UBS’s Steve Milunovich has reiterated a Buy rating on Apple (AAPL) shares, with a $500 price target, “writing that the company must respond to a maturing smartphone market by perhaps taking share, going for value shoppers, or just branching out into other categories,” Tiernan Ray reports for Barron’s.
A maturing market is problematic for Apple, not only in terms of available growth but potentially for its integrated strategy… If the high end is slowing, the obvious answer is to head to lower price points. Although analysts are anxious for Apple to broaden the iPhone line, we think the company has to be careful. Its brand cannot afford significant quality dilution— short-term gain could result in long-term pain. Management is very aware of the risk as reflected by Tim Cook’s comment that Apple is about making the best products rather than the most. If Apple wanted to go really low end, the right way to do it would be to set up a separate brand and perhaps even a wholly- owned subsidiary. But we don’t expect Apple to veer from its current strategy. The expected “low-end” iPhone probably won’t be priced below $350-400. Even at that level the gross margin could be near 30% and become an example of the company’s occasional willingness to accept lower margins to penetrate a market, as CFO Peter Oppenheimer said recently. — UBS analyst Steve Milunovich
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