ASP of iPhone at an All-time Low – Is Apple Ready for a Price War?

Technical Analysis by Rajiv Singh

Apple (NASDAQ: AAPL) Profit Margins Shrink; Record 33.8 million iPhones Sold in Q4

Apple Inc. (NASDAQ: APPL) announced strong revenue growth of $37.5 billion in Q4 as compared to $36 billion in the year-ago quarter, beating the company’s guidance of $34-37 billion revenue for the quarter. However, profits declined to $7.5 billion in Q4, or $8.26 per diluted share, compared to profit of $8.2 billion, or $8.67 per diluted share in the year-ago period, mostly attributed to higher research and development (R&D) costs.

Apple’s Quarterly EPS Trends


Increased Focus on Emerging Markets – Higher Revenue from International Markets

Apple’s international revenue growth has been a positive takeaway from its earnings. In the quarter ended September 2013, Apple’s non-US sales accounted for 62.8% of total sales as compared to 59.2% in Q3 2013, mainly due to Apple’s increased focus on Greater China and Japan. Apple has reported a 24% and 31% rise in revenue from Greater China and Japan, respectively, as compared to the previous quarter. Apple’s deal with NTT DoCoMo and talks with China Mobile is seen as a strategy to target the emerging markets going forward.

Shrinking Margins – A Growing Concern

A major disappointment for Apple was its falling gross profit margins, which is currently at 37%, down from 40% in the year-ago period, but in line with analysts’ average of 36.9%. The fall in margins is mainly attributed to the lower average selling price (ASP) and higher R&D expenses. Apple has been facing intense competition and steadily losing market share to Samsung’s Galaxy Tab, Microsoft’s Surface, as well as low-cost devices from Huawei and Lenovo, which is making Apple to reconsider its pricing strategy time and again.

The chart below clearly indicates Apple’s highest Q4 revenue ever; however, shrinking margins has diluted the effect to a great extent.

Apple’s Revenue vs. Gross Margins

Source: Bloomberg
Source: Bloomberg

Record Sales – Apple Sold 26% more iPhones year-over-year

During Q4, Apple sold as many as 33.8 million iPhones, a record for the September quarter and 26% higher as compared to 26.9 million in the year-ago quarter. Apple also sold 14.1 million iPads compared to 14 million in the year-ago quarter, and 4.6 million Macs, compared to 4.9 million in the year-ago quarter. Sales were mainly propelled by the 5S and 5C launches. Earlier this month, The Wall Street Journal reported that Apple had cut 5C orders while increasing 5S orders. This could work in Apple’s favor since the 5S is priced higher and could carry higher profit margins

Apple’s iPhone Sales and Y/Y % Sales Growth

Source: Apple
Source: Apple

Lower ASP – Does Apple see a Value in Low-end Handsets?

The ASP of iPhone and iPad slipped lower than the previous quarter as shown below. For its flagship product iPhone, ASP slipped to $577 in Q4 2013, from $581 in Q3 2013, and from $608 in Q4 2012. This implies that Apple is selling more lower-end handsets than ever before and definitely sees a lot of opportunity in the low-end mobile devices market.Apple has recently reduced the prices of a few of its flagship products and is offering free upgrades of the OS X Maverick. These developments are aimed at increasing Apple’s competitiveness, thereby helping it to retain its existing customers.

Apple Revenue per Device (in $)


Capital Returns Program

Apple generated $9.9 billion in cash flow from operations and returned an additional $7.8 billion in cash to shareholders through dividends and share repurchases during Q4, bringing cumulative payments under the capital returns program to $36 billion. Apple’s Board of Directors has declared a cash dividend of $3.05 per share of the company’s common stock payable on 14 November 2013, with the record date of 11 November 2013.

Going Ahead- Q1 2014 Guidance

As per the company’s guidance, Apple expects Q1 2014 sales of $55-58 billion as compared to consensus estimates of $55.6 billion. The company is targeting gross margins of 36.5-37.5% with operating expenses of $4.4-4.5 billion.

WSA on Apple Inc.

Looking ahead, investors are expecting that the two newly released iPad models, the iPad Air and iPad Mini tablets, along with new MacBook Pros, the radical new Mac Pro, OS X Mavericks and the next generation iWork and iLife apps for OS X and iOS will rekindle Apple’s growth amidst a tough economic scenario. With a slowdown in growth, there may not be much of a short-term upside for Apple shares. We recommend investors to wait for corrections post earnings and go long on Apple at the level of $500. Our price target for Apple based on FY 2014 earnings projections is $609.

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