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iPhone 5c: Apple picks profit over marketshare yet again

iPhone 5c: Apple picks profit over marketshare yet again

By Reuters | Updated: 11 September 2013 18:39 IST

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The higher-than-expected price of Apple Inc's new cheaper iPhone eased worries about gross margins, while arousing concerns the company was not being aggressive enough in its fight against Google Inc's market-dominating Android operating system.

Apple's shares were down about 3 percent at $480.50 before the market opened on Wednesday, a day after it unveiled the 5s, a high-end iPhone with a fingerprint scanner as well as a cheaper 5c model targeted at emerging markets.

Also see: Apple unveils iPhone 5c and iPhone 5s

"...We worry that Apple's inability/unwillingness to come out with a low-priced offering for emerging markets nearly ensures that the company will continue to be an overall share loser in the smartphone market until it choses to address the low end," Sanford C. Bernstein analysts said in a note.

Still, Bernstein maintained its "outperform" rating on Apple's stock, saying that it expected the new iPhones to have little impact on gross margins.

Also see: 10 new features in Apple's iPhone 5s

Nomura Equity Research analyst Stuart Jeffrey, who raised his price target for Apple shares to $480 from $420, said Apple may have ensured stable margins for the next couple of quarters by pricing the 5c at $99 with a contract and $549 without.

This was not enough for BofA Merrill Lynch and Credit Suisse. Both downgraded Apple's stock to "neutral" from "buy" and "outperform."

"Rather than offer attractive pricing for consumers, and move the iPhone 5c into a new and growing price segment, Apple retained a premium pricing strategy in targeting the $400-800 smartphone segment," Credit Suisse analyst Kulbinder Garcha said in a note.

"This segment is not forecast to see meaningful growth long term. This decision, at the margin, is good for profitability but not growth."

Garcha said that Apple's share of the smartphone market, where it faces intense competition from Samsung Electronics Co Ltd, would likely fall to 15.5 percent this year and 13.1 next year from 18.1 percent last year.

Saying the 5c was "nobody's low-margin phone", Cowen and Company analyst Timothy Arcuri said Apple's new relationships with Japan's NTT DoCoMo Inc and China Mobile Ltd supported the view that 2014 Street estimates for Apple earnings looked too low.

Arcuri said gross margins for the 5c appeared to be as high as the mid 50 percent area.

Apple's third-quarter profit fell 22 percent as gross margins slid below 37 percent from more than 42 percent in the year-earlier quarter.

"While the 5c is a first step away from the high-end, we do not think it is a big one," JP Morgan's Mark Moskowitz said.

The 5c will sell for 4,488 yuan China, almost $200 more than in the United States.

Also see: iPhone 5c price disappointment: 'Low-cost iPhone' fails to check-in

Canaccord Genuity kept its "buy" rating on the stock and raised the target price to $550 from $530, citing Apple's aggressive launch plans in more than 100 countries by year-end.

Canaccord also raised its 2014 estimate for iPhone sales to 180 million phones from 177 million.

Lazard Capital Markets raised its share price target to $570 from $500, noting a "best in class user experience".

"With escalating investor focus on Apple's diminishing product differentiation, slowing growth and margin compression, we think it's time to revisit what makes Apple unique," Lazard analyst Edward Parker wrote in a note.

"...We propose that Apple is a 'storage' company, not only levered to data creation but instrumental in driving data creation in ways its competitors are not," he said.

iPhone 5c and iPhone 5s launch in pictures

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Further reading: Apple, Apple China, Apple iPhone 5c, China, iPhone 5c