Apple's iPhone 5c pricing seen as right move, holiday sales expected to pick up steam
Investors should ignore supply chain noise about the iPhone 5c and trust that Apple made the right move in maintaining its margins, one prominent analyst said on Thursday.
Maynard Um of Wells Fargo Securities believes Apple's pricing strategy with the iPhone 5c, making it the company's mid-range phone with a $99 on-contract price, will pay off in the long run. He noted that last year's mid-range smartphone, the iPhone 4S, saw its sales ramp up heading into November and December, as more casual buyers showed interest during the holiday shopping season.
Some market watchers believe Apple should have priced the iPhone 5c more aggressively, in an attempt to take market share away from low-end smartphones running Google's Android platform. But doing so would have been too risky of a move, Um believes.
If Apple had taken lower margins and hoped for unit volumes to offset, there would have been "no guarantee of price elasticity driving volumes," he said. In addition, a cheaper iPhone 5c may have resulted in even greater margin pressures as Apple transitioned to its next models in 2014.
"We believe the certainty was the right choice and would not necessarily discount demand yet," Um said.
The analyst's comments came in response to reports this week from both The Wall Street Journal and Reuters, which cited anonymous sources as indicating that Apple was cutting orders for the iPhone 5c. The Journal initially speculated that changes in the supply chain could signal "weaker-than-expected consumer demand," but later clarified to say that any apparent reductions "may not be all bad."
Apple Chief Executive Tim Cook himself warned analysts earlier this year that reading too much into supply chain data can be a critical mistake.
"The supply chain is very complex, and we obviously have multiple sources for things," Cook said. "Even if a particular data point were factual, it would be impossible to interpret that data point as to what it meant for our business."
To that end, Um said in his note to investors on Thursday that supply chain data has been "hit or miss," suggesting he's not concerned by the latest reports.
"Regardless, we believe it would be more prudent for Apple to manage the channel (despite potential holiday demand) as the risk of excess inventory is much higher than ramping unit orders later," he said.
As for a series of discounts offered by retailers for the iPhone 5c, Um noted that this is a typical strategy for third-party resellers. He doesn't see discounts on the newly released model as concrete evidence of soft demand for the iPhone 5c.
"As has been the case in the industry for years, third-party resellers derive profits from carrier 'finder's fees,' which can amount to $250 depending on a number of factors, including whether it's a new contract or an upgrade," he said. "Thus, a price 'drop' is not necessarily a reflection of materially weak demand, but, rather, a business model strategy to drive volumes."
Wells Fargo Securities has maintained its "outperform" rating for AAPL stock with a share valuation range of between $525 and $575.
Maynard Um of Wells Fargo Securities believes Apple's pricing strategy with the iPhone 5c, making it the company's mid-range phone with a $99 on-contract price, will pay off in the long run. He noted that last year's mid-range smartphone, the iPhone 4S, saw its sales ramp up heading into November and December, as more casual buyers showed interest during the holiday shopping season.
Some market watchers believe Apple should have priced the iPhone 5c more aggressively, in an attempt to take market share away from low-end smartphones running Google's Android platform. But doing so would have been too risky of a move, Um believes.
If Apple had taken lower margins and hoped for unit volumes to offset, there would have been "no guarantee of price elasticity driving volumes," he said. In addition, a cheaper iPhone 5c may have resulted in even greater margin pressures as Apple transitioned to its next models in 2014.
"We believe the certainty was the right choice and would not necessarily discount demand yet," Um said.
The analyst's comments came in response to reports this week from both The Wall Street Journal and Reuters, which cited anonymous sources as indicating that Apple was cutting orders for the iPhone 5c. The Journal initially speculated that changes in the supply chain could signal "weaker-than-expected consumer demand," but later clarified to say that any apparent reductions "may not be all bad."
Apple Chief Executive Tim Cook himself warned analysts earlier this year that reading too much into supply chain data can be a critical mistake.
Maynard Um of Wells Fargo Securities isn't concerned about supply chain data, and he believes iPhone 5c sales could pick up heading into the holiday season.
