In a new report out from Piper Jaffary titled Why Investors Should Be Excited About AAPL Beyond iPhone 5, legendary Apple Inc. (NASDAQ:AAPL) analyst Gene Munster gives his latest thoughts on Apple and the iPhone 5. Munster maintains his price target on Apple of $910 a share.
He states that while iPhone 6 will likely be in the fall of CY13, some investors believe the hype around iPhone 6 won’t match the hype for the new form factor of iPhone 5.
Munster is optimistic on Apple Inc. (NASDAQ:AAPL) shares, nothing three reasons: 1. he expects an existing iPhone to reach $200 (unsubsidized) compared to $375 today. This should accelerate share gain in emerging markets and increase investor confidence in the sustainably of Apple’s overall growth. 2. Upside to iPad driven by 7-8″ inch form factor likely launched late in CY12. 3. The launch of an Apple Television. Despite all the talk, investors will believe it when they see it.
So what will be the biggest event for Apple in 2013? Munster thinks it will be a decrease in the price of the iPhone 5, noting:
Apple will likely reduce the price of an existing iPhone to ~$200 (unsubsidized) in September 2013. Currently the 3GS 8GB is the low end iPhone which retails for $375 unsubsidized. The $200 price is important given Apple’s market share is weakest in emerging markets. We estimate that Apple controls 55% of smartphone sales in the US, and closer to 10% in emerging markets like China. The cheaper iPhone is why we are confident (despite lower ASP’s) that Apple can accelerate iPhone sales to 34% y/y in CY14 from 25% in CY13 and 35% in CY12. Overall we believe iPhone global smartphone share will increase from 20% in CY12 to 32% in CY15.
Even though ASP’s will be declining, overall iPhone revenue growth should accelerate in CY14 via volume.
However, the ultra high margins which Apple Inc. (NASDAQ:AAPL) currently produces will likely be reduced, as iPhones are discounted.
Since the launch of the (subsidized) iPhone 3G in June 2008, Apple has maintained an average ASP of $641. The range of ASPs over the same time period has been $588- $674. If Apple were to offer a $200 iPhone in September 2013, roughly 20-25% of iPhone units would be of the cheaper device, resulting in a gradual ASP decline from $624 today to $434 by the end of 2015.
This would reduce the iPhone 5’s margins to similar levels to the iPad mini. A $200 iPhone would likely have gross margins closer to iPad (23-32% according to court documents from the Samsung trial) compared to the iPhone (49-58%). According to iSuppli, the bill of materials (BOM) for a 16GB iPhone 4S is $188 plus $8 in estimated manufacturing cost. It is becoming increasingly possible for Apple to build the low end iPhone for $130-150, which would suggest a 25-35% gross margin. While some investors might not like the decrease in margins, it will overall be beneficial for the company and the shareholders.
It appears that Apple Inc. (NASDAQ:AAPL) will go for size over margins, and this could increase its current market share and penetration.
(Disclosure No positions in any securities mentioned)
