Apple’s Move to Absorb Higher Component Costs Will Help iPad 2
The recent Japanese earthquake led to supply constraints and consequently higher prices for many of Apple’s (NASDAQ:AAPL) component suppliers. However, Apple has agreed to absorb the additional costs related to components in exchange for smooth shipments. [1] Although Apple’s profitability could be slightly impacted due to higher costs, we believe it’s still a market share game for Apple’s hit products like the new iPad 2 and so ensuring on time deliveries will put more pressure on the likes of Motorola Mobility (NYSE:MMI) and Research in Motion (NASDAQ:RIMM) that are trying to work their way into the tablet market. We maintain $420 price estimate for Apple stock, which is about 20% above market price.
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Apple’s iPad Business Could Benefit
We previously discussed the negative impact on our estimate for Apple stock from component supply issues, which were exacerbated by the recent Japanese earthquake (see Supply-Related Issues from Japanese Earthquake Could Hit iPad Sales). However, if Apple avoids or can reduce its supply constraints from component manufacturers, it will continue to gain from the robust demand for the Ipad 2.
We discussed before that supply constraints are the biggest risk to iPad’s business rather than slowing demand. Apple’s gross margin for the iPad is around 30% and may decline more than we thought on supply related issues. So far faster iPad unit sales have outweighed the negative impact from gross margins leading to higher profits.
Bigger Headache for Competitors
Competitors like Motorola Mobility are trying to play catch up with the iPad in the tablet market. If Apple decides to absorb additional costs, competitors might also have to follow the same process if component manufacturers demand higher prices to ensure supply. We estimate that the Xoom will make up roughly 20% of Motorola Mobility’s $25.45 estimate of stock value, and hence MMI could be one company that is impacted.
Although RIM has not disclosed any guidance numbers on soon-to-be-released PlayBook tablet, we believe its gross margins could be around 25% for 2011. We discussed this in a recent note titled RIM Worth $70 Though Near Term Concerns are Warranted. Any further gross margins declines could seriously hurt RIM’s PlayBook business profitability leading to potential downside for our near $70 price estimate.
You can see the impact on our estimate for Motorola Mobility and RIM stock by tweaking the above trend-line.
See our full analysis and $420 price estimate for Apple.
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