The "c" in iPhone 5c Stands for Cash

The tech giant Apple  (NASDAQ: AAPL  ) , recently released two new iPhone models simultaneously for the first time. To some, the new devices are a disappointment. One was deemed to be too pricey and the other not innovative.  To others, the phones will allow Apple to continue its past success and reverse the year-long swoon in the stock price following the release of the iPhone 5. 

This article makes the case for the latter.

"C" is for cash
One of the new devices, the iPhone 5c, has many of the same specifications and features of the iPhone 5, which will be discontinued. The "c" model has a plastic case, comes in several new color options, and has other design modifications that allows Apple to market it at a slightly lower price point. 

Many analysts and investors were hoping that the "c" would refer to China and that the phone would be priced even lower to effectively address the low-end or mid tier of the market there. Apple is lagging well behind many of its rivals both in China and worldwide. The selling price without a wireless contract will be approximately $730 in China . That certainly would not qualify it as a low-end phone.

Cupertino has a different strategy than Wall Street. The "c" really refers to generating cash.

Apple appears to be focused on maintaining superior product quality and increasing market share by bringing a new generation of users, including some from China, into the company's ecosystem. New users will upgrade their smartphones every few years and buy other products like iPads and Macs. This means cash for Apple. Lots of it.

The company could funnel that cash into their research and development efforts, continue to pay (and possibly increase) the dividend, and buy back shares, all which will add to shareholder value .

Any leftover cash will be added to Apple's growing stockpile, now valued at $137 billion. The strategy has resulted in a continuing increase in cash on hand over the years. 

Source: TechCrunch (Jan. 23, 2013)

Apple just received a license to operate on the China Mobile  network and is working on a selling agreement with China's largest wireless carrier in order to reach some of the company's 700 million subscribers. 

Recent surveys indicate that only a small portion of Chinese citizens would actually buy an unlocked phone priced over $700. Even if Apple sells the 5c model to only a small fraction of the market there, it's possible that the company can generate over $9 billion in sales and nearly $4 billion in gross profit (assuming a margin of just 40%). 

Apple also announced the release of the iPhone 5s model, the traditional upgrade from the "5." It features improvements like a beefed-up processor with 64-bit architecture (for the first time in a smartphone), a "motion" coprocessor, improved camera, larger battery capacity, and a fingerprint sensor in the home button.

The 5s model will also add plenty of cash to the Apple bottom line. Selling 30 million devices in just the first three months, which is certainly possible, will result in a gross profit of over $8 billion. 

The Apple bottom line
Release of two new iPhones, plus dividend payments and share buybacks, will boost shareholder value over the long-term.

"S" is not for Samsung
Probably the biggest reason for Apple's declining stock price over the past year is increased competition from Samsung  (NASDAQOTH: SSNLF  )  . The South Korean electronics giant has made significant inroads in a short time and now dominates the market worldwide. 

However, digging deep into the data shows that the iPhone 5 still outsold the latest model high-end smartphone from Samsung (Galaxy S4) by a wide margin. In the first two months after both devices were released, Apple reported sales of more than 800,000 units per day worldwide. The daily sales rate of the S4 was only 333,000.

Based upon the improvements found in the 5s and the "underwhelming" features of the S4, according to some analysts , it is likely that Apple will continue to rake in more cash than Samsung from its top-of-the-line phones. 

In addition, overall earnings at Samsung look to decline in the future according to many analysts . Apple offers a better deal than Samsung today. 

Conclusion
Apple just unveiled two new iPhones. Analysts were disappointed that the 5c was not priced low enough to complete at the bottom of the market, especially in China, and that the 5s was not revolutionary enough. 

However, Apple doesn't develop products to satisfy Wall Street. Its primary concern, as it should be, is to increase shareholder value and satisfy customers. It has been delighting users with the iPhone since 2007.

The two new Apple devices will continue to satisfy because of high quality and improved features, even if they are considered evolutionary by some. The company and investors will reap the rewards of the cash flowing in.

Samsung will probably continue to rule the overall smartphone industry for the foreseeable future, but the Apple strategy for generating cash will most likely prevail in the long term. 

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Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2013, at 1:55 AM, aeosfool wrote:

    wow, an article that actually looks at the long term and not almost meaningless low end marketshare(as far as app developers are concerned. Those very low end smartphone buyers are not spending hundreds of dollars per phone on apps like iphone owners are.

    One thing all the so called pundits overlook is that iphones are so much better made than most other phones, including all made by Samsung. This is important because iphones have a better resale value and millions are resold and used for years...resulting in much higher use percentages

    than their percentage of "new" sales. Also, it makes it easy for current iphone owners to upgrade at little or no cost, which should make for better sales in the future as the iphone base users expands.

  • Report this Comment On October 01, 2013, at 8:08 AM, demodave wrote:

    Good article. Somewhat as aeosfool implies, I don't think Apple wants to "win" at cheap. There is no margin there, and that is Samsung's "error".

    I also agree on the extended useful lifetime. I'll admit that I don't have a real use for my iPhone 3G anymore, but my iPhone 4 makes a perfectly acceptable iPod. (I think my 2003 iPod is about ready to take a dirt nap, but I'll keep it, because it ties well into my first ever AAPL investment. And that has worked out pretty well. :) In fact, since the iPhone 4 now lives at home, I don't put it in a case. It's real pretty!

    Innovation may not come with every product cycle, or it may not be immediately obvious what innovation is really taking place, but it will continue to come along in cycles, some creative, some destructive. I'll bet that 64-bit A7 and iOS are gonna do some neat tricks in larger form-factor devices: an iPad is a no-brainer, but I'm thinking MacBook Air.

  • Report this Comment On October 01, 2013, at 9:12 AM, Mathman6577 wrote:

    Thanks for the comments.

    I'm perfectly happy with my iPhone 4 but may trade it in for a 5s if I can get a good price for it.

    Speaking of innovation I wrote another article that discusses the importance of innovation to companies like Apple and Google: http://www.fool.com/investing/general/2013/10/01/apple-tops-...

  • Report this Comment On October 01, 2013, at 12:53 PM, Psychonautic wrote:

    I sort of agree. Apple's push to get the cheapos out with the new offering is a tactic to dominate the entire market. I actually did get the 5C :P so I'm one of the cheapos. But when you look at all the extra expense it doesn't really stay cheap much longer. Apple offers a nice case for 5C for about $29. But being the cheapo I am I actually found a company selling the same case for $9 (http://www.alphabolt.com/apple/iphone/iphone-5c.html) So I guess it is more about how the user navigates this tricky market to stay on the cheap side, whereas apple wants to create an illusion of cheap but still make up the difference from the accessory sales.

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