"The supply chain is very complex, and we obviously have multiple sources for things," Cook said. "Even if a particular data point were factual, it would be impossible to interpret that data point as to what it meant for our business."
To that end, Um said in his note to investors on Thursday that supply chain data has been "hit or miss," suggesting he's not concerned by the latest reports.
"Regardless, we believe it would be more prudent for Apple to manage the channel (despite potential holiday demand) as the risk of excess inventory is much higher than ramping unit orders later," he said.
As for a series of discounts offered by retailers for the iPhone 5c, Um noted that this is a typical strategy for third-party resellers. He doesn't see discounts on the newly released model as concrete evidence of soft demand for the iPhone 5c.
"As has been the case in the industry for years, third-party resellers derive profits from carrier 'finder's fees,' which can amount to $250 depending on a number of factors, including whether it's a new contract or an upgrade," he said. "Thus, a price 'drop' is not necessarily a reflection of materially weak demand, but, rather, a business model strategy to drive volumes."
Wells Fargo Securities has maintained its "outperform" rating for AAPL stock with a share valuation range of between $525 and $575.
Comments
number of CEOs helming the largest company in the world: one
number of sloppy armchair quarterback analysts who think they can do a better job: too many
seeing said analysts fall flat time after time: priceless.
sadly, there are very few consequences for the analysts when they mess up, and they do that quite often and in big ways.
[SIZE=2](i'm sure someone can do a better job on the "priceless" ad ... please do ... it's too early for me.)[/SIZE]
5S higher. 5C mid. 4S lower.
Note to analysts: Apple HAS a low priced phone.
Yes, the 4S Apple did absolutely NOTHING to promote, nor did they change in any respect -- unlike he 5c into which they have invested a massive amount in marketing alone, not to mention R&D, engineering, factory set up and tooling, etc.
How can these two phones be evaluated on the same level in any way?
Apple used two manufacture two basic models of the iPhone, all of which had debuted as the flagship before being discounted with no changes. So how can Apple invest heavily and support yet one additional model that sells no better than its historical predecessor in the same spot on the food chain? No matter how you slice it, it seems to me like they are losing money.
Yes, the 4S Apple did absolutely NOTHING to promote, nor did they change in any respect -- unlike he 5c into which they have invested a massive amount in marketing alone, not to mention R&D, engineering, factory set up and tooling, etc.- and then sold over a million more 5c iPhones opening weekend than they did 4s iPhones the previous year.
Fixed that for you.
Number of CEOs helming the largest company in the world: one
Number of sloppy armchair quarterback analysts who think they can do a better job: too many
Watching said analysts backpedal for the four dozenth time they’re wrong: priceless.
There are some things money can’t buy. For everything else, there’s Google and Samsung paying off everyone from individuals to bloggers to analysts to print media to lie about Apple.
Everything he said is bang on I think. Makes sense.. Only issue is it isn't sensationalist.. rofl! Surprised it was even a news item..
First, nobody except Apple knows how the 5c is selling compared to the 4s last year, but my guess, based on the initial sales figures of all iphones selling much better than last year seems to indicate the 5c is selling much better than the 4s did last year. Just as important is the fact that independent research firms that have evaluated the cost of the 5c to manufacture have all come to the conclusion the 5c costs LESS to manufacture than the 5...which should more than offset any additional re-tooling and marketing costs of the new phone.
All the analysts seems to have taken a stupid pill when it comes to Apple.
First of all, Apple does not need a cheap iPhone. Why? Because every year when they release a new one, they still sell the last 2 models. What is going to be the difference between an iPhone 4 and a cheaper iPhone?
Second, the iPhone 5C is pretty much an updated iPhone 5. Better 4G antenna with world support, cheaper to manufacture etc. But fundamentally it is an iPhone 5. It is never going to outsell the iPhone 5S because it has already been on the market for over a year in the form of the original iPhone 5.
Third, for a 1 year old product it is selling pretty well at about 30% of all iPhone sales. A year old Android anything? You will be hard pressed to give it away with a contract.
