Apple’s Cheap iPhone SE Raises Profit Margin Concerns
Apple ‘s ( AAPL ) decision to price its new 4-inch smartphone, the iPhone SE, starting at $399 could attract value-conscious consumers, especially in emerging markets, but it also could hurt the company’s profit margins. The iPhone SE was announced Monday at Apple’s spring product launch event at company headquarters in Cupertino, Calif. Apple also announced a 9.7-inch iPad Pro tablet; software updates for its mobile devices and the Apple TV; a price cut to the Apple Watch; and new Apple Watch bands. The iPhone SE is an update to the 2.5-year-old iPhone 5S. It features upgraded internal components such as an A9 processor, 12-megapixel camera, and NFC technology to enable Apple Pay. The “iPhone SE’s price was notably lower than we expected ($399 vs. $499), and we worry about (average selling price) and margin implications,” Bernstein analyst Toni Sacconaghi said in a research report. The lower-than-expected price may be a response to increasing sales of used iPhones and a conscious attempt to grow the installed base of iPhone users in hopes of pushing them to a services model over time, he says. The gross profit margin of the iPhone SE is probably about 30% to 35%, compared with about 45% for the iPhone 6 and 6S, Sacconaghi says. “Apple executives noted in yesterday’s remarks that the ‘vast majority’ of its iPhones are resold,” Sacconaghi said. “The bad news for Apple is that it captures no revenues from used iPhone sales. Accordingly, the low price of the SE may be an attempt for Apple to begin to provide an alternative to used iPhones for price conscious consumers and to capture those revenues directly.” Apple’s Use Of Same Components Helps Profits Nomura analyst Jeffrey Kvaal also expresses concern about the pricing of the iPhone SE and its impact on ASPs and margins. On the plus side, Apple’s use of the same components as higher-end iPhones could allow Apple to keep costs down and margins up, he says in a report. The iPhone SE is priced $50 below iPhone 5S models, which should help Apple attract new iPhone users in emerging markets while keeping gross margins stable, Morgan Stanley analyst Katy Huberty says in a report. The iPhone SE pricing likely won’t hurt gross margins because the handset shares manufacturing tools with the iPhone 5 and 5S, which have a similar design, and shares components with the iPhone 6S, she says. BMO Capital Markets analyst Tim Long says the attractively priced iPhone SE should help Apple capture more of the market that was going to smartphones using Alphabet ’s ( GOOGL ) Google Android operating system. “We continue to believe Apple’s growth over the next several years will be driven by the conversion of a small percentage of the 2 billion-plus mass market Android users,” Long said in a report. The iPhone SE “does a good job addressing a slice of that segment.” Sacconaghi rates Apple stock outperform, with a price target of 135. Kvaal has a buy rating on Apple with a price target of 135. Huberty rates Apple as overweight with a price target of 135. Long has an outperform rating on Apple with a price target of 130. Apple stock was up nearly 1% in afternoon trading on the stock market today , near 107. Apple Watch Price Cut Could Signal Version 2 Ahead On Monday, Apple cut the starting price for the Apple Watch by $50 to $299. Wall Street analysts say that move could signal that a second-generation smartphone is on the way from Apple. Bernstein’s Sacconaghi says the price cut could mean that the next version of the Apple Watch could arrive around midyear. “We note that Watch originally launched on April 24, 2015, and is approaching the one-year mark (on which Apple typically refreshes its products) — meaning Watch is due for an upgrade in the coming months,” Sacconaghi said. BMO’s Long says the Apple Watch 2 is likely to be announced this fall along with the iPhone 7. “We expect a refreshed model to be announced at the September event, which may well be a sweet spot, putting the release more than a year following the product’s initial introduction to avoid alienating early adopters,” he said. Nomura’s Kvaal says the Apple Watch price cut is more about trying to stimulate demand for the smartwatch in general. “Apple’s decision to lower the price from $349 to $299 without a new product launch suggests Apple is still searching for the right price/value ratio,” Kvaal said.