Wall Street is a curious bunch. Apple shares dropped by five percent Wednesday morning after analysts piled on with disappointment over the iPhone 5c.
Expecting an inexpensive smartphone costing $400 without a contract, Apple instead unveiled a device priced at $549 unsubsidized.
The departure from the expected script caused some industry observers to downgrade Apple’s shares, citing worries the iPhone maker may have shot itself in the foot when it comes to inexpensive Android alternatives selling in places like China…
But are analysts being nervous Nellies, unable to see the forest from the trees? There may be more to Apple’s Tuesday announcement, bringing some concerned investors off the ledge. A good place to start: injecting just a wee bit of rational thought into the overnight panic.
At $549, the contract-free iPhone 5c is just $100 less than $649 unsubsidized price tag for the flagship iPhone 5s, also announced Tuesday. Bank of America, UBS, Credit Suisse and others started today by downgrading (via CNN Money) Apple to “neutral,” sending the company’s stock down after opening at almost 468. By just after noon, shares were trading at 465.36.
All of which follows the investing maxim: buy on the rumor and sell on the news.
The rumor that Apple would unveil a cheap iPhone had fueled stock purchases. But once reality set in and Wall Street learned Apple wasn’t ready to slit its throat when it came to profit margins, people began selling the news.
Now comes a chorus of Wall Street prognosticators acting like children disappointed their dreams of some Christmas in China didn’t come true. For example, Goldman Sachs analyst Bill Shope (via Fortune) put it this way: “…Pricing for the 5c was a key disappointment…” “The ‘low-end’ 5c was nowhere to be found…,” remarked Timothy Arcuri of Cowen.
Lost somewhere in the disappointment that the device labeled the iPhone 5c was not low-cost, was Apple’s announcement that the iPhone 4s was now free. Free probably qualifies as low-cost, the only difference is the name of the device. Analysts wanted the cheap iPhone to be the iPhone 5c, not the iPhone 4s.
While many commented that the iPhone 5c was simply a marketing gimmick – having the guts of an iPhone 5 wrapped in a colorful plastic shell – the handset may in the end be Apple’s way to enter the inexpensive market at its own pace.
Gene Munster, the Piper Jaffray analyst who’s become an old hand at Apple-watching, took note of the intriguing possibility.
“The fact is, Apple doesn’t know what demand for the iPhone 5c will be in developing markets,” Munster told investors (via Fortune.)
In other words, rather than sell a cheap iPhone that erodes its profit margin, Apple opts to initially set a higher price that can be adjusted downward (always easier than trying the reverse) as time goes on.