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Apple: Growth At What Cost

Jul. 03, 2017 2:54 PM ETApple Inc. (AAPL)18 Comments
Bluesea Research profile picture
Bluesea Research


  • Apple has set a target to achieve 10 million iPhone sales in India.
  • It might be able to achieve this target quite soon, but there will still be a number of stumbling blocks for the company in this region.
  • Recent research shows that 55 percent of the total Apple sales in this region were accounted by older lower priced models.
  • This will impact the average selling price and gross margins for Apple.
  • Amid saturating American and European markets and a declining Chinese market, Apple might highlight growth in India, but investors should dig deeper into the data.

Apple Inc. (NASDAQ:NASDAQ:AAPL) is putting a lot of hope in the current iPhone iteration, but it will be facing a saturated market in important regions. There is also a lot of talk of declining sales in China as local competitors release premium smartphone features at rock-bottom prices. In this scenario, Apple’s management is looking to India and other emerging markets to revive growth and provide the next catalyst for sustainable momentum.

Tim Cook has visited India a number of times, trying to convince the government to lower tariffs and allow retail stores. In 2016, Apple sold 2.6 million iPhones in India, which was a growth of over 50% from the previous year. Although this number dwarfs in respect to 212 million total iPhone sales in 2016, this region can show triple-digit growth in the next few years. But the biggest issue for Apple in this region would be the product mix. Recent data from Counterpoint Research shows that 55% of these 2.6 million iPhones were older models.

Biggest dilemma

A large part of total iPhone purchases in India are for the older models. After recent slashing of prices, an iPhone 5S (16 GB) model can be purchased for INR 17,599 or $272. Similarly, iPhone 6 (16 GB) can be purchased for INR 22,999 or $355. Although both these models are not listed on the local Apple website, they can be purchased by resellers on online platforms. These prices will be further reduced as tax rates are getting reduced on smartphones. Apple has also started production of iPhone SE in small numbers in India and would likely ramp up production to cut import tariffs.

Both these factors can allow further price cuts of 15% to 20%. This would certainly help in creating a mass-market for Apple in a price sensitive region like India.

This article was written by

Bluesea Research profile picture
I have worked in the technology sector for over 4 years. This included working with industry stalwarts like IBM. I have done my MBA in finance and have been covering various blue chip stocks for the past 6 years. Having hands-on knowledge in the technology sector has helped me gain valuable insights into the ups and downs of this sector and predict winners and losers more accurately.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (18)

R2d2s profile picture
Rohit I you one question: do you know how many (if any) millionaires there are in India? Thanks.
FredHSTein profile picture
The headline provokes, "at what cost".
Answer: The costs are very small. The R&D expense for the older models is already amortized. There are costs to open stores and manufacturing in India, which represents about 1/7 of the world's population. Seems like a wise investment.
Of course, the author worries that the "cost" is slightly lower overall GM. The impact on GM will be minimal unless, and until, unit sales in India triple or quadruple or more. No worry.
Fear the cow profile picture
India is a great market for used phones, which props up resale value; which inherently props up initial value. Any inroads there is positive irrespective of ASPs. Cook is wise to do whatever it takes to reduce tariffs there. If he can get them down a bit more, the avalanche will happen.

Indians are price sensitive but they'll pay a small premium for Apple. Just not 50%. Gotta get that premium down to 25% or so.
The author falls for a very common and shallow analysis. Apple will not lose GM on India sales if it were to leverage its supply chain.

There are analysts who want Apple to throw Gross Margins to the fire and create unit growth in India and other places, but Phil Schiller's proclamation a few years ago was that "Apple will not make a cheap phone".

Apple has the numbers to make decisions on what is right - to what extent should they drive growth and to what extent they need to hold on to margins. Without having these numbers, all analysis is just loose talk.

I own the stock, and I trust Apple to make the right call.
Nick Cox profile picture
I am not sure if the author has his castings right here.
Old models are of course lower in price but not necessarily lower in margins initial costs have been written off.
Also,with more local content in India planned for old models and for the SE,this will drive costs lower.
FredHSTein profile picture
Excellent point. The R&D is already 100% amortized, which does NOT show up in Gross Margin.
An an investor, I'm delighted to see Apple chase unit growth in markets that cannot afford higher priced models. Lower margin % but higher EPS, which is all that matters in the long run.
Illuminati Investments profile picture
Tesla, Google, Netflix, and Amazon burn (sorry, "invest") billions on moonshots that might provide diminishing returns on (sometimes negative) margins, but god forbid Apple spends a dime to chase revenue growth while knocking their margins down from 29% to "only" 28.5%.
Wiseyou profile picture
Sorry... last para from the bottom, "as long as they are reducing sales..." should be "as long as they are NOT reducing sales..."
Wiseyou profile picture
@Rohit Chhatwal

I disagree with several of your statements.

