Why Apple Won't Get Crushed By The Recession

Henry Blodget

Apple's stock has been cut in half this year as investors worry sick that, as the recession takes hold, consumers and companies won't be able to afford its slick, expensive products anymore. Many analysts have also noted that most of the growth in the laptop market is at the super-low-price end, and that Apple still doesn't play there. The lack of the announcement of an $800 laptop last week further fueled these fears.

Fear not!

Apple is handling these latest challenges the right way. It is a premium brand with premium products and premium profit margins, and it would be a terrible mistake for the company to suddenly begin to compete on price. (Or, worse, to throw its whole value proposition out the window because of a temporary dip in the economy.)

People buy Apple products because of the magical halo of quality and cool that Steve "Sex in a Box" Jobs endows them with, and they understand and accept that--to get that halo--you have to pay up. Once Apple's marketing pitch becomes "costs the same as a Dell", this sexiness will evaporate, and the company will become just another box maker.

It is true that it will be more and more challenging for Apple to maintain its amazing growth and margins as it moves out of a small, passionate high-end market and into the mass market, but the company is gradually positioning itself to do this without sacrificing its premium positioning. Importantly, its prices are coming down, just not enough to where anyone will accuse it of trying to compete on price.

• A $1,000 laptop is not really much more expensive than an $800 laptop, especially for a product that should last a few years. Apple will never win over the folks who choose purely on price anyway, so it would be dumb for it to sacrifice its premium positioning to try.
• The $200 iPhone has much of the functionality that many people once looked to laptops for, and some potential buyers of $500-$800 laptop will opt for that instead. Apple's iPhone, moreover, is still the highest quality product in the market, so no one who buys it will ever feel like they're settling for less.

In short, Apple has positioned itself to sell products to all but the most price-sensitive segment of the market. and because that segment is also the least profitable (except at Walmart-like scale), the company is smart not to sacrifice its brand and value proposition to play there.

But Won't a Recession Flatten The Company?

No. BMW, Mercedes, and--more relevantly--Toyota don't go out of business every time the economy weakens. They get hit, of course--everyone gets hit--but their value proposition doesn't suddenly disappear.

What will likely happen to Apple over the next 18 months?

• Its growth will be slower than expected (because some customers will either delay purchases or choose cheaper options).
• Its margins will be lower (because it will be spreading its fixed costs over a smaller sales base)

The stock market has already foreseen this, which is why the stock has gotten so beaten up. There is a big difference between this and Apple being in any sort of trouble, however. And that's why you've also seen such aggressive buying every time the stock gets near $90 a share.

Apple has $20+ billion in cash, no debt, and the highest margins and fastest growth rate in the industry. At $90, after excluding the value of the cash, the stock trades at just under 10X free cash flow, which is an extraordinarily low multiple for a company of this quality. In a market environment like this, the stock could obviously go lower, but if it does, this won't be because of any mistakes Apple has made.

Original here