Apple Inc. (AAPL): Low-end iPhone at This Price May Not Affect Margins

Apple Inc. (NASDAQ:AAPL) has been under some pressure to expand its smartphone offerings of late, as the company has been showing signs of losing market share in the smartphone market due to its premium-priced devices, which are generally out of reach for many consumers in emerging markets – especially China, India and Brazil. But while some reports have shown that Apple has been gaining market share in some of these areas, the expectation has been brewing for months that Apple would bring out a lower-end iPhone device to more directly compete for market with some of the cheaper Samsung Electronics Co. Ltd. and Nokia Corporation (ADR) (NYSE:NOK) smartphones in these emerging markets.

But there has also been some rumblings about Apple Inc. (NASDAQ:AAPL) sacrificing its famous margins for more phone volume with the cheaper iPhone in the market, and also fears of some iPhone cannibalization – like was expected when the iPad Mini was introduced and was taking away market share from the iPad – further diminishing those legendary margins, which had already been shaved below 40 percent in recent quarters. However, analyst Katy Huberty of Morgan Stanley came out with a projection recently that looked into the low-priced iPhone and trying to come up with a projected price point what actually would not sacrifice margins at the end of the day.

Huberty did some calculations about a low-cost iPhone and what it might cost Apple Inc. (NASDAQ:AAPL) to produce based on the features and components mentioned in the current supply chain that would be in a cheaper device would come to less than $250. She then considered a number of price points for this cheaper device and calculated how the margins would be affected, assuming that a lower price point would mean more cannibalization of the full-feature iPhone.

What did she find? She found that if Apple Inc. (NASDAQ:AAPL) were to sell an unlocked, unsubsidized low-price iPhone on the market, her calculations indicated that indeed, gross margins could fall below 35 percent if the low-cost iPhone sells for $329. However, if the phone were to sell for $399, margins would actually rise slightly from a 37.1-percent model. The ideal margin-neutral price Huberty came up with was $393 for a base model of the low-cost iPhone (16GB). The overall iPhone gross margin would increase if the low-cost phone were sold for $429.

What could this mean for Apple Inc. (NASDAQ:AAPL) investors who have been lamenting the legendary margins as a thing of the past?

Apple Inc. (NASDAQ:AAPL) is not likely to see margins in the 42-45 percent range anymore. Those days could very well be over, but certainly if Huberty’s calculations are somewhat reliable, this could mean that Apple may have an opportunity to get margins back near 40 percent with the right mix of devices and price points that can increase market share without sacrificing too much of the premium-priced devices that drive margins in the first place. It’s likely we could see very strategically priced devices in the coming months, and perhaps some new premium devices in the pipeline – rumors of a 13-inch iPad have been swirling – may be enough to get Apple margins closer to 40 percent again, which would increase investor confidence in the company as volume numbers and market share increase.

What are your thoughts about Apple Inc. (NASDAQ:AAPL) and its low-cost iPhone? Do you have faith in Huberty’s numbers, and do you think Apple can pull this off? Give us your feedback in the comments section below.

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