Analyst: Not the First Time Critics Questioned Apple’s Pricing

| Apple Stock Watch

Critics, pundits, and analysts have come out in force to criticize Apple's iPad mini pricing—including our own John Martellaro—but Sterne Agee analyst Shaw Wu pointed out to his clients that we've heard it all before.

Apple introduced the iPad mini during a media event on Tuesday starting at US$329, higher than entry-level devices from Amazon and Google, but Mr. Wu argued that Apple has matched pricing to demand again and again during its meteoric rise to become the world's most valuable company.

"This isn't the first time many have questioned AAPL's premium pricing strategy," Mr Wu wrote in a research note obtained by The Mac Observer. "We have seen it with the iPhone, iPod, Macs, and even iPad. We would argue that AAPL has a strong track record in pricing to optimize volume and profits unlike most competitors who need to price low to have a fighting chance."

Dear Apple...

To put that in another way, Apple is likely to face supply constraints for the iPad mini, and there's little need to sell the device for less if the company can move all of the product it makes at the higher price it chose. More importantly, Apple has shown a propensity towards being able to optimize price and demand, and there's no reason to think it hasn't done so again.

"We continue to believe iPad mini is the competition's worst nightmare and likely to drive incremental volume," Mr Wu added, echoing comments he made on October 9th.

He argued that $329 is still more attractive than $399 for the iPad 2 or $499 for the iPad with Retina Display, an that some customers who might consider a Nexus 7 or Kindle Fire HD will instead consider the iPad mini.

"Keep in mind that competitors have a tough enough time competing against higher priced iPads and we think iPad mini that is $70 less will make it even more difficult," he wrote.

Shaw Wu maintained his $840 price target for AAPL and his "Buy" rating.

Barclays analyst Ben Reitzes had a similar take, though he expressed it in slightly more critical terms. In a research note to his clients, Mr. Reitzes wrote that, "We were hoping the mini could be priced at least a little lower given its competition is situated as low as $99, with many starting in the $199-$249 range."

He added, "That being said, Apple seems convinced that consumers want the iPad and its ecosystem, which has worked so far at the high-end."

Mr. Reitzes believes that Apple can sell 5-10 million iPad minis during the December quarter, with 25-50 percent of those units (1.25-5 million units) cannibalizing sales of iPad 2 and iPad with Retina Display.

Ben Reitzes lowered his price target for AAPL from $810 to $800, while maintaining his "Overweight" rating for the stock, the equivalent of a "Buy" for Barclays.

The reduction of his price target was based on a belief that Apple will guide lower-than-consensus for the December quarter. He also noted that Apple CEO Tim Cook's claim that his company sold its 100 millionth iPad two weeks ago means that September iPad sales are likely below expectations.

Apple reports September earnings on Thursday, October 25th, after the markets close.

AAPL ended Wednesday higher, at $616.83, a gain of $3.475 (+0.57 percent) on moderate volume of 19.9 million shares trading hands. This represented a slight bounce off of Tuesday's 3.3 percent loss of $20.67 per share.

Image made with help from Shutterstock.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

Comments

Constable Odo

Apple is going to get severely whacked on Thursday by Wall Street.  No doubts about that.  Apple’s expectations are too high and Apple will miss.  Despite Wall Street’s desire for Apple to keep profit margins high, they will chastise Apple for keeping selling prices too high.  In other words, Apple shareholders can’t possibly win a crooked game.  Apple has to know better than anyone on how to price its products to maintain financial balance.  Outsiders are only guessing.

Overall, the iPad Mini is priced well within Apple’s normal guidelines.  Apple doesn’t compete with Android tablet pricing because it’s a different type of company that serves upscale consumers.  Apple will sell every iPad Mini it can make and lowering the price will only hurt profit margins.  Lowering the price would only increase a demand that Apple wouldn’t be able to meet and would therefore gain nothing from doing so.

akcarver

This has been a mantra of the critics for years. People were screaming about the price of the iPod when it first came out, saying “It‘s _just_ a music player,” which of course it wasn’t, and it turned out OK for Apple. I’m not afraid of their pricing for the iPad mini or any other product out there. They know their business, they know what the market will bear.

Odyssey67

“People were screaming about the price of the iPod when it first came out, saying “It‘s _just_ a music player,” which of course it wasn’t, and it turned out OK for Apple.”

It turned out ok because Apple eventually lowered the price of the standard iPod. then also started offering more capabilities for the same price, then started offering nanos & minis & shuffles - all of which occupied lower price points as well. Finally, the iTunes ecosystem added immeasurable value.

Basically what I’m saying is that Apple is no less immune to market pricing pressures than any other company. They always respond to those pressures. Sometimes they do so by lowering prices, sometimes by offering less expensive versions of a product, sometimes by adding to value to a price they don’t want to move off of, and usually/always/eventually all three.

And it’s only when they finally do make those adjustments that their always impressive - and often successful at launch - products REALLY take off.

wab95

Bryan:

Your graphic made me chuckle the other day when I came across your article. I just wanted to say, many thanks and well-done.

In fact, I’d like that graphic on a wall paper, or even a t-shirt, as well as another with those immortal words of SJ, ‘Then why the *#&@ doesn’t it do that?!’. Oh, and while you’re at it, can you toss in one with that scary clown of AT&T lore?

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