Apple Inc. (NASDAQ:AAPL)’s less expensive iPhone will address the 65 percent of the smartphone market the company’s current lineup doesn't address, according to noted Piper Jaffray analyst Gene Munster. He released a report to investors this morning detailing his expectations for the company’s stock in light of concerns about profit margins. While Munster believes that the company will be affected by the lower profit margin that’s necessary for the creation of a less expensive iPhone, he feels that the market opportunity is more important for the company.
He believes that Apple Inc. (NASDAQ:AAPL)’s margins will be effected by less than 1 percent “over the next few years,” however he is reiterating his Overweight rating for shares of the stock. He believes creating a lower priced phone is “the right move” for the company because the high-end market will be about 320 million units for the 2013 calendar year. Munster expects that Apple Inc. (NASDAQ:AAPL) will take about half of that market, but it will miss out on the other 65 percent of the market, or 580 million units, if it doesn’t create a less expensive phone.
Thus he believes that while profit margins will take a very small hit at first, the opportunity is “too large to miss” because the market for low-end phones is growing much faster than the market for high-end phones.
He also believes that Apple Inc. (NASDAQ:AAPL)’s stock “can work” even if the company’s margins are flat or down slightly. According to Munster, investors are concerned that introducing both a low-end phone and the Apple Television in the same year will put pressure on the company’s margin, making it “difficult” for the company’s stock to move higher.
However he feels that “earnings growth and market share are more important to the overall story than slight fluctuations in gross margins.” He projects 21 percent earnings growth for Apple in both the 2013 and 2014 calendar years. He is leaving expected margins for Apple the same at 41.5 percent for this year because he doesn’t believe the less expensive phone will impact them much in 2013. However he is adjusting his expected margin for the 2014 calendar year down to 40.6 percent.
Munster has set his price target for shares of Apple Inc. (NASDAQ:AAPL) at $875 from previous $900 per share.