iPhone 5c

Apple (AAPL) was widely rumored to come out with an iPhone version which would cater to the middle segment of the smartphone market if not the lower end. This would greatly enhance the company’s TAM as it would allow millions of users in emerging markets to buy Apple products, as the current lineup is simply unaffordable for a majority of developing market consumers. However, Apple came out with iPhone 5C which was just $100 below that of its flagship iPhone 5S version. At around ~$650 (Indian price), iPhone 5C made no sense in terms of positing. The phone was another premium smartphone which was out of the reach of the aspirations of low income consumers. Even spending $300 is a bit of stretch for most smartphone buyers in India and China. The iPhone 5C is a big strategic mistake on the part of Apple’s management team. This was the first time that they came out with 2 versions of the iPhone and they made a complete mess. In comparison, the iPad mini or the iPod Nano had been as successful as the mainstream tablet and music players from Apple. While the iPhone 5S continues to sell well, iPhone 5C sales have been far below expectations and in some markets it is already being discounted. While Apple’s stock price has not been hurt by the iPhone 5C mistake, I would recommend investors to avoid the stock given the lack of innovations and mistakes being made by Apple’s top management.

iPhone 5C Positioning – Neither Here nor There

I have failed to understand the positioning of iPhone 5C and I think that the market too is confused. It is not a cheap smartphone for people who cannot afford the iPhone 5S. People who can afford to pay $650 for an iPhone 5C can also easily pay $750 for iPhone 5S. Apple continues to lose marketshare in the overall smartphone market, as it does not have a product in the fastest growing mid to low end segments. Apple also does not have a product for the large screen size “phablet” segment which has become extremely popular in places like India and China. Samsung is criticized heavily for being a follower rather than a leader in technology, but the company should be credited for the fact that it created an entirely new product category. iPhone 5C also does not seem to be targeted at a specific demographic segment (for example the youth segment), as I have not seen any preference of iPhone 5C over iPhone 5S in any segment. A lot of Apple buying takes place due to the fact that it is seen as a status symbol. So very few people would want to buy a lower priced Apple product (that too when the difference is just $100). A product generally sells either because of cost or differentiation. iPhone 5C does not fall in either category and that was apparent to me from Day One. Now market data is also proving that fact.

iPhone 5C Sales are far below expectations as Foxconn to follow Pegatron in Lowering Production

There has been a lot of anecdotal evidence that iPhone 5C sales have been quite lackluster with unsold inventory piling up even as iPhone 5S is sold out. There is also a report on DigiTimes that Apple is now sharply cutting down its iPhone 5C orders. Both Pegatron and Foxconn have been told down to lower their production of iPhone 5C as the sales have been below expectations.

iPhone 5C is being Discounted while iPhone 5S is not

One of the biggest indicators for bad smartphone sales is the “discounting” of the phone through exchange offers by the company. I could make out very early that BB 10 phones were not doing well when the company came out with an exchange offer for the smartphones. The company management said it was a promotional offer by American Express (AMEX) but it later turned out that Q10 and Z10 sales were doing poorly. Apple has started an exchange offer for iPhone 5C which is surprising when you consider that it has been less than a month since the iPhone 5C (~Rs 42,000) was launched in India. More tellingly, the iPhone 5S which is a much higher priced phone (Rs ~55,000) is not being discounted through an exchange offer. It is quite apparent that Apple is finding it hard to push iPhone 5C sales and is using exchange offers to lower the inventory.

Apple’s Stock Price and Valuation

Apple’s stock has been pretty stable in the $500-550 level in the last one month, after falling as low as ~$390 since it reported its C1Q13 results. The biggest share buyback in history and the increased dividend yield has set a floor for the stock. Apple’s stock is not expensive with a forward P/E of just ~10.4x. While the stock may not look expensive on conventional measures, the earnings can quickly evaporate in extremely competitive technology sectors. I do not think that Apple has a lot of upside left, given its current strategy and performance while the danger of a Nokia (NOK) or Blackberry (BBRY) type of outcome is not immaterial.

AAPL Total Return Price data by YCharts

Summary

The performance of Apple’s top management after Steve Jobs has not been very good. They have made quite a few mistakes such as the maps mistake. The company is also not leading in terms of new product introductions or innovations. All the new products released in 2014 are mostly incremental versions of previous products. The company’s growth in both revenues and margins has started to decline and competitors are closing the gap in terms of software and hardware. I do not think that the stock has much upside left, given its currently high market valuation and limited growth. While the valuation is not challenging, the low P/E can be an illusion in the technology industry as we saw with Nokia and BlackBerry. Apple does not launch many products like Samsung (SSNLF) or other smartphone makers. Out of the 2 smartphone products it has launched this year, one is a disaster. This makes it a big error in my view. I would avoid Apple’s stock and look for better prospects.