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Michael Blair
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I retired as CEO of an Automotive Parts supplier, and manage an investment portfolio for myself and family. I have a BA in History from Royal Military College of Canada and an MBA from the University of Western Ontario. My first career was as a fighter pilot in the RCAF, and, following my MBA I... More
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  • A Lower-Priced iPhone May Improve Apple's Market Share But Is Unlikely To Increase Its Share Price 6 comments
    Aug 18, 2013 12:52 PM | about stocks: AAPL

    Apple (NASDAQ:AAPL) may release a lower priced iPhone. No doubt it will be a popular product in Asian markets in particular. It is in many ways an essential offering if Apple is to slow or stem market share erosion it is suffering at the hands of Android and Windows devices.

    The existing iPhone series has an estimated manufacturing cost of between $207 and $238 per unit, according to iSuppli.

    (click to enlarge)

    I presume Apple can shrink that cost by a few dollars by omitting the camera and using a plastic shell, but it seems unlikely they can get the manufacturing cost below $150 per unit and $160 is a better guess, as reported by Apple insider

    Apple currently realizes something close to $583 for each iPhone sold and is selling about 30 million devices a quarter, more or less. Total revenue from the 31.2million iPhones sold for its last quarter was $18.2 billion. iPhone margins are reportedly between 49 and 58%. For the purposes of this analysis I am going to use 53%, the approximate mid-point.

    Assume that Apple's lower cost iPhone is a runaway success and sells 20 million units a quarter. Some of these will come at the expense of the more fully featured devices and I am going to assume 40% for convenience. Profit margins on the lower cost device have been estimated in the 40% range suggesting a wholesale price of about $340.

    The low priced iPhone would thus spur growth in unit sales. Applying the model to the recent June quarter, the results may surprise some.

    Unit volume would have been 38.7 million, a sharp increase from the 31.2 million actually recorded. Of those, 20 million would be iPhone Lite and 18.7 million the fully featured version. Applying the 53% margin rate to the higher priced version and a healthy 40% margin rate to the lower priced version, revenue actually declines marginally and margin comes up short by over $1 billion. There lies the rub!

     

    iPhone June 2013 quarter

    iPhone June quarter pro forma

    Units sold

    31.2

    38.7

    Fully featured

    31.2

    18.7

    Lower priced

    Nil

    20.0

    Price realized per unit

       

    Fully featured models

    $583

    $583

    Lower priced models

    $340

    $340

    iPhone revenue

    $18.2 billion

    $17.7 billion

    iPhone margins

       

    Fully featured models

    $9.6 billion

    $5.8 billion

    Lower priced models

    Nil

    $2.7 billion

    Total iPhone margin $

    $9.6 billion

    $8.5 billion

    All is not lost, since the increased unit volumes suggest higher sales of software, music and applications which have been averaging about $35 per phone in use, adding over $200 million in revenue from that source per quarter. Not all of the higher volume would result in increased iPhones in use, however, since there would likely be some existing users shifting to competing devices.

    The point of this article is simple. Apple investors are looking to a lower priced iPhone to save the day for the stock price. A lower priced iPhone is a competitive necessity in my view, but rather than forming a panacea for Apple investors it simply becomes a defensive move which is more likely to permit Apple to hold on to levels of profit currently enjoyed than to cause any dramatic rise. In the end, higher profits will require new products in new areas and not just more entries into the increasingly crowded smart phone space.

    I have been an Apple bear for a while now. I don't think September 10th will cause me to move to the long side of the street. I will short stock into any price spike.

    Disclosure: I am short AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I have a short position in Apple calls at $500 strike.

    Stocks: AAPL
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Comments (6)
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  • Joshua Chin
    , contributor
    Comments (74) | Send Message
     
    Yikes, those are some serious cannibalization rates you are assuming there. I would have to respectfully disagree with your stance. My estimates on an iPhone Lite and the effect on share price can be found in my analysis here:
    http://seekingalpha.co...
    18 Aug 2013, 03:17 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7621) | Send Message
     
    "Assume that Apple's lower cost iPhone is a runaway success and sells 20 million units a quarter."

     

    How do you come up with such a low number?

     

    AAPl already sells well above 30 million units today in holiday quarters, it sold close to 50 million in Q1 2013:

     

    http://bit.ly/WNcVSw

     

    I'm assuming 45-60 millions per quarter aggregate iPhone sales in the future (averaged over one year) - if the new iPhone 5C is close to 0$ with a contract in most countries this is certainly possible.

     

    There are also rumors about an updated Apple TV later this year, I wouldn't go short Apple into the holiday season, even more so with famous investors starting to pile on the stock in recent weeks (Icahn, Soros...)
    18 Aug 2013, 03:22 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7621) | Send Message
     
    Just a quick addition how I arrive at 45-60 M iPhones per quarter if we assume current iPhone sales at 30 M / quarter:

     

    (General assumption: Apple does infact add a lower-end iPhone (5C ?) on Sept 10, 2013)

     

    1. Add China Mobile and other new carriers worldwide (Apple still has fewer carriers signed than the Android competition), especially in emerging markets:

     

    + 5-10M / quarter

     

    2. Add iPhone 5C (net of cannibalization of iPhone 5s):

     

    + 10-20M / quarter

     

    This would result in 45-60 M iPhones sold per quarter in late 2013 and 2014, of course the figure can vary a lot between quarters. Usual spikes on release and holiday quarters.
    18 Aug 2013, 07:28 PM Reply Like
  • Joshua Chin
    , contributor
    Comments (74) | Send Message
     
    Also, I noticed we are from the same alma-mater. Cheers!
    18 Aug 2013, 03:28 PM Reply Like
  • Michael Blair
    , contributor
    Comments (5099) | Send Message
     
    Author’s reply » Western or RMC?
    18 Aug 2013, 07:49 PM Reply Like
  • Joshua Chin
    , contributor
    Comments (74) | Send Message
     
    Western! Great to see a fellow Canadian and Mustang on SA. I enjoy the quality of your writing and your thesis. Thank you for maintaining a level of quality on SA.
    19 Aug 2013, 12:41 AM Reply Like
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