So far, the company has raised prices on almost everything except the iPhone.
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The market is bearish on tech giant Apple (NASDAQ:AAPL) Recently, there have been growing concerns that growth and margins will come under pressure in coming quarters. reason? Companies like Micron Technology are benefiting from insatiable demand, with the company raising prices on its popular products in response to soaring memory prices.
While Micron could be a big winner from this trend, Apple could end up losing big. While the price increases may help offset rising memory costs, the risk is that the company’s already expensive products could become even more unaffordable for consumers.
Is Apple currently in a difficult position?
Apple CEO Tim Cook has warned of rising costs. MacBook and iPad prices have increased, in some cases by hundreds of dollars, to offset rising costs. The trouble is, this may not be the end. “The consumer electronics industry is facing unprecedented challenges,” the company said, adding, “We have never seen component prices rise this rapidly.”
It’s a little surprising to see such panic, especially considering Apple’s fairly strong profit margins in recent years.
AAPL Gross Margin (Quarterly) Data by YCharts
The big question in the company’s next quarterly earnings report will be how much margins will shrink. The gravity of the company’s statement suggests it matters. What’s even more concerning is that Apple’s costs could continue to rise as the shortage of memory products isn’t going away anytime soon. This is not an isolated event that only affects a single quarter. And if the company also has to raise iPhone prices, demand for its flagship product could be wiped out.
Apple stock is falling, but is it worth buying?
Apple’s stock price has fallen about 10% over the past month, a significant drop for a tech giant. However, overall prices are still up about 4% since the beginning of the year. Investors are bearish on the stock, but its price-to-earnings ratio of 34x is still quite high, so it’s not necessarily a bargain.
I’m going to hold off on making a decision about Apple until they release their latest earnings numbers to see how much the rising memory prices are impacting the company’s profit margins. If the impact is indeed as bad as management suggested, it could put further downward pressure on the stock price in the future. However, at this stage, we do not believe that the value is low enough to compensate for the potential risks and uncertainties going forward. I’m not going to rush out and buy one right now.
David Jagielski, CPA has no position in any stocks mentioned. The Motley Fool has positions in and recommends Apple and Micron Technology. The Motley Fool has a disclosure policy.
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