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Apple Inc.’s profit margins have long been the envy of the consumer-electronics world. Defending those margins may now be coming at a significant cost

IPhone maker may need to break with past practices and become more price-competitive to get out of its growth woes

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by Dan Gallagher | WSJ

Apple Inc.’s profit margins have long been the envy of the consumer-electronics world. Defending those margins may now be coming at a significant cost to what is no longer the world’s most valuable company.

Slowing iPhone sales triggered a nearly unprecedented warning from Apple on Wednesday about lower-than-expected revenue for its fiscal first quarter, which ended Dec. 29. That warning—the first from the company in nearly 17 years—sliced another 10% off Apple’s already battered shares on Thursday and brought the total damage over the last two months to 37%, or about $415 billion in market value.

That makes the one-time trillion dollar company now only the fourth most valuable in tech behind Microsoft , Amazon.com and Google-parent Alphabet Inc.

Apple cited disappointing sales of the iPhone, mostly in China, as the main reason for its reduced outlook. That comes as Apple has continued to raise prices on its iPhones to help offset a slowdown in unit sales reflective of a maturing global smartphone market.


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Apple now has five iPhone configurations priced at more than $1,000 in the U.S. In China, the cheapest of the company’s newest models, the iPhone XR, costs nearly twice as much as a comparable device from Huawei without any trade-in credits.

That pricing game now seems played out, which raises the question of just how Apple can maintain the profit margins that have long been a major point of attraction for investors.

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Apple’s gross margin has averaged 39% over the last five fiscal years and analysts estimate the iPhone lineup alone averages gross margins closer to 50%. Apple’s operating margins, which take into account marketing, R&D and other costs to run the business, totaled 27% for the fiscal year ended September, compared with about 10% for the mobile-phone division of rival Samsung over the same time frame.

Apple has never been a low-price leader, nor has it ever chased market share for the sake of share. But the product that generates more than two-thirds of its revenue is now in a mature global market with little-to-no growth seen for the years ahead.

Consumers also no longer feel the need to rush out and buy the latest and greatest device, particularly when it costs them $1,000 or more. And while Apple and its supporters still frequently point to the growing services business as an important offset, most of Apple’s services remain closely tied to its devices.

Even with strong projected growth ahead, analysts expect services to account for less than one-quarter of the company’s revenue by 2021.



Cutting iPhone prices would likely hurt Apple’s margins and may feel like a bitter pill for investors to swallow. But Apple is now trading just under 10 times forward earnings, excluding its huge pile of nearly $123 billion in net cash, which makes it the cheapest among large-cap techs, save for IBM .

Once dominant Big Blue also used to covet earnings protection. That should serve as a sharp reminder for Apple and its investors that things can always get worse—if they let it.

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