A Problem With Pacific Crest’s Apple Thesis

While Pacific Crest's upgrade of Apple on richer ASP mix is interesting, it's not as clean-cut as it initially seems.

Mar 15, 2014 at 2:30PM

Pacific Crest's Andy Hargreaves issued a note to investors calling for a $635 price target on Apple (NASDAQ:AAPL). The crux of Hargreaves' argument is that with the introduction of a higher-tier iPhone, Apple can grow total gross profit dollars as there will be a meaningful portion of the customer base that takes no issue with a $100 base price increase. This argument is interesting, but there's a bit of nuance here that makes it less "obvious" of an argument, although the general premise of upward mix-shift and share gain with a larger iPhone seem to pass the common sense test.

What happens when a 32GB iPhone 5s buyer picks up a 16GB iPhone 6 4.7-inch?
Hargreaves' assumption is the following:

  • A user who would have normally picked up a $199 iPhone 5s 16GB would then pick up a $299 iPhone 6.
  • The iPhone 6 would carry a bill-of-materials that is $60 higher than the iPhone 5s, which would translate into an additional $40 in gross profit per unit.

But what happens when you get something like the following happening:

  • A user who normally would have picked up a 32GB iPhone 5s ($299), which has a $100 higher ASP over the 16GB iPhone 5s, chooses to go with a 16GB iPhone 6 ($299) instead.
  • The incremental cost of an additional 16GB of NAND flash is, perhaps, $11. So, now Apple has actually seen a decline of $29 in gross profit per unit in having a user go from a $299 iPhone 5s equivalent to a $299 "larger" iPhone 6.

The counterargument to this is that users who are buying the more expensive phone anyway will probably want to use more apps and store more music, particularly since the larger screen promotes more media/content usage. That said, there are those (and it is probably not a small amount) who simply buy the latest-and-greatest iPhone for the brand cachet.

The share-gain story, on the other hand, is compelling
The fact is, many people seem to enjoy the larger screens of the Samsung (NASDAQOTH:SSNLF) Galaxy S products, and there is likely a nontrivial portion of the Apple user base that has defected to the Samsung camp simply because they wanted a larger screen. With a larger iPhone option, Apple can boost its retention rate and gain back share that it has presumably lost over the years to Samsung's products. This, coupled with a still-growing smartphone market, is a recipe for success -- if it plays out.

Foolish bottom line
At the end of the day, Apple can grow its top and bottom lines by taking more share at the high end of the smartphone market, and building a larger iPhone is likely to do it. That said, the claims that customers are willing to pay a ton extra for a bigger/higher end iPhone may hold water, but it's not as "clean cut" as one might initially believe as there are multiple higher-priced tiers with the current iPhone line.

Is the market discounting Apple's huge opportunity?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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