The Silicon Valley success manual is just three words; Faster, Better, Cheaper.
I heard it all over the place when I moved to the Valley in 1984, and over time, all sorts of industries have latched on to it in search of higher profit margins.
It takes Moore’s Law, which states that the number of transistors on a microchip doubles roughly every two years, and turns it into rock-solid business advice.
Tim Cook has clearly read this mantra too, and is making all of the hefty experience behind it his guide with his recent announcement of an ambitious plan for Apple Inc. (AAPL) to use its own chips to power Mac computers.
This decision has the potential to more than triple computing power in some apple products, while saving customers as much as 10%, all while boosting profit margin.
I believe this is a very savvy move. And today, I will show you how it will help Apple continue to double the market’s return…
Going It Alone
Now then, Cook took the starring role in the recent Mac presentation, shot at the company’s sprawling Apple Park headquarters in Cupertino and streamed over the Web.
The switch to new chips had long been rumored, but the size of the announcement took most by surprise. Cook unveiled new versions of the Mac mini desktop computer and the MacBook Air
I use both of those models every day of the week and love them. But heavy users weren’t left out in the cold. Apple also upgraded the MacBook Pro line.
All of them will now feature Apple’s own M1 chip, replacing the Intel Corp. (INTC) processors that Apple had been using for the last 15 years.
The performance benchmarks make it clear why Apple made the switch.
Take the low-powered MacBook Air, for example. It will now come without a fan. Yet, it will still be 3.5 times faster than its previous, Intel-powered model.
In terms of pure graphics performance, it will be five times faster.
All that as its battery life goes up by one-third, or six more hours, and its price drops by $100.
Like I said…Faster, better, cheaper.
Credit Suisse analyst Matthew Cabral estimates this move will increase Apple’s margins by $60 per sold computer. Deutsche Bank analyst Jeriel Ong thinks Apple’s earnings will go up by $0.13 per share once the transition away from Intel is complete.
Given the high prices of Intel’s chips, which require steep licensing fees, $60 may be a low number, especially as Apple was developing very similar chips anyway for its line of powerful iPad Pro tablets.
Now, Apple’s iPhones and iPads get most of the attention these days, but COVID gave the firm’s computer lineup an adrenaline boost.
With millions of people working from home, sales of Apple’s computers shot up by 29% to $9 billion last quarter. That marks a new high for the company.
Not only does Tim Cook’s decision to cut out the middleman create a highly reliable moneymaking opportunity, it also creates an example that you can follow too.
The All-New Supply
Cook’s announcement comes at a great time.
If the COVID pandemic has shown industry anything it’s that companies need to tightly control their supply lines. Hoping that designing, building, and assembling parts and devices in countries all over the planet will work out just doesn’t cut it.
Lockdowns meant production and assembly had to pause in different places at different times, throwing the whole web into chaos.
Meanwhile, shipping itself became difficult, as borders closed, ports filled up, and ships had to wait out at sea.
By moving away from Intel, Apple now designs its chips itself and deals only with its trusted manufacturing partner, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) when it comes to having them made.
Make no mistake. The new iPhone 5G looks to be a hit. A new survey from Evercore ISI shows that buyers are more excited than expected about Apple’s recently announced new smartphones.
Of the 2,500 iPhone users surveyed, 78% said they were interested in upgrading to Apple’s latest smartphone. That’s up from 68% last year.
Even better, interest for the more expensive models also increased, pushing Apple’s average sales price for this year’s iPhones up to $838, compared to $806 in 2019.
That good news comes on the heels of a strong quarterly earnings report that saw Apple beating Wall Street’s expectations. The firm reported per-share earnings of $0.73, while analysts had been expecting only $0.70.
In addition to Mac computer sales rising, as you saw earlier, iPad sales surged by 46% to $6.8 billion.
But maybe most important was the growth in Apple’s services, up 16%. This segment has the highest margins by far, and once people start using things like iTunes for music and iCloud for storage and computer backups.
And at $14.5 billion this past quarter, the services segment now has a $58 billion run rate.
That’s significantly higher than Cook’s goal of $50 billion, set last year. In the middle of a pandemic, that’s very impressive.
With the holiday shopping season coming up, I’m expecting consumers to go for both the new 5G iPhones and the new M1-powered Mac computers.
Combine that with the recent good news on a vaccine for COVID early next year, and you have a “perfect storm” for a nice run in Apple’s stock.
My stance on Apple has been the same from the very beginning…buy, buy, buy.
Because I still see plenty of upside ahead.
Add it all up and you can see why I say Apple is a savvy play for the post-COVID long haul.
Cheers and good investing,
— Michael A. Robinson