Sterne Agee Encourages Apple to Pursue Larger iPhones

| Apple Stock Watch

$AAPLSterne Agee analyst Shaw Wu told clients on Tuesday that Apple needs to think different[ly] about making a larger iPhone, arguing that the company has ceded perceived control of the high end of the smartphone market.

From the research note, "The big question we get from investors is whether the greatest turnaround and growth story of the past decade is over? Our answer is no but we do believe that AAPL needs to think different and change its strategy to regain its mojo."

Mr. Wu offered two suggestions for doing so. The first was to "reclaim high-end leadership as iPhone 5 isn't viewed as high-end anymore." He argued that large-screen devices from Samsung and even HTC are being perceived as more advanced because of those screens.

From the note, "What looked initially like a risky attempt by Android partners Samsung, HTC, Motorola, and others to differentiate against iPhone, in building larger touchscreen smartphones that many ridiculed as too big, ended up being a much bigger success than most expected."

He said that in some markets around the world, Samsung's Galaxy SIII and Galaxy Note II are perceived as the market leader, and that Apple should take that crown back with a larger iPhone. He didn't specify, but said that his own supplier checks found "evidence of progress" on this front.

The second suggestion Mr. Wu offered was for Apple to get "more aggressive" about the mid-range of the smartphone market. He specified that he is not in the camp that wants Apple to muck about in the low [and unprofitable] end of the market, but said that Apple's margins for iPhone 4 and iPhone 4S are attractive, and that Apple should get more serious about making those devices available in all markets where they are in demand.

"The company itself admitted on its conference call that it is supply constrained," the analyst wrote. "From our supplier checks, we believe this isn't because of components but because iPhone 4 and 4S manufacturing capacity had been scaled back in favor of iPhone 5."

Mr. Wu maintained his price target of $715 and a "Buy" rating on $AAPL.

Shares of Apple jumped on Tuesday, ending the day at $457.844, up $15.528 (+3.51 percent), on volume of 20.4 million shares trading hands.

*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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12 Comments Leave Your Own

furbies

Is there really a major market for a larger screened iPhone ?
I’ve got an iPhone 5 and I couldn’t imagine a larger device fitting in a pants or jacket pocket. Besides what about the iPad mini. Surely Apple would rather sell us both ?

Bosco (Brad Hutchings)

So here is something I have noticed lately. People who are too heavily invested (not money, but personally) in something who suddenly have big suggestions about how to fix that something are sinking. It is best to stay clear of them. It’s like a drowning person. When trying to rescue someone who is drowning, your first concern is that they don’t take you with them. One of the things they taught us in lifeguard class back in the day was if the victim was flailing too dangerously and you’re actually at the point where you’re swimming out to get them (last choice), smack him upside the head as you approach.

Wu is drowning and flailing. Many of us suspected that he was a sunshine pumper. His failure to see this correction coming and his failure to omit he was wrong just confirms what we thought. Now he’s trying to save face, so that if AAPL doesn’t progress toward his target, he can just say they didn’t listen to him.

Bosco (Brad Hutchings)

(grrrrrrr. “admit”, not “omit”)

FlipFriddle

Larger screens are nonsense. One of my coworkers has one of those huge Samsung phones and it’s ridiculous how big it is; hardly a portable device. What pocket is that going to fit in? If anything the iPhone needs to become smaller and lighter. As it is now it barely fits in a pocket like every other smart phone. In other news Apple encourages Shaw Wu to stick to stock prognostication. I’m sure Mr. Wu wants to make sure the new 7” screen iPhone6 docks to his Apple flat screen TV too. Sheesh.

Bryan Chaffin

5” screens are bigger than I want—I also keep my iPhone in my pocket. They are, however, being bought in huge numbers. This is undeniable despite the opinions of those of us who like our iPhones. smile

Unlike cheap smartphones, which are also bought in huge numbers but generate no profit (at all), the large screen devices occupy the high end of the market where Apple plays. Mr. Wu’s point about Apple reclaiming the perceived lead is, IMNHO, valid.

Look at the iPhone/GS3 spec comparison I did back in September. At that time I said that both devices were excellent and that which one you picked should probably be based on which ecosystem you preferred.

