Apple Inc.’s (AAPL) stock is trading near an all-time high but could go even higher if it rolls out a cheaper iPhone model. That’s according to Trefis, a platform created by a team of MIT engineers and Wall Street analysts to help investors understand how companies' products affect share prices, which argued in a research report that shares can jump 20% with the launch of an iPhone that goes after the lower end of the market. Trefis said the fair value for Apple’s stock could be near $215 a share if it expanded the markets its iPhone was in.
Earlier this week, Bloomberg reported the Cupertino, California, smartphone maker is gearing up to launch three new iPhones including a larger iPhone X, an updated iPhone X and a less expensive one that will include some of the features found in its latest device. The move, reported Bloomberg, is prompted by less-than-expected demand for the current iPhone X.
Unlocking Value With Lower Prices?
“Apple shares are currently trading around an all-time high figure of $180. We believe that the current stock price represents the fair value for Apple’s shares,” wrote Trefis in the research report. “However, the tech giant could potentially unlock a sizable amount of value for investors by introducing a cheaper version of the iPhone to target other segments of the rapidly growing smartphone market.”
According to Trefis, Apple’s exclusive focus on the high end has helped it maintain high profit margins, but in order to compete better against rival Samsung Electronics (SSNLF), Trefis thinks it should expand its market focus. “More importantly, the more iPhones Apple manages to get into users’ hands, the more revenues it can generate through its closed ecosystem—a benefit none of its rivals have,” wrote Trefis. It thinks Apple’s iPhone sales could reach 300 million a year, up from 232 million, if it unveils a “meaningfully cheaper” iPhone. (See also: 3 Reasons Why Apple's Shares Will Outperform.)
While Trefis acknowledged the cheaper iPhone would impact the average sales price for its devices, the more users it has the more people will use its other products and accessories, and that should drive Apple services revenue higher. It should also offset any negative impact to Apple’s gross margins. Apple Services have high margins as does the companies other hardware products including the HomePod, Apple’s new smart speaker, Trefis noted. The HomePod, for example, has margins of more than 30%, Trefis wrote. The firm thinks the introduction of a lower-end iPhone will bring average selling prices down to $630 from $765 but that overall margins will go to 23% from 21.6%.