Echler Solomon Feng
Jan 05, 2019

A Cheaper iPhone for Apple

The markets shuddered, and the tech sector stumbled, as Apple stock sank nearly 10% last Thursday after Tim Cook told investors it was cutting its forecast for the first quarter of 2019.

Putting the blame on weak iPhone sales and a slowing Chinese economy, shares of Apple fell sharply last Thursday closing at US$142.19 per share, the lowest since July 2017. At this rate, the stock has already lost close to US$452 Billion in market capitalization in just three months – this coming from a 52-week high of US$233.47 per share reached last Oct 3. With a loss that outsizes Facebook’s total market value, Apple is now pegged at around US$674 Million, after reaching – and being the first US company to achieve the US$1Trillion level last year.

In a letter to investors last Wednesday evening, the company finally confirmed what investors have feared for months – that iPhone sales were in a slump, and the company now expects that it will miss its own revenue target by at least US$4Billion to US$84Bn from its original US$89 –93 Billion– the first downgrade in 16 years.

As most disappointments are married with excuses, Apple was quick to provide reasons for not meeting expectations: from a strong dollar, supply constraints, and fewer smartphone subsidies from wireless carriers. But the primary reason given by Apple CEO Tim Cook was that iPhone did not sell well in China during the holiday season was that the Chinese economy was not as buoyant as it has been. For this, we think Apple not only missed its revenue target, but Cook also skipped over the crucial reasons why it did not do well.

The main competitors, namely Huawei, Vivo, and Oppo did very well in China during the said holiday quarter. The problem: pricey iPhones!

Amid this fallout, analysts are quick to point blame on the firm’s pricing strategy – which has seen iPhones balloon up to US$1,499 each for contributing to iPhone’s fall. Apple wants to brand itself as a luxury item (hence the pricey aspirational appeal) yet at the same time wants to gain market share thru mass adoption. You can’t do both – not in China. Either you are an expensive luxury item, or you are a widely embraced cheap smartphone handset.

Huawei, Oppo, and Vivo very well understand this about the China market- with handsets that cost between US$60 and US$100. If iPhones prices are eye-watering for Americans, they are even more unpalatable abroad. As an example, an iPhone XS costs 8,400 Chinese Yuan or US$1,220 for a device that retails in the US at US$999.

As Nicolas Baratte and Cherry Ma, analysts at the Hong-Kong based CLSA wrote in their investment notes last Friday, “While Tim Cook blamed a slowing China economy and trade tension, we maintain our opinion that the iPhone’s average selling price is the biggest hurdle given the uninspiring specs and rising competition in China and Europe.

It is, in fact, a simple solution for Apple: market iPhones at lower prices to increase sales. It is also basic economics that people will buy more apps and accessories for their iPhone as the prices go down.

Meanwhile Apple’s largest shareholder, Berkshire Hathaway must now be either salivating at the prospect of being able to buy one of its favorite stocks at a massive discount to the prices it had recently been paying; or else worrying as to the billions in write-downs it will be compelled to make on its overall average purchase cost.

It will be fascinating to see how the Oracle of Omaha, Warren Buffet, will comment on the most substantial loss [on paper/unrealized] he has ever incurred given his stellar investment career over decades.