Up until that time, each and every spec comparison I did found Apple the clear winner. The iPhone had both the ecosystem and the specs.

In any event, the large screen thing is part of this. There are tens of millions of people picking these mondo devices, and Apple is either going to have to refocus attention on some other feature—certainly a possibility—or launch its own large screen model.

I’ll also note that when Mr. Wu says the supply chain shows “evidence of progress” in this area, my ears perk up. I don’t recall any time that he has been wrong when discussing his Apple supply chain sources.

paikinho

A friend recently brought over his GS3. It was so big I was amazed. His work made him upgrade from a blackberry he loved. He didn’t really seem overly enthusiastic with the size, but that is the way they make it.

I much prefer the size of the iPhone my neighbor has. Even that seems a bit too big to me. But then again I would get the iphone as a replacement for an small flip phone from Samsung. I guess I am used to small phones as of now.

Any likelihood they might come out with a smaller phone? I would definitely be not inclined to buying a giant saucer I have to put up to my ear.

lrd555

Have only seen a handful of these large screen phones. Seen many more smaller screen phones. Apple would be better off investing in 100 more retail stores.

Terrin

I love the iPhone 5. When I first picked it up and used it I was amazed. It by far is the best phone on the planet. It is much better than the 4S. It is fast, light, and plain beautiful.  I, however,  fail to understand why Apple can’t appease the people who do want a bigger screen. Apple’s mantra has always been it is better to cannibalize your own sales then to allow somebody else to do it. It seems the Android camp has shown a significant amount of people do want a bigger screen. I can see Apple making the 4 inch screen the base line, and then offering something in between 4 and 5 inches.

On the other hand, Apple is selling iPhones faster than it can make them. At least it was last quarter. This will definitely be an interesting year for Apple because it also needs a cheaper phone to get a deal done with China Mobile.

Bryan Chaffin

Great observations, Terrin (IMNHO). There is definitely a level of product differentiation beyond which leads to decreased gross margins and lower profitability. Apple has been brilliant at not crossing that line while still satisfying different price points.

It just occurred to me, too, that Apple could make a larger iPhone and the iPad mini with the same resolution to keep from fragmenting developers any more than it has to.

Lee Dronick

The iPad Micro

RonMacGuy

Welcome to the iPhone 6 - now in 3”, 3.5”, 4”, 5”, and 6” varieties.

And, for the iPad, in addition to the 9.7” iPad and the 7.9” iPad Mini, we now have the 6.9” iPad Tiny and the 13.9” iPad Letter (relating to 8.5x11 letter sized paper).  And, of course, in Europe, the iPad A4 (8.27x11.69).

But I am going to hold out for the iPad Tabloid!!  11x17 baby!!

What people don’t realize is the power of liquid metal.  The iPhone 6 will sit in your pocket at a 2” size, and when you take it out of your pocket, you say “Siri, please expand to xx inches”.  And the liquid metal will expand to whatever size you want, from 3” to 12”.  They can call it the iPhone Terminator T-1000!!  Just hope that no one around you says “Siri, please expand to sword blade” when the iPhone is still in your pocket!!

grin

Elliot Stevenson Smith

I own a galaxy note 2. It’s great. What’s not to like? I fits in my trouser pocket easily. Try one and you will appreciate just how good it is. The typing is so much better than iOS as it guesses your next words with great accuracy. The S pen is great. And it’s hopeless to sync to my Mac. Grrrh. And I can’t sync it with my 3 iPads. When I chose it the S3 looked too small and as a previous multi iPhone owner, the iPhone 5 was too small too. Why did apple ignore the clamour for larger screens? Fanboy-ism. We just worshipped whatever we were offered but finally apple has realised there’s huge demand out there for small,mid and large screens. And phablets. I used to chomp at the bit eagerly awaiting every new phone but for once I feel happy with what I have. And I crack up when the ‘phablets are too big crowd’ produce an iPad mini from a coat pocket. Come on! Still you have to praise apple for the brand loyalty of apple owners. Because if apple ever produce anything as good as the GN2, I’ll probably get one! LOL, but true…

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