bizarrely, doubling in sales size without increasing its profits has been Amazon’s strategy for the past 15 years.

    • FalKirk

      “Could you imagine Amazon doubling in size, thereby doubling its quarterly losses?” – Rene Stein

      Bizarrely, doubling in sales size without increasing its profits has been Amazon’s strategy for the past 15 years.

      • http://www.facebook.com/profile.php?id=1573495479 Rene Stein

        Do you know how investors are on board with such a scheme? What is the end goal of the company? I have not read this analysis anywhere yet. The company is low and negative margins, and they only operate in the most profitable markets. There is no way they can expand into emerging economies and hope to make profits there. So, they are growth limited. Do they hope to completely consume every market that they enter so they can eventually abuse monopoly power to make profits?

  • Matang_Lawin

    John, despite your good defense and analysis of profit share and ever
    growing sales. Explain the rationale why Apple’s stock is crumbling to the ground despite being soo profitable??? FYI the stock of Apple rose to fever pitch of 700 but is now only 560.94 ( last I checked) w/c translates to loss market cap wealth of 75 Billion Dollars!!!.

    If youre going to delve into the business side of tech, at least do so wholistically.

    • AdamChew

      Explain the rationale of Apple share going to $700 per share.

      There is no logic neither can it be explained.

      If John can explain the rationale he should be richer than Bill Gates.

      • Matang_Lawin

        The rationale behind the $700 Adam, was this, investors and analysts alike were highly anticipating the ip5 launch with forecasted sales and trends in the profitability of such a new Apple product. This resulted to higher demand for Apple stock with the assumption that it will go to the $1000s mark come early FY13.

        I can explain the rationale myself but I am universe behind Bill Gates riches Adam. :P

        • benbajarin

          Bottom line was the lead up and uncertainty of elections as well as concern for Macro economic climates perhaps for next year. I have read all of the notes to clients from the major investement houses and they all still peg Apple at above 800 by end of CY 13. Again, Macro economic uncertainties being the only deterrent. Plus this right now is a simple bet against or with the market. At some point the market will adjust to the value, perhaps when Apple releases next results or black friday numbers validating the unprecedented demand for their products this quarter. I have seen retail figures on this, which is why I am confident on it. At some point that data will go public.

          CapEx was also 2.3 billion higher than anticipated. This as Apple stated was for :

          The Company’s capital expenditures were $10.3 billion during 2012, consisting of $865 million for retail store facilities and $9.5 billion for other capital expenditures, including product tooling and manufacturing process equipment, and other corporate facilities and infrastructure.

          Product re-tooling the key word. They are in position to alter infrastructure for the long haul and thus regain key margin points as well as be aggressive with pricing in later generation products and still gain margins.

          The key point most stock analysts miss is that the market for smartphones and tablets is still a land grab. The head room for growth is astronomic in all cases, thus companies with solid businesses and profit strategies are poised to stay relevant and be safe stock bets.

          I speak with every major Android and Windows OEM regularly and believe me when I say they are freaked out. Apple is not. The other key consideration again in light of the potential double dip recession for 2013 due to alteration of taxes and other macro-economic trends is that Apple is one of few poised to weather the storm due to their massive cash. If some things play out it may very well spell disaster for those operating on razor thin margins. Market share can not protect against some of the things that could come. In fact great market share, and little profit, could actually spell the end of some in very quick fashion.

          I agree with you we need to look at this holistically but in my own industry analysis, I am consistently shocked at how un-holiscitally most analyze Apple.

          In many scenarios both good and bad I have modeled, Apple’s cash hoard may be one of their biggest differentiators.

          • Matang_Lawin

            Thank you Ben for the erudite inputs. I do, however believe that theyll be able to recapture the lost stock price if they have addressed key manufacturing concerns they still face with re to ip5 due to its top class quality. How well the smooth execution is played remains to be seen.

    • FalKirk

      Stock markets are rational in the long run and irrational in the short run. If you watch short-term market gyrations and expect them to reflect reality, you will go mad.