As one of the largest consumer technology companies on the planet, Apple (NASDAQ:AAPL) gets a lot of backseat drivers. Many analysts don’t evaluate the company and its stock as much as they attempt to develop a prescience about what Apple will or should do next. Sometimes these analyses are accurate and insightful; other times, they are speculative and vapid. Either way, they are a large part of the conversation: What can Apple do, what should Apple do, and what will Apple do?
Needham & Co. analyst Charlie Wolf took a stab at these questions in a Wednesday note seen by Apple Insider. In it, Wolf argued that it would be an “insane idea” for Apple to develop and produce an iPhone lower on the price spectrum than the 5C. Not impossible — Apple could clearly bring resources to take on such an initiative — but insane. That is, even though Apple could do it, it shouldn’t, and Wolf appears to be predicting that the company won’t.
Here’s why: Wolf argues that producing a truly low-end iPhone would both eat into the company’s fat margins, which help insulate the company from relatively low global market share, and do damage to the company’s brand (last valued by Interbrand at $98.3 billion).
Wolf argues that Apple would have to sacrifice both margins and brand if it wanted to put an iPhone into the market at $350, the price point sweet spot for emerging markets. Wolf calculates that if the company wanted to maintain a 40 percent margin on such a device, it would need a bill of materials that ran just $90, impossibly low if the company didn’t want to sacrifice quality. Combined with a $120 cost of goods sold — Wolf’s estimate — that puts a 40 percent margin on a $350 iPhone.
This compares against a $549 price point for an unlocked iPhone 5C. Wolf calculates cost of goods sold on the 5C of $120 and a bill of materials of $165, yielding a margin of about 48.1 percent.
Not entering the low-end of the market is not a death knell, though, according to Wolf. The analyst argues, “The evidence suggests that Android users are switching to the iPhone in far greater numbers than users switching from the iPhone,” per Apple Insider. He said as the market matures and saturates, there will be ongoing migration from Google’s (NASDAQ:GOOG) Android platform to Apple, not the other way around, providing a slow but steady stream of growth.