Low-cost “iPhone M” expected to outsell iPhone 5S next year

An UBS analyst said in a note to investors that the upcoming low-cost iPhone will outsell the new flagship iOS smartphone next-year, although it may not be as profitable for the company as its more expensive brother. Interestingly, the device is expected to launch this quarter.
Analyzing Apple’s future, Steve Milunovich looked at the company’s various mobile products including the iPhone, iPad and iPod, reiterating a “Buy” ratting for Apple stock with a price target of $500.
However, Milunovich cut estimates for next year, saying that the iPad and “iPhone M” may have a negative effect on Apple’s profits. Milunovich expects for Apple’s fiscal year 2014 a $179.9 billion and $42.29 per share net profit, and a gross margin of 36.6%, down from $185.1 billion and $43.36 per share.
Milunovich refers to the low-cost iPhone as the “iPhone M” – various reports seem to believe that the phone will be sold as the iPhone 5C – while the high-end seventh-generation iPhone is called iPhone 5S.
According to the analyst, the iPhone M will have tremendous success with the public, selling anywhere from 92-99 million units in Apple’s fiscal year 2014 – Apple’s new fiscal years start in October of each year.
iPhone M will account for 53% of sales next year, and they’ll make up for 3% of iPhone sales this year – thus, the analyst is also suggesting the new low-cost iPhone may be arriving before the September quarter ends, which is Apple’s fourth quarter in fiscal year 2013.
However, the analyst notes that these are just estimates for the handset, and it’s not yet clear how it will impact Apple’s business. Milunovich expected the iPhone M to cost $379, but to only offer Apple a gross margin of around 32% compared to the 55% gross margin of the iPhone 4/4S, which the iPhone M would replace:
“Because the M has such a lower gross margin than the 4/4S, the M reduces earnings in our model. iPhone gross profit declines by 4% or $1.6bn with the iPhone 5/5S profit up $4.9bn and the 4/4S/M profit down $6.5bn. The net iPhone impact is a reduction to F14E EPS of $1.16.”
He further explains that at 92 million iPhone M units sold, Apple’s profit would be diminished, while at 99 million “the gross profit impact would be neutral.”
Milunovich’s report also looks at iPad and iPod sales, with the analyst concluding that growth is slowing for both devices when compared to the iPhone.
The analyst says that the iPad growth will be lower than of the iPhone, explaining that, surprisingly, the whole tablet market is growing slower than expected. Even so, Apple is expected to sell 84 million iPad units next year, and 74 million this year – the Street expects the company to sell 87 million tablets next year.
However, the launch of new iPad models may affect the growth of the tablet:
“With two new tablets anticipated over the next few quarters, perhaps the iPad is in a lull and will jump to a higher unit plateau as seasonality proves more important than saturation. Our view is that the iPad is being accepted faster but likely will not be as important as the iPhone over time. This story could play out in other new categories Apple proposes—a fairly fast benefit with rapid acceptance but a shorter half-life of earnings impact.”
Milunovich sees Samsung and Lenovo as the main tablet rivals for Apple next year.
Overall, the analyst says that the tablet market will increase to 235 million (2014), 301 million (2014) and $367 million (2015).
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