Daily Ticker

Cure to what ails Apple can be found in the margins

Daily Ticker

Wall Street was not pleased with Apple's (AAPL) holiday quarter.

Apple sold 51 million iPhones in Q1 -- a new record for the company and a 6.7% year-over-year increase  -- but that was below analysts' expectations of 55 million sales. Net profit was flat at $13.1 billion versus a year ago and revenue of $57.6 billion came in slightly above estimates. The stock fell 8% to $506.04 in after-hours trading Monday and is down early Tuesday morning. Weak guidance for the current quarter helped drive shares lower.

"The quarter was solid...it's not as bad as it looked," says The Daily Ticker's Henry Blodget in the video. "The company is maturing and needs a new product line."

Apple CEO Tim Cook suggested on the company's conference call Monday evening that the firm would unveil a new product category this year. Yet few details or a confirmation of rumors that Apple was busy developing a smartwatch or TV were given. Blodget says a new product category would undeniably help Apple but argues that the company really needs to follow the lead of Google (GOOG) and Amazon (AMZN) by sacrificing margins for investment. Apple recorded gross profit margins of 37.9% last quarter.

Related: Is Google more innovative than Apple?

"The real growth is on cheaper phones and Apple is stubbornly refusing to offer products that are priced for emerging markets," Blodget explains. "It's hurting unit growth. Apple has a massive margin and a humongous cash pile and should use that cash to grow its platform."

Apple's iTunes service and software have become increasingly important revenue sources for the company and Apple executives should try to get as many iPads and iPhones in the hands of new customers, says Blodget. Wireless carriers will not subsidize the price of a smartwatch and it's "a hallucination that [a smartwatch] will lead to a sudden acceleration of growth," he adds. Moreover, the highly-competitive TV market has too many players, all reasons why Apple needs to shake up its current pricing model.

"If Apple resets margin expectations and drives growth in emerging markets, it sets them up for long-term success," says Blodget.

Is Apple stock headed higher or lower? Watch the video to see what Blodget and Aaron Task think!

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