Apple (NASDAQ:AAPL) recently announced results for the second quarter of 2010. Headline news: Despite increasing competition in the smartphone sector, iPhone pricing remained strong at an average of $595 for the quarter. This compares well with the $593 average price for the whole of 2009.
In response to this news, we have increased our Apple stock price forecast from $296 to $337. This forecast incorporates our assumption that competitive pressures will force Apple to lower iPhone prices over time. Our analysis follows below.
Potential upside to Apple’s stock if pricing remains resilient in the long term
Apple competes with Research in Motion (RIMM), Motorola (MOT) and Nokia (NYSE:NOK) in the mobile phone market. Although Apple has managed to keep average iPhone pricing between $550 and $650 for the past six quarters, we believe that Apple can’t sustain these high prices for long. We currently estimate that iPhone pricing will decline from $593 in 2009 to $413 by the end of the Trefis forecast period.
The iPhone constitutes nearly half of the $337 Trefis price estimate for Apple’s stock. You can drag the line in the chart below to create your own estimate for the impact of changing iPhone pricing on Apple’s share price.
In the unlikely event that the current average price holds over the long term, it would create a 20% upside to our $337 estimate for Apple’s stock. Below we explain why we think Apple will be forced to reduce iPhone pricing.
1. Competitors are cutting prices and improving phones
RIM, Motorola and Nokia smartphones have much lower price points compared to the iPhone. Unlike Apple, RIM and Nokia have steadily cut their smartphone prices over the past few quarters, while introducing new features that make their phones increasingly competitive with the iPhone.
The table below compares average prices of Apple, Nokia, Motorola and RIM smartphones since the first quarter of 2009.
|Q1 2009||$580||$369||EUR 190|
|Q2 2009||$558||$356||EUR 182|
|Q3 2009||$608||$344||EUR 190|
|Q4 2009||$638||$319||EUR 186|
|Q1 2010||$600||$311||$357||EUR 155|
|Q2 2010||$595||$299||Result Awaited||EUR 143|
2. AT&T negotiates for lower subsidy
AT&T (NYSE:T) pays Apple a subsidy of around $400 per iPhone. In an earlier article, we noted that the wireless giant will likely press Apple to reduce this subsidy after AT&T’s exclusive license to sell the iPhone expires next year. This would mitigate AT&T’s risk of losing subscribers to rival Verizon (NYSE:VZ) if Apple decides to sell iPhones through Verizon’s network from 2011 onward.
A lower AT&T subsidy would put pressure on Apple to reduce iPhone pricing in order to make the device more competitive with other smartphones.
Disclosure: No positions