Apple is Recession Proof. Here's the Proof.

The average Wall Street pundit will say, "How will the consumer be able to buy iPods when he or she can't afford to eat?" To that I respond, "Therein lies the answer." Those who are so affected by the prospect of recession that they can't afford to eat (being facetious), are not the types of individuals who buy iPods or $1,500 computers for that matter. Recession is nothing more than cocktail conversation for the wealthy middle class who make up the vast majority of the U.S. population. They love to talk recession at dinner parties celebrating the purchase of their new 52" flat screen T.V.s. Those Americans, the ones reading this blog, and the ones with whom readers of this blog associate, form the basis of the Apple consumer market. Apple sells the Rolls Royce of Computers, Cell Phones and MP3 players. These products are not intended for recession-affected individuals.

Moreover, its a big misconception to think that Apple's growth is driven by iPods sales anymore. This couldn't be any further from the truth. Apple is no more driven by iPod sales growth than is Sony driven by Playstation 2 sales growth. In the average quarter, non iPod sales make up more than 74% of Apple's total sales. Let me say that again. Three-fourths of Apple's sales revenue is derived from products other than the iPod that Wall Street so loves to bash.

Nearly all of Apple's growth over the past 2 years has come almost exclusively from it's explosive sales of its Macintosh computer. Thus, to make a claim that Apple's growth will be hampered by recession is really nothing more than claiming that Apple's growth in its computer sales will begin to slow as a result of recession. Yet, such an argument falls nothing short of being ridiculous. First of all, whether the U.S. consumer spends 1% more or less than it did last year will have, at best, a nominal impact on Apple's computer sales growth which stands at 45% year over year. But since Wall Street is in the business of quabbling about the inconsequential, I have decided to weigh in on this total inane and worthless topic.

The average price of Apple's computers is $1,531. Anyone with any intelligence would understand that the stupidity should stop here. Yet, given the fact that analysts need everything spelled out for them, I will do my best to write in terms they can understand. Apple sells its computers for $1,531...$1,531...$1,531. Again. $1,531. An average hunk of junk Dell costs between $500 and $700. A recession-affected individual is not the type of individual who shells out $1,531 for a Mac even when the economy is booming. He or she, instead ops for the $500 dell. Similarly, this individual is not buying a BMW when he or she could buy a Ford and he or she is not buying an iPhone for $500 when he or she could get a flip phone for free. The point being made here is this: If you can afford to buy a $1,500 computer when the economy is doing well, then you could afford to buy one when the economy is in a mild recession. Case closed.

Now obviously this is just a rule of thumb and won't apply to mortgage brokers or other similar highly paid individuals who have recently lost their jobs due to the current housing recession. Yet, this still comprises of a relatively small subset of individuals. This point needs to be driven home to Wall Street analysts. Apple sells the most expensive products in its class that prices out those who are susceptible to being affected by a recession. Those who take the time to cut out coupons in order to save $5.00 on their grocery bill, likely does not own an iPod. Finally, the point of this article is not to say that Apple will continue its explosive computer growth, as that is neither here or there. It is to say, however, that whether Apple can maintain its explosive computer growth will have little or nothing to do with whether the United States enters into a technical recession. Whether the United States spends 1% more or less than it did last year will have no qualitative effect on Apple's earnings.

Disclosure: I own long term 2009 and 2010 call options in Apple. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.