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Here's Why Apple Inc's iPhone 6 Will Reignite Growth

There has been a lot of talk about Apple (NASDAQ: AAPL  ) failing to address the sub-$300 segment of the smartphone market. Indeed, while an iPhone 4s is available today with a two-year contract for free, it still sells for a whopping $450 off-contract (which gives you a hint as to what kinds of carrier subsidies Apple is able to command). While some folks believe that Apple needs to extend the range of its product offerings, this, in my view, would be a mistake. Apple needs to sew up as much of the high end as possible for financial and strategic reasons.

Apple doesn't have the cost structure to play in the low-end pigpen
If you look at what Apple's corporate culture has traditionally been, it has been to stay as far away from the nitty-gritty manufacturing as possible. Apple's strengths lie in design and marketing. The company is able to design superb products, and it is able to quite literally create markets where nothing (or very anemic offerings) had existed before.

It also has placed a very strong emphasis on the quality and user-friendliness of the underlying software. Remember, while hardware is technically (and in some cases aesthetically) interesting, the real value in any sort of computing device is what runs on the platform. This includes the operating system, the various first-party software, and the quality of the apps that come from the third-party developers (Apple puts a lot of work into its tools). This is how Apple locks both users and developers into its ecosystem and, ultimately where Apple's "real" value is.

Apple should be paid for its work
While some will criticize Apple for offering "fewer" features on its phones compared to competitors (this is done to keep costs manageable and margins reasonable), Apple should ultimately be paid for the experience that it delivers. Yes, having a fast 802.11ac Wi-Fi is fantastic, but this raises costs for a benefit that, frankly, most users probably won't notice on most Wi-Fi networks.

A user will notice something like the convenience of Touch ID, or the improved usefulness of iOS 7, far more than a slightly more expensive Wi-Fi chip or a faster cellular modem on networks that hardly deliver a tenth of the maximum theoretical capabilities of the current generation modems. Of course, Apple does need to advance its hardware, but it needs to do so while keeping its cost structure in check (i.e. not being on the bleeding edge of the adoption curve). 

Capturing the high end -- a matter of size?
Apple's iPhones sell phenomenally well despite the slowdown in the growth rate, and it is clear that Apple's brand cachet is as strong as ever. The problem, however, is that many users simply want larger phones and -- by implication -- larger iPhones. A lack of a larger offering has likely cost Apple a non-trivial portion of the high-end market.

The good news is that, when Apple finally introduces an expanded lineup, this should serve as a catalyst for more robust growth/share gains. In turn, this could lead to a nice profitability spike if it can keep cost structure in check, and perhaps command a bit more on the pricing side of things.

Foolish bottom line
Apple is on the cusp of what could be a very exciting second half of the year, but investors need to make it past the remainder of the first half. It won't be easy, but it's not all that long now. Hang in there!

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Read/Post Comments (4) | Recommend This Article (3)

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 April 26, 2014, at 11:49 AM, artlaz wrote:

    Couldn't agree more. The phablet (5"-6" screen size) market is estimated to be 100 million units per year and growing. Apple currently has no product to offer, but that will change by year end. Estimates are that Apple could easily sell 10 million of these devices and possibly as many as 20 million. ASP's for top-of-the-line phablets run about $100 higher than smaller high end devices. Figuring $700 ASP that's $7-14 billion in sales, not counting accessories and apps. With typical Apple margins, they could easily see over $5 a share in added EPS from this one new product.

  • Report this Comment On April 26, 2014, at 1:04 PM, SanPasqual wrote:

    Apple is getting entrenched in mainstream corporate enterprise use. Microsoft realized this when they [unofficially] dissed Surface in support of iPad. Phones are another element, and I could see Apple introduce their new accessory projection keyboard at the same time as the phone and an oversized iPad.

  • Report this Comment On April 26, 2014, at 2:54 PM, zippero wrote:

    Another good article, Ashraf. Apple is covering all the sub-segments of the high end from the 4S to the iPhone 6 phablet and everything in-between. It's picking up a lot of new users, especially former Android users. By the way, many people in Android forums are saying the new Samsung Galaxy S5 was a rush job, especially in regard to its camera which seems to be defective as far as low-light performance and oftentimes even permanently failing after just a few days of use. The 6 optical components in its camera module apparently get misaligned very easily if the phone gets bumped at all, which causes permanent camera failure. So many people have been affected in just the first few weeks after release.

  • Report this Comment On April 26, 2014, at 10:32 PM, larryw101 wrote:

    Ashraf, you always have been an Apple bear.

    Lately you're in love with them. What gives?

    Did you finally come to your senses?

    Are you looking for redemption?

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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