For several years, Apple (NASDAQ:AAPL) engineers have endured catcalls to deliver technology for mass consumption, rather than strictly luxury tastes. Meanwhile, analysts have certainly remained privy to market share data that featured the Google (NASDAQ:GOOG) Android operating system picking up emerging market sales - at the presumption of Apple's expense. The Google business model, of course, is somewhat divergent from the vertically-integrated Apple Way. The bait-and-switch Google practically gives away product at cost in order to drive traffic towards higher margin Search. To date, the premium Apple brand has largely remained above the fray of engaging within any price war with the likes of Samsung (OTC:SSNLF), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google.
The iPhone 5C was actually a compromise between the idealism of those arguing for an all-inclusive Apple and the exclusive legacy of the late Steve Jobs. For an added touch of symbolism, the Apple iPhone 5C and 5S both hit shelves at the same time, on September 20, 2013. Still, within a few short weeks, Big Media erroneously trashed the iPhone 5C into the bargain bin alongside Microsoft Surface, Windows 8, and BlackBerry (NASDAQ:BBRY) 10. By October, Eric Dutram and Zacks had already dismissed the iPhone 5C as an "ongoing disaster." In retrospect, however, Apple iPhone 5C haters were in the market for fried ice. The 5C was no flop. If anything, iPhone 5C-related sales figures and commentary support Apple's dominance as the alpha consumer electronics movement. Going forward, any perceived fallout from the iPhone 5C launch should actually power long-term outperformance in Apple shares.
Apple iPhone 5C Specifications
2-year Contract 8GB
2-year Contract 16GB
2-year Contract 32GB
2-year Contract 64GB
In prior years, Apple would simply slash prices for its existing and immediately older phones upon the launch of a new handset. In 2013, again, Apple released the iPhone 5S and 5C simultaneously, while discontinuing the iPhone 5. At the time of this writing, the 8GB Apple iPhone 4S remains available for sale. The 4S is now given away for free if consumers agree to the terms and conditions of a two-year service contract. Without a service contract, Apple offers the unlocked 8GB 4S for $450.00. The 4S, of course, establishes somewhat of a price floor for Apple handsets. As such, critics constantly rail against the alleged entry-level 5C handset for being overpriced. The 5C prices out at a mere $100 less than the premium 5S at every level. Last December, Wal-Mart (NYSE:WMT) did slash the contractual price of the 5C down to $27.00, as part of a brief Holiday Season promotion. The technology commentariat quickly seized upon this news in further support of a thesis that the 5C was indeed, a dud.
In terms of technical specifications, Sandra Vogel and ZDNet already dismissed the "second-tier" 5C as simply a "colorful iPhone 5 with better battery life." The iPhone 5C, of course, may be most notable for its plastic shell casings made available in Seattle Seahawk neon green, Carolina blue, bright yellow, hot pink, and pure white. The 5S, 5C, and 5 have all been designed with similar physical dimensions that make for a more vertical feel relative to older iterations of the iPhone. Each 5S, 5C, and 5 phone also features a four-inch Retina screen that displays graphics in 1146 X 640 pixel resolution. Thrill-seekers may also take pictures with the help of 8-megapixel sensors and shoot 1080p high-definition videos at 30 frames per second. The A6 chip is the engine driving both the iPhone 5 and 5C. Still, the 5C offers 10 hours 3G talk-time, which compares favorably to the 8 hours 3G talk-time for the iPhone 5S. The iPhone 4, of course, features a shorter and stockier profile, slower A5 chip, and 960 X 640 pixel resolution graphics.
Be advised that the A7 chip installed within the iPhone 5S was the first 64-bit processor to hit mobile market shelves. Going forward, technology enthusiasts speculate that the iPhone 6 is set to launch this summer and will follow ongoing trends towards larger smartphone screens. Superficially, the iPhone 5C will remain effectively in limbo, as a value. The critics, or haters, must recognize the idea that the iPhone 5C was not designed for Apple to compete against itself. The 5C actually fared quite well as a replacement for the largely discontinued iPhone 5 and direct competitor against the Samsung Galaxy line. Research firm Counterpoint actually listed the 5C as the world's fourth most popular handset through October 2013. The iPhone 5S, iPhone 5, Samsung Galaxy S4, and Samsung Note III rounded out the top-five. The Apple iPhone 5C was never meant to be a blockbuster. The 5C was actually a smash hit when graded for its supporting role.
