As is usually the case with Apple Inc. (AAPL) product launches, the new iPhone SE has attracted initial praise from tech enthusiasts. Consensus seems to be that Apple stock’s decision to bring back the small form factor while loading the phone with state-of-the-art mobile technologies is a good decision.
The initial praise is valid. After all, Apple made the new iPhone to have the same processor with iPhone 6. Its rear camera is a 12MP iSight camera — the same offered in iPhone 6. iPhone SE offers the Apple A9 processor, the same as is offered in iPhone 6s. iPhone 6 offers Apple A8 processor.
Its 2GB RAM is the same as present in iPhone 6s, higher than the 1GB RAM in iPhone 6. It also has a fingerprint sensor. For all the similar specifications that the iPhone SE shares with iPhone 6, while costing about $150 less, initial consensus should be that it will perform well in the market.
However, it’s not very likely that the new iPhone SE will drastically improve iPhone sales, which Apple stock already expects to decline in the first quarter of this year.
I’d point you to two reasons why the iPhone SE might not sell well. And these two points find their root in the fact that AAPL is trying to make cheaper phones — which makes sense on the surface. Here we go.
iPhone SE Still Expensive for Emerging Market Consumers
Gartner recently said in study that smartphones now sell at the slowest pace since 2008, owing to smartphone saturation in matured markets like most in the West. By implication, phone makers are now looking to emerging markets, like the Latin American countries, for growth.
On the surface, it would seem iPhone SE would be a favorite choice in the emerging markets, since these regions are seeing increasing growth rate of smartphone adoption. But as the name sounds, folks in the emerging markets are, well, just emerging economically. Implicatively, while they can afford more luxury than ever, they are not so wealthy, on the average, that they can adopt the iPhone SE en mass.
You want to bear in mind that most phones in emerging markets are below the $100 threshold. In fact, Kevin Walsh of GfK once told The Telegraph that, “The reason for emerging market dominance of smartphone growth in the next year  is that pricing is reaching the sweet spot of $30 to $50.”
Going by that number, the average smartphone price in emerging markets is about eight to 13 times less than the price tag Apple stocks places on iPhone SE. So to say that the iPhone SE will be a massive success in emerging markets would be a shot too far. And let’s not forget the preference for larger screens in the emerging markets, too.
Yes, there will be many buyers in these regions, but the growth potential in this region for AAPL is a bit overstated at current economic levels.
The iPhone SE Dubbed as Cheap
The Wall Street Journal reported after the launch of iPhone SE that the phrase “cheapest iPhone in history” was trending on Chinese social media site Weibo. In fact, they were comparing it to Xiaomi’s budget phone Redmi.
The thing is, Apple stock has already built a reputation for itself as a phone maker for the high-end market. So the perception that the iPhone SE is cheap won’t help it at the beginning, as it sends a wrong message — that it is substandard.
And in matured markets like U.S., lower price isn’t going to motivate consumers to buy the phone.
Bottom Line for AAPL
Investors shouldn’t get too excited about the launch of iPhone SE based on the reasons discussed above. The only positive for the long-term is that it could give emerging market consumers a taste of what AAPL offers with the iPhone, thereby positioning Apple stock to do well in these regions as when they can afford more luxury spending.
This aside, though, the potential failure here doesn’t condemn AAPL to a ‘”sell” list. As I have discussed a number of time this year, Apple stock a strong enough powerhouse to weather mini-failures like this.
And the stock is still trading at a discount to its free cash flow.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
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