Morgan Stanley drops price target for Apple down to $95

Thu, Dec 11, 2008

Analysis, Featured, Finance, News

Morgan Stanley analyst Kathryn Huberty cut her target for Apple’s stock down to $95, five dollars less than her previous target of $100.  She also lowered expected 2009 iPhone sales to 14 million, down from an original projection of 19 million.

First of all, let me go off on a quick tangent here and briefly say, that most analysts are, to be blunt, clueless.  Take the recent brouhaha about a $99 iPhone at Walmart for example.  One day an analyst says that a $99 iPhone is inevitable.  The next day another analyst says that Apple has to release a cheaper iPhone in order to boost sales.  Then word gets out that a $99 iPhone isn’t happening, and other analysts jump in with the benefit of hindsight and boldly declare that a $99 iPhone was never feasible in the first place.

That said, a price target on Apple stock is only as relevant as the analyst releasing it is credible.  And, in the case of Kathryn Huberty, she’s already well-known as being one of the most inconsistent and inaccurate analysts when it comes to Apple.  In the past, she’s underestimated Apple revenue estimates by almost $1 billion, iPhone sales by 700,000 units, and iPod sales by a whopping 2 million units.

And what, exactly, was the cause of Huberty’s latest Apple downgrade?  It’s apparently based upon a survey which indicates weaker consumer interest in the iPhone.  More specifically, the survey found that 46% of prospective iPhone buyers found that even the cheaper $199 iPhone was too expensive.  Whether or not their answers were rooted in the context of current economic conditions, or an inherent belief that $199 for an iPhone is too much is unclear.

Nevertheless, this is, of course, something to take into consideration when projecting iPhone sales. But Huberty reveals her ignorance when she naively suggests that Apple should cut the price of the iPhone in half and sell it for $99 bucks.  She assumes that this would double iPhone sales.

I’m not a stock broker, but this all seems rather elementary to me.  What drives a companies stock price is its earnings.  Doubling iPhone sales without taking into account how a lower priced iPhone would affect profit margins and overall profits seems curiously shortsighted, and oddly ignorant coming from one of Americas foremost brokerage firms.

Analysts like to talk up a $99 iPhone, but fail to take into account the fact that Apple doesn’t operate in a vacuum.  Apple isn’t the only company involved in the sale of iPhones, and it’s no secret that the reason iPhones are as cheap as they are is because AT&T pays a hefty subsidy to Apple for each and every iPhone sold. If Apple cut its prices in half, either AT&T would foot the bill, or Apple would take a hit in its gross margins, two scenarios that each company would never agree to. AT&T, while successful in its goal to lure away customers from competing providers such as Verizon, is suffering some short term financial losses as a result of the heavy subsidy price it pays. There’s no reason to think that it would decide to burden itself even more just so Apple could sell a few more phones. And Apple is a company with a track record of taking its gross margins seriously, and with the iPhone already aggressively priced compared to similar smartphones on the market, there’s no reason why Apple would feel the need to slash prices even further.

Why increase volume by slashing prices by 50% when you can do the same thing by significantly increasing a products distribution channel, as Apple appears to have done with its recent deal with Walmart.


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