Analyst: Here’s Why Apple Picked the Right iPhone 5C Strategy

Source: Apple.comWells Fargo analyst Maynard Um examined and dismissed some widely publicized concerns about Apple’s (NASDAQ:AAPL) iPhone 5C in a recent note to investors. As noted by Um, some analysts have cited rumored production cuts and discounted iPhone 5C prices at retailers like Best Buy (NYSE:BBY) and Walmart (NYSE:WMT) as evidence that Apple miscalculated the demand and pricing for its plastic iPhone.

For example, KGI Securities analyst Ming-Chi Kuo recently cut his original iPhone 5C sales estimate based on reports that Apple recently slashed iPhone 5C production orders in half from 300,000 to 150,000 units per day. However, Um dismissed those concerns, noting that supply chain rumors are often unreliable. The analyst also pointed out that Apple would be better off having too few iPhones rather than too many since it is riskier to have excess unsold inventory.

Um believes that some analysts are misinterpreting the meaning of the substantial iPhone 5C discounts that many U.S. retailers are offering. For example, Walmart recently announced that it would be selling the iPhone 5C for $45 throughout the holiday season.  While some analysts believe this is evidence that not enough iPhone 5C models are being sold, Um pointed out that this a longstanding “business model strategy to drive volumes,” rather than a sign of weak consumer demand.

Some analysts have also pointed to the discounted iPhone 5C price as evidence that Apple originally miscalculated the appropriate price for the plastic iPhone. The 16GB version of the iPhone 5C currently costs $99 with a two-year contract, or $549.00 off-contract, at the Apple Online Store.

However, Um noted that Apple would have had to rely on higher sales and lower margins if it had set a lower iPhone 5C price. By setting a relatively high price, Apple guaranteed a higher margin and also allowed for the possibility that future “price elasticity” could help further drive sales.

In a final positive note, Um cited the historical trend of legacy iPhone sales increasing over the holiday season. Since the iPhone 5C essentially functions as Apple’s “legacy” iPhone, the analyst expects that iPhone 5C sales will ramp up as the holiday shopping season progresses.

Here’s how Apple has traded over the past five trading sessions.

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