After a rocky start to the year, shares of Apple (AAPL) appear to be on solid footing. Trading in the giant has been much more favorable lately, with prices now holding on to the $500 per share level once more.
This marks a nearly 10% increase for AAPL in just the past month, a level that easily beats out the S&P 500 over the same time frame (the benchmark was flat over the past month). Plus the stock is now a Zacks Rank #2 (Buy), a move in the right direction after being a Zacks Rank #4 (Sell) earlier in the year.
Yet despite the recent success and the strong short-term outlook, there are definitely some clouds appearing on the horizon for AAPL. This is best evidenced by the ongoing disaster that is the iPhone 5C.
Sure, the company is shipping a ton of 5Cs — over 23 million according to Prudential, via a Reuters UK article — but demand remains slack, as evidenced by price cuts and reduced orders. Wal-Mart (WMT) has actually cut retail prices in half, while Apple has told some assemblers that it is reducing orders by nearly 30%.
While this might sound like terrible news at first, this is actually the best possible thing that could happen to Apple. That is because the iPhone 5C is actually hurting Apple in several key ways, and the impact may start to appear in AAPL before long.
Though there are a number of reasons why this new product is unfavorable for the company, three of the biggest problems that I have with the iPhone 5C, as they relate to Apple’s long-term prospects including the following items:
#1: Status Symbol in Jeopardy
One of the main reasons to buy an iPhone (whether people want to admit it or not) is that the product is a bit of a status symbol. The product was somewhat exclusive, or at least you had to put down a big chunk of change in order to buy it.
But if you watch the latest iPhone 5C commercial, you’ll realize that this is really the first Apple product that is intended for everyone, anywhere. While it is great to include all, I feel as though this approach from a premium product company cheapens the brand, and takes a bit of the luster off of the stellar Apple name.
After all, if Mercedes Benz started selling a car for $15,000 with a cheap faux-leather interior, wouldn’t you think differently about their once-premium brand, even if nothing changed about their other cars? Of course you would, so the sooner Apple abandons this version, which screams to many that you ‘couldn’t afford the real thing’, the better.
#2: What Emerging Market Help?
Part of the goal for the 5C launch was to compete more successfully in emerging markets with a cheaper product. However, at just $100 cheaper, does this really accomplish the task of being a better pick for emerging market consumers?
This is especially true considering that some android smartphones are priced in the low triple digits, a far cry from the Apple 5C’s unsubsidized price of $549. This makes the product still out of reach for many in the emerging middle class around the world, so it hardly will help in boosting sales in these key markets.
So why cheapen your brand name when the product is still too expensive for many developing nations anyway?
#3: Higher Margins on the Flagship Product
According to an article from Computerworld, the iPhone 5S costs $199 to manufacture, while the 5C costs $173. And given that the iPhone 5S costs $100 more to consumers, it is pretty clear that the 5C is a less profitable version of the iPhone for Apple (though the actual margin may vary depending on who you ask).
Also consider that if Apple is forced to cut prices on the iPhone 5C in order to boost sales, that this will only tilt the balance more in favor of the 5S from a business perspective for the Cupertino-based giant. And with margins already falling at Apple in recent quarters, one has to wonder if the company wants to stack the deck even further in favor of a product with a (albeit slightly) lower margin.
So really, the problem isn’t that the iPhone 5C isn’t selling well — as this could actually help Apple boost margins — it is that such an initiative was even attempted at all. Clearly, Apple is running out of ideas, but that doesn’t mean that the company should abandon the strategy (everyday high prices with superior quality) that got it to this point.
Consumers haven’t embraced the iPhone 5C as much as its more expensive counterpart, and it doesn’t seem to be helping the firm achieve its goals (expanding in emerging markets), and it could actually be hurting its high-quality brand. The sooner that Apple recognizes how damaging the iPhone 5C is and focuses back on its core competencies (or brings real innovation to the market once again) the better.
But what do you think? Is Apple on to a winning idea here, or should Apple focus in on what got it to this point instead?
Let us know in the comments section below!
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
APPLE INC (AAPL): Free Stock Analysis Report
Zacks Investment Research