Analyst: Apple Comfy With High End Smartphones & Other Notes

| Apple Stock Watch

Apple is quite comfy selling high end smartphones at a solid profit, and feels no need to venture deeper into the low end of the smartphone market, according to Citigroup analyst Richard Gardner. The long-time Apple analyst and other Citigroup analysts met with Apple CEO Tim Cook and CFO Peter Oppenheimer and released his thoughts on that meeting in a research note to clients.

Apple's Big Pile O' Money

“We did not get the impression that Apple feels a burning need to move down-market in smartphones, but rather that the company believes consumer preference will continue to gravitate toward the more capable devices that Apple currently produces,” the firm said in its research note.

This is a repetition of Apple’s oft-stated belief that it will focus not on profits, but rather on building great products. This position was first advanced by the late Steve Jobs and has been iterated and reiterated by Tim Cook, Peter Oppenheimer, and other Apple execs over the years.

At issue in the smartphone market is whether or not Apple could gain more market share by offering cheaper iPhones with fewer features or less impressive specs. Apple has heretofore declined to do so, and instead has used older iPhone models being sold for a lower price to address the entry level of the market. Citigroup apparently believes this will continue to be the case.

Tablets

Mr. Cook also took the opportunity of the meeting to repeat that he believes tablet sales will eventually eclipse the sale of new PCs, something that is already the case at Apple itself. Apple sold more than 15 million iPads in the December quarter, and in the same period the company sold slightly more than five million Macs, which was itself a record high.

Richard Gardner’s take is that Apple believes its iPad is not only taking traditional PC sales, it will be more than enough to fend off Microsoft’s upcoming (and first serious) foray into the media tablet market, Windows 8.

“We have wondered whether Apple might offer an ARM-based version of the MacBook Air at some point,” Mr. Gardner wrote. “We walked away from this meeting with the impression that Apple feels iPad satisfies—or will soon satisfy—the needs of those who might have been interested in such a product.”

We’ll add that this is precisely what Apple said about the netbook market, though at the time it didn’t name the iPad, which hadn’t yet been released. At that time, company execs scoffed at the idea that netbooks made anyone happy and hinted that Apple was already addressing some netbook demand with the iPod touch and the iPhone. It went on to address the market not with its own cheap netbook, but with the iPad.

We’d extrapolate that Apple intends to expand the iPad product or the product line with features it believes will keep it ahead of Microsoft’s Windows 8 platform.

China

The other key part of Citigroup’s research note concerned China, where Apple said that 12% of revenue in fiscal 2011 originated. This represents a 600 percent increase from 2009, but Mr. Cook told Citigroup that the company is “just scratching the surface” of the fast growing market.

Mr. Gardner believes that a deal with China Mobile, the world’s largest wireless carrier, will be announced in 2012, a move that could dramatically increase Apple’s iPhone sales in the country. He also believes that expanding Apple’s retail presence in China will be a top priority for Apple’s new head of retail, John Browett.

AAPL

Mr. Gardner maintained his “Buy” rating on the stock and a $600 price target.

Shares of AAPL moved higher in the late afternoon session. As of this writing, the stock was trading at US$459.15, a gain of $4.03 (+0.89%), on light volume.

*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.

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