Wedbush: Apple must lose its ‘pricing hubris’

From a note to clients by analyst Daniel Ives that landed on my desktop Wednesday:

While the stock will be range bound, in our opinion, until Apple reports its final FY1Q (Dec) results on January 29 after the bell, all eyes will be on March guidance as the key swing factor for shares in the near term.

Taking a step back, US/China tensions have not helped Apple’s demand story in the field for its latest iPhone XS/XR product cycle, but to be crystal clear, we believe the primary driver of Apple’s demand doldrums come down to a mispriced smartphone with XR as the culprit in China and elongated upgrade activity within its installed base a clear headwind…

We continue to believe the services business, poised to exceed $50 billion in FY20, will be the ultimate driver for the next phase of the Apple growth story set to take hold over the coming years with 190 million to 200 million iPhones shipping in both FY19 and FY20 based on our new estimates.

In a nutshell, better execution, a more innovative product strategy, larger M&A around content/more services, and losing pricing hubris (e.g., $750 XR device) will need to take place in Cupertino with Cook’s chess moves over the coming months laying the groundwork to help get Apple out of its darkest chapter in the modern iPhone era.

Maintains Outperform rating and $200 price target. 

My take: It will take more than three metaphors in a nutshell to spice up analysis this bland.

6 Comments

  1. Robert Paul Leitao said:

    The iPhone upgrade cycle has elongated but it hasn’t stopped. Although the iPhone’s ASP rose last year, the percentage of recognized revenue that flowed to the gross margin lined declined slightly in FY2018. This suggests Apple is pricing the iPhone X series commensurate with the higher costs of design, engineering and production. Apple must innovate and innovation is expensive.

    There’s a greater cost to the lack of innovation in the form of reduced customer satisfaction than there is in the elongation of the iPhone upgrade cycle due in part to higher prices. Slowing the pace of innovation for the sake of lower prices would cost more in the form of lost customers than would be gained from reducing prices.

    The pre-owned iPhone market is growing at a double-digit rate. There’s no reason for Apple to compete against itself if the desired goal is expanding the global user base. Higher pre-owned iPhone prices supports new iPhone prices. Lowering prices on new iPhones would become a zero-sum game for the company.

    2
    January 9, 2019
  2. Fred Stein said:

    Are Apple’s prices too high because they bundle lifetime SW support? Lifetime SW support is easily worth 20% or even 40% depending on how long customers keep their phones.

    Many people would opt out if support were unbundled. This would reduce customer loyalty, hurt the brand, and likely lower effective ASPs. Conundrum.

    The dilemma is worse considering Qualcomm’s licensing, which in effect asks Apple to pay Qualcomm a % of Apple’s bundled SW support. Ugh !

    1
    January 9, 2019

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