1. "...it [Apple] will be facing saturated market in important regions. There is a lot of talk of declining sales in China as local competitors release premium smartphone features at rock-bottom prices." > I disagree that Apple is facing a saturated market. This is an old and tired argument that has never held water. The market is by no means saturated for the following reasons. First, over 600 million people use iPhones around the world. About half of them have iPhones that are more than 3 years old (i.e. iPhone 6 or older). If even a third of these upgrade in the coming year, Apple will have double digit increases in sales of iPhone 7S. Second, many iPhone buyers are people who are currently Android users, many of whom are switching to iPhones because of its greater reliability, longevity, and security. Third, the prices of premium Android phones are close to iPhones. Older iPhone models that are cheaper will encourage more people to switch from Android.

2. "Biggest dilemma ... older models pried at $272 and $355 making a large part of total sales... ASP in emerging markets will end up much lower". > I believe that the point missed by your discussion is that any increases in revenues and profit will be cream on the pie. The pie may be US and China but anything added on top will be welcome growth. Given the numbers of people in India, 10 million is a conservative estimate of the people who would buy iPhones. At present, because of the huge taxes on iPhones in India, most Indians purchase their iPhones in the United States. Note that if they buy the latest editions of the iPhones, they will pay the same ASP as consumers in US and China. However, the availability of lower priced older editions will encourage sales growth. More important, it will increase use of Apple Services. You forget that Apple makes money from the consumers but at the front and back end.

3. "Investors should closely watch the ASP and gross margin numbers... Bullish sentiment based on unit sales would be ill-advised when the ASP and gross margins take a hit in these regions." >. Apple can well afford taking a hit of gross margin in India since it is all gravy and older editions of the iPhone. The buyers of the cheaper older iPhones would otherwise be buying Samsung and Chinese smartphones. It is better that Apple get these sales than let them go to Samsung because Apple will eventually get them to pay for services and eventually upgrade to premier models.

As long as Apple does not reduce their prices on current models in India (which I don't think Apple will do), any additional sales that Apple gains in India will be gravy. All manufacturer and retailers lower their prices of older models to increase market share in crucial markets. Apple can and should do that in India, as long as they are reducing sales in other parts of the world.

By focusing solely on iPhone sales, I think that you making a significant error. While iPhones still represent about 60% of Apple's revenues, other parts of Apple have been growing and will grow even faster in the coming years. For example, services have been growing at nearly 20%. Given all the investment that Apple has made in iPads, I expect that there will be better and possibly record sales of iPads in the coming year. Likewise, Macbook and Mac sales should increase. Apple upgraded their Macbook and Macs.

When the 7S iPhones hit, I expect that the new phones will do as well or better than iPhone 7 which is on track to outselling iPhone 6S and possibly even iPhone 6. I don't think that we have to wait for the iPhone X (tenth anniversary iPhone) this coming Spring or iPhone 8 to come out next Fall to see a boost in revenues and profits for Apple. Even a modest increase of 5% would be very welcome. A 10% increase in revenues and profits would be spectacular and quash the arguments that Apple has lost its ability to sell and innovate.
davel profile picture
There are several limiting factors in India

1) price. Apple has a price tier. It is pretty consistent in price world wide. It does not slash prices in markets that are price challenged
2) network. India still needs a widespread reliable 4g/5g infrastructure
3) middle class. The middle class in India is not as widespread as in china, limiting potential sales.
4) stores. Until Apple can open its own stores in major metropolitan areas its retail prospects are limited.
Every phone Apple adds increased sales to apps, services , Apple Pay etc. FCF is amazing and growing. Lower the price? So what. Apple will eventually bring home the cash and the stock is inexpensive here.
VanWelij profile picture
TD Ameritrade is throwing me through a roller coaster this afternoon.

GOOG dropped to $123.85, and I wish I could buy at that price. AAPL went to $645 before dropping to $125. MSFT at exactly the same level as AAPL at 125.

What the heck is going on? lol
Blueshade profile picture
I'm still seeing several bids over $654, it would be nice :)
AAPL is at $143.50, not $125.
VanWelij profile picture
I know, but many websites showed quite the different story.
Once the new phones come out, the existing phones will decrease in price. There will be plenty of us so called deplorables who will buy these phones in the states. If it is good for us then it will be good for India.
You have no stake in Aapl whereas, I own 3,400 shares of Aapl.

I agree with doc47. Let Cook penetrate this market; the market exists.
Among several factors not included in this analysis of India's Apple purchases is this world wide fact: once people buy an Apple phone they overwhelmingly stay with Apple phones and other Apple products. Ergo, a big percentage increase in sales from a small base will be reflected in increased profits years down the road and thus represents a positive, long-term development development.
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