Although several electronic gadget companies have introduced interesting variants in the industry, people who are loyal to Apple (AAPL) products seldom think of switching. Experts believe that this is mainly because of the prestige attached to this brand. AAPL seems well aware of its prestigious position and this is one reason why its marketing mix is aimed at enhancing this prestige.
Apple has the same pricing philosophy as Louis Vuitton. It sells premium products at premium prices and never discounts. That philosophy has made it an aspirational brand worldwide. You don't see vendors in China selling fake Google Nexus 7s. Apple products are so much more expensive than the competition that only the rich and faithful tend to buy them. But that uncompromising devotion to the fundamental philosophy is what has made Apple such a powerful global brand.
This analysis by Felix Salmon clearly indicates that the success AAPL has attained is mainly because of its premium positioning strategies. However, we feel that AAPL's success because of this prestige based perception can fade away in the near future. This is because of some recent strategies adopted by the company through its key strategic partner Wal-Mart (WMT).
The world's leading retail giant, WMT, is selling iPhone 5, iPhone 4s, and iPad at significant discounts. Wal-Mart said it is selling the 16 GB iPhone 5 for $127 versus an original price of $189.97. The price is valid with a two years contract from wireless carriers such as Verizon (VZ), Sprint (S) and AT&T (T). WMT also reported that it is selling the third generation iPad for $399. While this certainly can boost sales for WMT, we feel that this strategy of selling on discounts can become one of the biggest threats to AAPL's premium positioning.
As mentioned earlier, AAPL has long used the premium pricing strategy by refraining from discounts to enhance its prestige based image. However, this new promotion based on offering discounts can make customers feel that AAPL is no longer a brand for the prestige loving customers. Research proves that although offering discounts is a nice move for improving sales, it ruins brand prestige hurting long term profitability. AAPL's new strategy makes us feel that AAPL is focused more on increasing sales than capitalizing on its most important weapon, i.e. brand prestige. While we definitely support increasing sales, we also feel that doing this at the cost of brand damage is certainly not a wise strategy.
Moreover, while AAPL products used to be radically different from their competitors a few years ago, prestige seems the only radical difference now. AAPL's core product is almost identical to the offerings of its key competitors. Therefore, a step which ruins the premium brand image can mean a potential drop in the competitiveness and future value of AAPL.
Such deals become even more dangerous if moves from competitors like Samsung (SSNLF.PK) are taken into account. Samsung has introduced new high end products like the Note 2 to capture the prestige based market long held by AAPL. In such a situation, if AAPL loses its premium because of discount based promotions, other brands can get a chance to strengthen themselves in the perceptions of customers.
From an investor's perspective, we feel that AAPL should decide carefully before taking promotional steps for improving sales. This is because those steps which hurt brand prestige can decrease its EPS in the future. Currently, AAPL seems as prestigious for investors as it is for customers. It holds the highest market cap amongst its key competitors. Similarly, its enterprise value is more than the combined enterprise value of Google (GOOG) and Microsoft (MSFT). AAPL is trading at a forward P/E of 9x compared to competitors' average of 11x. Other multiples like EV/EBITDA and P/S also lead us to believe that AAPL is an undervalued stock. Based on its historical P/E of 10.4x and forward EPS of $57.8, we value AAPL at $599. From an investor's perspective, this stock has a potential capital return of 17% and total return of 20% compared to MSFT's capital return of 12% and total return of 15%.
While we still have a buy rating for AAPL, we feel that price based promotional strategies should be avoided by a premium brand like AAPL. We do support promotional strategies but suggest tactics other than discounts for that. As we feel that discount based promotions can ruin future profitability, any further deal of AAPL with other retail giants like Target (TGT) Amazon (AMZN), etc can lead us to change our views about AAPL's long term horizon as a valuable option for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.