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Apple, Inc. Isn't This Desperate (Yet)

By Evan Niu, CFA - Mar 8, 2016 at 7:45AM

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Boosting unit volumes at the cost of lower ASPs and compromised brand strength? No, thanks.

iPhone 5s. Image source: Apple.

There aren't too many levers that Apple (AAPL 2.45%) has left to pull in order to jump-start iPhone unit sales. But prominent (and fairly accurate) Apple analyst Ming-Chi Kuo thinks that Apple could be about to do the unthinkable: slash the iPhone 5s price by a whopping 50%. That's in addition to the rumored 4-inch "iPhone SE" that is expected to be unveiled at a press event later this month.

That doesn't sound like Apple.

It's a fire! ... sale.
The new iPhone SE is said to be priced in the range of $400 to $500, which would occupy what's typically been Apple's lowest official price point. Right now, the iPhone 5s, initially released in 2013, sits at that price. But a 50% reduction would bring that all the way down to $225.

The lowest that Apple has ever been willing to go in the U.S. has been $450, and while it may make some sense to still offer the iPhone 5s at a lower price, dropping the price so substantially doesn't make much sense, even if the 5s cost curve is extremely cheap and Apple could turn a reliable profit.

Of course, the broader implications of a $225 iPhone would be potential unit growth while average selling prices suffer. Although in some regards, Apple could afford a hit to ASP since the iPhone 6s and 6s Plus are driving ASPs to record levels ($691 last quarter). But it still doesn't make any sense to go that low. Apple isn't that desperate.

When Kuo loses his edge
Relatively speaking, Kuo has demonstrated a fairly accurate track record when it comes to Apple rumors. But most of the time that's related to hardware specs and other information that can be uncovered through supply chain leaks.

In contrast, pricing is a little harder to predict since it's a strategic discussion that takes place mostly in Cupertino. That also applies to branding, which is why it's a bit harder to find clues as to what Apple may or may not call a certain device. Interestingly enough, sometimes the most reliable branding leaks come from leaked images of product packaging -- which is physical evidence, like other hardware leaks.

Pricing is very hard to predict because there is no physical evidence as to what Cook & Co. are thinking. That's why the iPhone 5c (whose name was tipped by leaked product packaging) pricing took everyone by surprise in 2013 when Apple announced the plastic iPhone would cost $550, while investors were expecting it to be more affordable.

Maybe one day
To be clear, iPhone unit volumes do look like they're peaking, but the real question is whether or not Apple feels investor pressure to grow units while sacrificing brand strength.

I personally think Apple's business is just fine in terms of units and cash flow, but investors are still unwilling to give Apple reasonable valuation multiples. Demanding unit growth may not be worth it if it comes at the price of lower ASPs, compressed margins, and a compromised brand that hurts pricing power.

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