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.
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.
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.
Mark Morelli owns shares of Apple. 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.