Apple iPhone Sales and Profits
iPhone Unit Sales
iPhone Revenue Per Unit Sold
iPhone % of Apple Revenue
Be advised that Apple does not specifically break down its iPhone sales figures according to model. As such, iPhone revenue per unit sales may serve as a rough guide to the dynamics of the underlying product mix. Apple iPhone revenue per unit sold has remained well above $600.00 over the past five years. This statistic would indicate that the average Apple consumer would purchase the latest 16GB premium iPhone, which has historically priced out at $649.00. Apple iPhone revenue per unit sold did decline by 3.5% from $629.60 to $607.45 between fiscal 2012 and 2013. At that time, language written within the 2013 annual report blamed the drop upon consumers who had chosen to purchase older iPhone handsets.
On January 28, 2014, Apple filed its first 2014 quarterly report for the period ended December 28, 2013. As always, Apple's Q1 report was a highly anticipated event that largely coincided with Holiday Season results. Apple closed out its latest blowout quarter having sold a record 51.0 million iPhones and 26.0 million iPads, despite enduring the misplaced jeers concerning an iPhone 5C flop and apparent loss in branding power. Please be advised that quarterly iPhone revenue per unit sold did decline from $641.57 to $636.90, upon a year-over-year basis. Tim Cook, Apple CEO, did suggest during the Q1 2014 conference call that a larger iPhone 5C inventory was somewhat of a drag upon sales. Cook, operations man, felt that Apple had not rolled out the ideal iPhone product line mix until the midpoint of Q1 2014. Still, Apple bears cannot afford to commit to the elementary argument that the 5C sabotaged Cupertino. Again, most importantly, the 5C was an effective roadblock against Samsung and its more cost-conscious target market.
Research firm IHS iSuppli revealed fat 5C profit margins in the aftermath of its recent smartphone supply chain teardown. IHS iSuppli estimated bill of materials and manufacturing costs of $173.45 and $182.85 for the 16GB and 32GB iPhone 5C, respectively. Again, the unlocked 16GB iPhone 5C retails for $549.00. Apple reportedly paid only $9.40 in additional NAND Flash costs to offer the 32GB iPhone 5C for $649.00. The IHS iSuppli estimates broke down to 72% 32GB iPhone 5C gross margins. IHS iSuppli also estimated 72% gross margins for the 32GB iPhone 5S.
The Bottom Line
Despite record sales figures, Wall Street traders clearly were not happy with Apple, and immediately dumped shares to $506.60 in the January 28 trading session. Within 72 hours, Apple stock was hammered from $550 to $550 amid the latest earnings disappointment and Wall Street sell-off. Again, frantic traders and analysts may highlight the recent product mix shift towards the alleged 5C flop as the culprit behind Apple reporting a mere $13.072 billion in net income off $57.6 billion in net sales. Last year, Apple took down $13.078 billion in net income off $54.5 billion in Q1 2013 revenue. Long-term investors may consider taking more nibbles out of Apple stock at this junction time. Activist investor Carl Icahn recently upped the ante to purchase an additional $500 million in Apple shares. Icahn has already described his move to invest billions of dollars with Cupertino as a "no brainer."
Apple did close its latest quarter with $158.8 billion in cash and investments above $95.5 billion in total liabilities on the books. Apple's liabilities did include $11.4 billion in deferred revenue, which will ultimately fall off the balance sheet and slide over to the income statement. In effect, Apple would be left with $74.7 billion in cash and investments, after paying down its financial liabilities and accrued expenses. At the current $508.79, one share of Apple stock offers roughly $80 in built in liquidity. After backing out the impressive liquidity pile, Wall Street has valued the Apple business model at a mere 10 times current estimated earnings. Going forward, Apple has pledged to return an additional $100 billion back to shareholders through buybacks and dividends by the end of 2015. Apple has already slashed its outstanding share count from 938.9 million to 896.1 million over the past year.
Apple stock is still a buy, despite any misguided chatter of any alleged 5C flop.