Apple Inc. (AAPL) shares tumbled a day after the company launched two new iPhones. Apple stock closed at $467.71 per share on Sep 11, 2013, down 5.4% compared to the previous day’s closing price.
Apple unveiled iPhone 5S with a 64-bit A7 processor, fingerprint scanner and a 8-megapixel camera and a cheaper model, iPhone 5C, specially designed for the low and middle income consumer markets such as China, India and South Asia.
Prior to the launch, industry observers expected Apple to price its low-cost smartphone in the range of $400 and $500 (without contract). On the contrary, Apple seems to have followed its traditional pricing structure as the iPhone 5C is priced $549 (without contract) in the US and around $733 in China.
The investor community and shareholders were disappointed as the pricing of the so called low-cost smartphone did not match their expectations. However, it appears that Apple is more concerned about maintaining a higher gross margin as it has come down sharply over the last few quarters, instead of gaining market share in the low cost regions.
Although Apple successfully gained license necessary to run iPhone on China Mobile Ltd (CHL), we believe that the comparatively high price of the iPhone 5C will still keep it out of the reach of low and middle-income Chinese smartphone users. This will negatively hurt Apple’s market share going forward.
Moreover, we believe that the Asian handset manufacturers who use Google’s (GOOG) Android operating system and have a better supply chain and significant local presence will use this opportunity to further lower prices of their devices. This price competition will make it difficult for Apple to penetrate these markets in a meaningful way.
We believe that Apple is fast losing its innovative edge. The company seriously needs to come up with something (Apple TV, smartwatch) new to regain its lost status. We believe that the acquisition of Nokia’s smartphone business by Microsoft (MSFT) will further intensify competition in the smartphone market and will be a major headwind for Apple going forward.
Currently, Apple has a Zacks Rank #3 (Hold).
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