Apple Crushes The Competition

Apple's (AAPL) relentless innovation has disrupted its industry, sending competitors scurrying to stay relevant. The iPhone, along with Google's (GOOG) Android, sheared profits at Nokia (NOK) and Research in Motion (RIMM). The GPS capability of the iPhone created a far cheaper alternative to Garmin's (GRMN) navigation systems. The iPad threatens Hewlett-Packard (HPQ) and Dell (DELL) PC sales.

The Dismantling of Apple's Competition: Smashing Operating Margins

Competing against Apple hasn't been good for your margins. The competition has been forced to cut prices, increase marketing costs, and spend more on R&D in a frantic effort to defend against Apple. As a result, operating margins aren't what they used to be. For example, Garmin, Nokia, and Research in Motion's margins have tumbled since 2007 while Apple's have soared.

(TTM is trailing 12 months. Data from Morningstar.)

Apple's stronger margins have translated into extraordinary product profitability.

Apple's earnings per unit sold have skyrocketed: In fact, they have defied gravity.

Owing to the company's unusual transparency, it's easy to derive how much money Apple earned from its average unit sale. Apple sold 73 million units this quarter: 37 million iPhones, 15.4 million iPads, 15.4 million iPods, and 5.2 million computers. Simply divide its $17 billion operating income by the 73 million units and you reach Apple's average profit on each unit sold. (The figure includes money earned from services related to the product.)

Last quarter, Apple earned $241 in operating income per average unit sale, far greater than the $74 made in 2007.

The figure includes even the lowly $49 Shuffle. That's extraordinary considering the company sold 15 million iPads last quarter: Except for some higher end Touches, most iPods sell for under $250, below the $241 earned per average unit sale. Clearly, less expensive iPods drag down the average earnings brought in per unit. Profits on the rest of the line-up -- iPhones, iPads, and notebooks -- must be far higher.

Very few tech companies tell investors how many computers or phones they sell. Hewlett doesn't. Dell doesn't. Samsung (SSNLF.PK) doesn't. Amazon (AMZN) won't tell us how many Kindles it's moving. These are all secrets. Personally, I'd like to know: It makes it so much easier to tell how the company is doing! I suspect investors would be shocked at how little a company actually makes on each sale. For example, Amazon is probably losing money on each Kindle sold.

Thank goodness for Nokia, RIM, and Garmin: They tell us how many devices they sell. I've assembled the numbers at these companies along with Apple. That way, you get a sense of how remarkable Apple is. Unfortunately for Nokia, Rim and Garmin, the news isn't good: Average unit profits have been clobbered. I suspect things aren't much different at HP or Dell. Perhaps, that's why Dell has moved away from notebooks and more into Enterprise. Anyway, I promise to include them if HP or Dell ever divulge the numbers.

(Derived from 10Ks and 10Qs)

Question: How do you compete with Apple's $241 in operating profits per average unit sold? Answer: You can't.

Imagine you're poor Nokia earning 3 bucks on your phone sale. That's probably what Apple earns on each Shuffle. RIMM and GARMIN's numbers have not held up either: They've halved while Apple's have tripled since 2007. So, what's their best solution? Move to a line of products that Apple doesn't make.

Will the trend be broken? There seems to be no let-up in sight judging by Apple's historical income per sale performance. Apple remains a long term buy.

Disclosure: I am long AAPL.