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The Apple Inc. iPhone 5se Timing Makes Perfect Sense

By Ashraf Eassa – Feb 2, 2016 at 8:45PM

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A rebuttal to a claim made by well-known Apple bull Gene Munster of Piper Jaffray.

Analyst Gene Munster with Piper Jaffray put out a note this morning (via Barron's) expressing his skepticism that Apple (AAPL 0.23%) will be releasing a new, updated 4-inch iPhone at a March product launch event, as reported by 9to5Mac's Mark Gurman.

Munster's reasoning is that a 4-inch device launched in the spring would "be quickly outdated when the redesigned iPhone 7 comes out in six months." He also notes that launching such a device in the spring would shift "the iPhone news track to two events a year, which could take away from releases of other products."

I wholeheartedly disagree with Munster; the timing of this launch makes complete sense. Here's why.

Apple needs to strengthen its low-end product lineup ASAP
The theme of Apple's most recent earnings call was that macroeconomic and currency headwinds were significantly impacting the company's business. In particular, in order to preserve its gross profit margins, Apple actually had to "adjust" (read: raise) pricing in "several" markets.

In order for Apple to try to try to boost demand even in this tough currency/macro environment, the company needs to find a way to go after lower price points while at the same time maintaining its margin structure.

A device such as the rumored iPhone 5se would be a great way to do that.

What the iPhone 5se should enable
Gurman reports that the iPhone 5se in a 16 GB configuration should slot in at $450, with the 64 GB configuration presumably selling for $550. Given that this phone is expected to be significantly upgraded from the prior-generation iPhone 5s (and could even sport top-of-the-line components like the A9 processor), it should represent a significant boosting of the attractiveness of Apple's products at this price point.

Further, I'm not entirely convinced that the current iPhone 5s will even be retired following the launch of the iPhone 5se. I could see Apple continuing to sell the iPhone 5s in emerging markets at even lower prices (for example, $350 for the 16 GB model and $400 for the 32 GB model).

At this point, the iPhone 5s is probably extremely cheap for Apple to produce, so such price points are probably possible without disturbing Apple's overall gross profit margin structure significantly. It is also still a very good device even to this day, so if Apple wants to profitably gain share in emerging markets (where many potential buyers simply can't afford current Apple products), a further price-reduced iPhone 5s would likely be a good way to do that.

Addressing Munster's main points
Munster's main points are that the iPhone 5se will be outdated once the iPhone 7 rolls out and that a March iPhone launch could divert attention from Apple's main launches. Let's debunk both of those points now.

Starting with the first, remember that Apple's flagship designs will likely continue to be the larger screen models from here on out. This iPhone 5se is aimed at customers who want a modern 4-inch smartphone as well as customers who want the iOS/iPhone experience (with reasonably modern hardware), but can't quite afford the flagships or even the mid-range phones (iPhone 6/6 Plus).

If anything, the fact that the iPhone 7/7 Plus are around the corner works really well for Apple; customers with the money to spend on flagships will find it hard to choose the smaller iPhone 5se by virtue of the fact that the 7/7 Plus will be so far ahead of the 5se in terms of features/performance, minimizing the cannibalization of higher-end/higher ASP models by the lower-end model.

The second point, that the iPhone 5se launch would take away from the main iPhone events also doesn't appear to make sense. If anything, as Android vendors release their flagships in the spring, Apple would like to find a way -- short of releasing new iPhones every six months -- to be on customers' minds for as long as possible. A launch of the iPhone 5se in the middle of the not-going-all-that-well iPhone 6s/6s Plus cycle is one way to do that.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.

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