Apple Inc. (NASDAQ:AAPL) is launching a cheaper iPhone according to many sources. Some analysts think that a cheaper phone could result in cannibalization. However, ‘Apple guru’ Gene Munster notes in a recent report that even with 30% cannibalization from a cheaper iPhone, shares are still a buy. Munster has adjusting his CY13-15 iPhone estimates to assume a worse case scenario of 30% cannibalization from the upcoming cheaper iPhone and still thinks that the tech giant is worth $688 a share (down from $767). He notes that March Street expectations still appear too high and that Apple Inc. (NASDAQ:AAPL) is likely to guide June down;
Factoring In 30% Cannibalization (i.e. for every ~3 cheaper phones sold, 1 full priced phone is cannibalized)
Munster expects Apple to sell a $300 iPhone starting in September. For CY14, he now expect 6% high end iPhone unit growth or 37% share of high end market vs. 43% in CY12. Apple Inc. (NASDAQ:AAPL) will likely sell 75m cheaper phones or 11% of the low end (below $400) market vs. 0% in CY12. Given Apple Inc. (NASDAQ:AAPL)’s 42% share of the high end market in CY12, getting 11% share of the low end market in CY14 is achievable.
What Happens To Margins?
Factoring in 30% cannibalization, gross margin goes to 36.6% in CY14 vs. 38.6% in Dec-12. This assumes a $300 ASP, and a 30% gross margin for the cheaper iPhone vs. $620 ASP and a 55% gross margin for the high end iPhone.
Munster expects Apple Inc. (NASDAQ:AAPL) to guide June revenue below the Street
He believes the guide will be for $34-36 billion compared to his new estimate $35.1 billion (down from $37.6 billion), which includes new expectation of flat iPhone growth y/y in June from his prior up 15% estimate. The Street currently expects $39.6 billion in revenue, which implies around 33 million iPhones (vs. Munster’s estimates of 26m). Finally, margins should improve sequentially in June from economies of scale in products launched in the December quarter. Guidance should reflect this improvement and June gross margin guidance could be in the range of 38-39% vs March at 37.5-38.5%.
Look For Dividend Increase At March Results, Potential For Debt Later
Munster expects Apple Inc. (NASDAQ:AAPL) to modestly increase the annual dividend from $10.60 to ~$14 (based on using cash generated in US) at the March quarter results. However, do not expect an increase in the buyback at the March quarter results. Longer term, he believes that using debt could be an option for Apple Inc. (NASDAQ:AAPL) to fund further dividend increases and/or share buybacks, although he doesn’t expect an announcement for that at the March quarter report.