Lastly, I am not sure how many times they need to be proven wrong, but their supply chain numbers are always off.
Yes, the 4S Apple did absolutely NOTHING to promote, nor did they change in any respect -- unlike he 5c into which they have invested a massive amount in marketing alone, not to mention R&D, engineering, factory set up and tooling, etc.
How can these two phones be evaluated on the same level in any way?
Apple used two manufacture two basic models of the iPhone, all of which had debuted as the flagship before being discounted with no changes. So how can Apple invest heavily and support yet one additional model that sells no better than its historical predecessor in the same spot on the food chain? No matter how you slice it, it seems to me like they are losing money.
I've heard so many people say that Samsung does much better than the other Android phone makers because of its heavy marketing. So I'm inclined to say the same thing about the 5c. With so much advertising you would think it would do a lot better than 17% growth year over year in the US (and that is giving the statistics the benefit of the doubt). Add to that, we don't even know how many 4s units were made available last year or 5c units this year and how many were left in the channel each year.
Next year at this time we'll see if the move was a good one. Personally I'd expect nothing less than 33% growth yoy in the mid tier.
First, nobody except Apple knows how the 5c is selling compared to the 4s last year, but my guess, based on the initial sales figures of all iphones selling much better than last year seems to indicate the 5c is selling much better than the 4s did last year. Just as important is the fact that independent research firms that have evaluated the cost of the 5c to manufacture have all come to the conclusion the 5c costs LESS to manufacture than the 5...which should more than offset any additional re-tooling and marketing costs of the new phone.
Independent research firms? That's like trusting analysts.
Apple has come out with a new product category with the 5c. It can't be understood by concepts that derive only from iPhone history.
It's the first phone designed by Apple for fun and delight, not for technical-instrument admiration.
We won't fully understand why they made this phone until results are in from Christmas, and from the rest of the world, especially Japan and China. So your pronouncements are too early.
Consider this: You're Apple and you have a lower cost phone you're introducing going into christmas. Should you sell that phone at the lowest possible price, right when demand is highest?
Of course not.
Why not offer a slight discount on the lower priced one, then wait until the new year to lower the price to the "normal" lower price?
You preserve margins during the period when you can't make enough of them, and you don't hurt sales when demand is lower in the spring.
Maybe next year we'll get an iPhone 6 in the fall, and an iPhone 6C February. Maybe Apple is going to a twice a year update cycle. (or maybe they're going to intro two models each fall, not sure.)
Either way, it's seems silly to lower the price in the face of peak demand! Yet this is what the armchair types are always telling Apple to do.
Just because you can't sell android devices at $200, doesn't mean Apple can't sell as many iPhone 5Cs as they can make at $500! In fact, they can.
Because the iPhone is not a piece of junk.
And yet Sammy can't outsell the flagship iPhone and can't outsell the 5C (at least in the US).
As an Apple shareholder, I'd like to see Apple flood the market with low-priced iPhones and grab a huge amount of market share, but I know Apple doesn't do business that way. I'd only want them to do it so I could immediately see a huge share price jump and I'd be much richer on paper. That's just my greed talking. Plus, I'd like to see Apple catch up in share price to Google. I know it's not going to happen and Apple should just continue with what it's been doing and everything will be just fine.
So, season purchase plan is as follows:
- wife: white 5C, red case (carries phone in all sorts of bags)
- niece: red 5C, red case (drops everything around, typical teenager)
- myself: white 5S (efficiency freak)
- my little daughter: gets my white 4S
(modest child)
yep, 5C will surely sell like crap. /s
It's the first phone designed by Apple for fun and delight, not for technical-instrument admiration.
I like Apple too, but this comment reads as if it were taken from a press release.
The 5C is basically the flagship 5 from a year ago in a new plastic case. I don't see how it is any less "technical" or provides more "fun an delight" as a result of changing its shell.
Go to the store and put one in your hand. If that doesn't work, get that right hemisphere checked out by a competent shaman.