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Apple Worth $400 A Share?

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a recent Barron's article, Mr. Lindberg from ABGSC Sundal Collier was cited as adding to his bearish stance on Apple (NASDAQ: AAPL). This wasn't too big of a surprise since just days before he initiated coverage on the company and placed a sell rating and a $400 price target. With due respect to Mr. Lindberg, he is making certain assumptions and in the light of how the wireless market works, they just don't make sense.

Apple Needs To Take A Page From Nokia? Did He Really Say That?

Mr. Lindberg said that Apple will need to make a cheaper iPhone to tap into the entry-level smartphone segment. He mentioned Nokia's (NYSE: NOK) Lumia 620 (a stripped down version of the 920) as a phone that Apple would need to emulate. He said that, “Apple may take cues from Nokia's extensions of its new range of Windows devices.” In short, he thinks a cheaper iPhone is coming out next year that will be “more palatable by customers and carriers alike”. There are several holes in these arguments. First, Apple has no reason to take cues from Nokia in its pricing. Look at the two companies recent quarterly results. Apple saw an increase in iPhone sales of better than 20%, Nokia saw smartphone sales plunge 56% with volumes down 63%. With all due respect to Nokia, this is the same company that for years dominated the cell phone industry here in the U.S. and has since fallen prey to Google's (NASDAQ: GOOG) Android dominance. With domestic market share for Android estimated at 75% and Apple holding about 14%, there isn't a lot of room for other companies. Making the assumption that a strong competitor with pricing power should follow a weaker competitor’s example makes very little sense.

Does Apple Need An iPhone “Mini”?

To answer the question of whether Apple should produce a cheaper iPhone, you have to understand why the iPad mini came into existence. Apple dominates the larger tablet market with multiple versions of the original iPad design. The reason the iPad mini was introduced is Apple saw companies like Amazon.com (NASDAQ: AMZN) and Samsung generating sales in the 7” segment of the market. Apple's products are priced at a premium to protect margins, which is why the iPad mini came out at $329. If you are already in the market for an iPad, and want one that is 34% cheaper, and half the weight, the mini could be an attractive option. Does Apple care that Amazon is selling the Kindle Fire 7” for $199? In a word, no. Apple's eco-system of apps is much deeper than Amazon's. In addition, Apple wants to make a profit on the iPad mini at point of sale, Amazon wants to break even and make it up in continuing sales down the road. These are different businesses with different models. To protect margins, Nokia's Lumia 620 won't offer the same capabilities as the flagship 920. To be blunt, if customers want a stripped down version of the iPhone 5, that's what the iPhone 4S and iPhone 4 are there for.

Pricing Does Not Determine Sales In Smartphones:

In the smartphone industry, pricing is not the most important factor when it comes to choosing what model to buy. If you want proof, just go to any major wireless carrier's website and look at the pricing of each of the most popular smartphones. I looked at Verizon Wireless, and each of the most popular smartphones just to test this theory. What I found was the iPhone 5, Samsung Galaxy S3, and the HTC Droid DNA all are being sold for $199 with a 2 year contract. In addition, some smartphones like the Droid RAZR MAXX HD and the Samsung Galaxy Note II are selling for $299 with a 2 year contract. Since these prices include subsidies from the carrier, what about retail pricing?

Since retail pricing is more prevalent overseas, where Mr. Lindberg believes Apple needs a cheaper product, let's look at that piece of the puzzle. Without subsidies, the prices of the above phones are all between $600 and $700. In fact, there was a not too surprising revelation in retail pricing. The brands that have the best sales also have the highest prices, the brands with less market share have lower prices. For instance the iPhone 5, Galaxy S3, and Droid RAZR MAXX all sell for $650 without a contract. The Nokia Lumia 822 and BlackBerry Bold 9930 sell for $450 and $510 respectively. I doubt that it's a coincidence that two of the more beleaguered companies in the cell phone industry have their flagship phones selling for prices that are as much as 30% less than the category leaders. There is a hard truth here, popular smartphones have pricing power, less popular phones do not.

Conclusion:

The bottom line is, Apple needs to take a page out of Nokia's book like they need to learn from Dell or HP how to build and sell computers. The PC industry has been around for a lot longer than the smartphone industry. In the last quarter, Apple was one of the few companies to see revenue growth, while competitors like Dell and HP saw revenues drop by double digits. Apple is not going to be the Nokia of the smartphone world, the company doesn't believe everyone should have an iPhone. The company makes premium products priced at a premium. This is why Apple is perfectly happy to take 14% of the domestic smartphone market and can make billions doing so. If pricing were an important factor in smartphone sales, then models given away for free would be the sales leaders. In addition, with older versions of the iPhone like the 4S and 4 being sold for $99 or given away for free, there is no reason for Apple to strip down its current model. Customers who want these older models can find them for around $200 - $300 on eBay without a contract, why would they want a stripped down version of a Nokia phone? Apple needs to ignore this advice, just like investors need to ignore this line of thinking and focus on what Apple does best. The company builds products that customers want, pricing is designed to protect the company's margins, and Apple has been wildly successful with this model. If I have to choose between Tim Cook and Mr. Lindberg, I'm betting on Tim Cook every time.


MHenage owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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