Analyst: Apple Needs to Choose iPhone Margins or Marketshare

| Apple Stock Watch

Apple reported selling 43.7 million iPhones during its second fiscal quarter for 2014, beating analyst estimates and showing better margins in the process. Despite that good news, Wells Fargo analyst Maynard Um sees a time coming where Apple will have to choose between maintaining high device margins, or driving unit sales.

Analyst: Apple may have to choose between strong iPhone sales or high marginsAnalyst: Apple may have to choose between strong iPhone sales or high margins

Mr. Um said pushing the low cost iPhone 4S in unsubsidized markets helped Apple gain market share in those areas, but the price for doing that was covered by iPhone 5S margins. That's not something he sees as a long term option for the company.

In a note to investors he said,

Apple's strategy of pricing the iPhone 4s more aggressively to drive unit elasticity in some unsubsidized countries have been, in our opinion, absorbed by higher 5S margins (which we expect the 6 will not be able to absorb) as well as lower component/manufacturing costs (which may be more variable). We believe Apple will eventually approach a fork in the road where it needs to choose between ASP/margin or units, as both, in our opinion, will be difficult to maintain.

Apple's 43.7 million iPhone sales topped analyst expectations for 38.5 million units, which helped drive second quarter revenue up to $45.6 billion in revenue with earnings per share at $11.62. The company's stock started climbing in after hours trading during Wednesday's Q2 earnings report conference call, and was up over $44 in Thursday morning pre-market trading.

Company CEO Tim Cook commented on product pricing during the conference call saying he was "not stuck on certain price points," which could be a hint that Apple is considering charging more for the iPhone 6 compared to the iPhone 5S as a move to improve future device margins. Mr. Um doesn't, however, think that's a likely scenario.

"Time will tell whether this will be possible and what effect this may have on unit growth," he said. "However, given historical trends in the wireless industry, we are wary of predicating a bull case on a price hike."

Apple also announced an increase in its share buyback program, an 8 percent increase in quarterly dividends, and a 7-to-1 stock split, all of which pleased investors. Lower than expected iPad sales slightly lower average selling price for the iPhone have investors watching closely to see how the company performs going forward.

Mr. Um is raising his fiscal 2014 EPS from $43.45 up to $44.61, and bumping up his fiscal 2015 EPS from $44.03 to $45.92. He is maintaining his "Market Perform" rating and $388 to $576 target range for Apple's stock. Apple is currently trading at $565.92, up 41.17 (7.85%).

Comments

Lee Dronick

Mr. Um said pushing the low cost iPhone 4S in unsubsidized markets helped Apple gain market share in those areas, but the price for doing that was covered by iPhone 5S margins.

Do we know that for a fact?

adamC

“If Apple wants to keep its high margins on iPhone sales, and can’t keep component costs low, it’ll have to raise prices across the board, and that’s the part that could impact sales.”

Mr Gamet, have you ever thought of being a financial analyst, I think you are wasting your time here. Your above thought put many an analyst to shame.

mrboba1

Yeah, thanks Um.

I think that’s probably the argument for nearly any product ever sold.

I think I took a class in college some 20 years ago that ran a simulation that showed a higher price/margin reduced the number of units sold. This ain’t exactly groundbreaking analysis from our friends at Wells Fargo.

ibuck

Um, that’s Stage Coach type wishful thinking. Cook has said repeatedly that Apple wants to make high quality devices. That means higher prices, not low ones (devoid of profit) to increase market share.

Even though Apple did increase market share this past qtr, it’s apparent that you are not listening. Do your assumptions, beliefs or peers prevent you from listening?

aardman

I think Apple has made the choice, it’s margins over market share.  It’s just the so-called analysts who keep insisting that they pick market share AND margins, without any recognition at all that such a choice is basically impossible.

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