Apple (AAPL): The Myth Of Being A Software Company

Apple (AAPL) says customers have already downloaded 60 million software applications for its iPhone. That number seems phenomenal, but from a revenue standpoint it is not. According to The Wall Street Journal," If sales stay at the current pace, Apple stands to reap at least $360 million a year in new revenue from the App Store." Apple should have total sales of over nearly $30 billion during the next year.

The idea that Apple is becoming a software company is a fiction.

Investors in Apple’s stock would like to think it can partially escape being in the hardware business where margins are relatively modest because of the cost of goods sold. The chances of that happening are remarkably small no matter how well its Mac OS or iTunes businesses do.

Hardware sales were over $5.2 billion of Apple’s total $7.5 billion in revenue in the last quarter. iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories totaled only a bit over $800 million. In other word, the hardware is Apple’s core business. Software is not.

This may explain why Apple’s shares are down over 10% in the last quarter. The company warned that margins may shrink in the current period. Inflation is hitting Apple’s component costs and its is actually dropping prices of products like the Mac to pick up market shares.

Apple’s margins are likely to fall through this quarter and the next year. High margin software does not carry enough water at Apple to dig it out of that hole.

Douglas A. McIntyre