Apple Inc. Defies Tanking PC Sales With Rising Mac Sales

Numbers compiled by IDC show that PC sales tanked in Q4 2015, dropping 10.6% compared to the previous year. PC manufacturers finished 2015 with their lowest annual sales since 2008.

Apple stock doesn;t reflect strong AAPL Mac sales
Source: Apple

One company bucked the trend, however: Apple, Inc. (AAPL). Mac sales were up 2.8% on the quarter, and the company finished the year with a global PC market share of 7.5%, propelling AAPL into a tie with ASUS as the world’s fourth-largest PC maker.

The demand for PCs worldwide has continued to slide, despite the launch of Windows 10 last year. There was hope in the PC industry that once Microsoft (MSFT) released its new operating system, PC sales would surge.

Consumers and businesses had held off upgrading after the Windows 8 stumble, despite Microsoft ending support for Windows XP. With compelling new hardware including ultra-thin, high performance laptops like Dell’s award-winning XPS-13 and the hype around Windows 10, there was an expectation that there were a lot of aging PCs out there that would finally be replaced in 2015.

That may have been true, but with under 300 million PCs sold worldwide in 2015, many of those PC owners chose to simply upgrade the operating system instead of buying new hardware. Or maybe they chose a Chromebook or tablet instead, ditching their PC altogether.

Good News and Bad News for Apple Stock

While Windows PC manufacturers had a disappointing year, AAPL Mac sales increased, moving the company from fifth place over-all to a fourth place tie, despite the fact that Apple’s computers carry a premium price tag. IDC has an idea of why the Mac continues to do well in a global PC industry that’s in decline:

“Even as mainstream desktop and notebooks see their lifetimes stretched ever longer, Apple’s emergence as a top 5 global PC vendor in 2015 shows that there can be strong demand for innovative, even premium-priced systems that put user experience first.” 

Apple stock has been taking a beating in recent months, largely out of concern that iPhone sales growth seems likely to slow, while the Apple Watch hasn’t yet sold in numbers great enough to be the considered the next “must-have” AAPL gadget. Could the Mac be the product that steps up?

Unfortunately for Apple stock holders, that’s not likely to happen. The Mac already represents around 15% of Apple’s revenue. Until the iPod and then iPhone were released, the company was a PC maker first and foremost. Even for AAPL, margins people will pay for a computer are considerably lower than they’ll tolerate for a smartphone, and the upgrade cycle is much longer for a Mac than for an iPhone.

I’ll have to use 2013 figures for Mac profit margins (Apple is very secretive about these stats, making them difficult to find), but Asymco released a study that year suggesting AAPL derives an average gross margin of of 26% on Mac computers. Even factoring in marketing and R&D costs, Apple was making nearly four times as much profit on each Mac it sold than any other Windows PC manufacturer, including Dell, Hewlett-Packard (HPQ) and Lenovo (LNVGY).

That sounds great … however, the profit margin on an iPhone is dramatically higher — as much as 69% on the iPhone 6 by some estimates. Then there’s the fact that consumers wait four or five years to replace their computers, while upgrading to a new smartphone every year or two.

In other words, single-digit increases in Mac sales — while great news for Apple — don’t have nearly the impact on overall profits that those iPhone sales do.

As a result, Mac sales remain an important source of revenue for AAPL, but even outperforming the PC market dramatically isn’t likely to move the needle much on Apple stock. However, for long-term investors in Apple stock, it’s good to know that one of the pillars of Apple’ business remains viable, and that even as the PC industry itself declines, Apple is grabbing a larger chunk of what remains to grow that business.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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