SAN FRANCISCO — Apple Inc. may not have any surprise products up its sleeve for its much-anticipated event this week, but the company is expected to unveil key details that investors deem vital to its outlook.
Apple is widely expected to unveil two new iPhone models at an event set for Tuesday morning at its headquarters in Cupertino, Calif. The event is also expected to feature a launch date for the iOS 7 mobile operating system, as well as expansion of the roster of wireless carriers that sell the iPhone _ including the addition of China Mobile to that list.
But the bigger question remains how much the company plans to charge for a new, lower-cost version of the smartphone that has been widely dubbed the iPhone 5C. The company needs to prove the iPhone can break into new, more price-sensitive markets while maintaining its strong position at the high end of the smartphone value chain, which offers lucrative profit margins but limited sales growth.
Analysts who cover Apple say this will be a key data point in helping to turn sentiment on the stock, which has surged more than 25 percent since late June but remains well below its peak above $700 when the company launched the iPhone 5 about a year ago.
“Price is going to be the big story on Tuesday,” Gene Munster of Piper Jaffray told MarketWatch, speaking specifically of the expected pricing of the lower-cost iPhone.
Tuesday’s event is also expected to include a launch date for iOS 7 _ a redesigned version of the iPhone’s mobile operating system that is expected to become available with the new iPhones.
Apple is also hosting another event in Beijing later in the day that is expected to add China Mobile to the lineup of wireless carriers selling the iPhone.
The iPhone 5C is also expected to become Apple’s main tool to grow its share in China and to break into emerging economies. Customers in these markets are more price-sensitive, so analysts say Apple needs to have an attractive, unsubsidized price under the $400 mark for the new iPhone to do well _ despite the effect that might have on the company’s profit margins.
“In general, the unsubsidized price is a big deal in these markets,” Munster said, adding: “You’re going to see Apple get more aggressive on margins in exchange for market share.”
In addition to the iPhone 5C, Apple is expected to introduce an updated version of its current iPhone 5, which reports have called the iPhone 5S, with a faster processor and additional features. Some believe the 5S will come with fingerprint-scanning capability, though whether it will be employed for security or as a payment technology _ or both _ is unclear.
The iPhone 5C is expected to feature a 4-inch screen similar to the iPhone 5’s, but in a plastic casing. Analysts expect the device to deploy an older Apple processor, as opposed to the A7 expected for the iPhone 5S.
Apple has never been known for low-cost designs; most of its products, from Macs to iPods to iPads, have typically been priced higher than competitors’ offerings. Analysts do not believe the iPhone 5C has been designed to be the low-cost leader in its targeted markets, but the unsubsidized price needs to hit a certain level for the device to hold appeal in this competitive category.
Amit Daryanani of RBC Capital said he believes Apple will come closer to the $300 price point with the iPhone 5C. That price, he said, is still above what many handsets cost in markets like China, so it would “encapsulate the ‘Apple markup’ “ without being deemed too expensive to sell.
But Apple faces another risk with a low-price iPhone _ hurting the company’s overall gross margin, which has slipped from 40 percent in last year’s September quarter to 36.9 percent for the most recent period, which ended June 29. The iPhone has traditionally carried margins estimated at above 50 percent _ Apple does not break this number out _ but more competitive devices from rivals like Samsung Electronics Co. and slowing growth at the high end of the market make it difficult for the company to maintain pricing power.
“IPhone gross margins above 50 percent are going to be very tough for them to replicate going forward,” RBC’s Daryanani told MarketWatch, noting that his own estimates indicate that “the iPhone 5C will still have better gross margins than the iPads do.”
Others, like Glen Yeung of Citigroup and Peter Misek of Jefferies & Co., have said they believe the iPhone 5C will come in at a higher price point _ around $400. Both analysts, who currently have neutral ratings on Apple, say an unsubsidized price well below that level could boost investor sentiment on the shares.
“If they come in much lower than that, I think that would be interesting,” Yeung told MarketWatch.
He added that investors have grown more comfortable with where Apple’s gross margins are, and that the main question for the company right now surrounds its ability to get back to sales and earnings growth. Expanding the market for the iPhone family with more price points and more carriers could do that, but the saturation at the high end of the market makes it more challenging.
“Unless you bring something truly revolutionary, it’s hard to stimulate the market,” Yeung said. “That applies to Apple and to anyone else selling high-end smartphones.”
Also, Apple’s event on Tuesday is not expected to address other perceived weaknesses in its product line, such as the lack of a large-screen iPhone that could better compete with devices like Samsung’s Galaxy S4 and Galaxy Note. Apple is reportedly working on new iPhones with larger screens, but those are not expected to launch until next year.
“I’ve have hundreds of discussions with investors, and my feeling is that this event will not change the handful of factors” that are weighing down Apple right now, Misek told MarketWatch. “It’s not going to address high-end saturation. It’s not going to address the screen-size shortage in the product portfolio. And the iPhone 5C price point _ which we think is around $400 _ is not the price developing markets are expecting.”
Munster of Piper Jaffray is more bullish on the company, saying that he believes the launch of the new iPhones will mark Apple’s “return to earnings growth.” He agreed with Yeung’s assessment that investors have grown comfortable with thinning gross margins.
“Investors are OK if the margins go down but stabilize somewhere around 35 percent. They are not OK with this water torture of them constantly going down by a little,” he said, adding that “it’s been a long time since Apple’s investors were talking about earnings growth.”
- MCT Campus