Apple lowering iPhone price is prudent

We are maintaining our fair value estimate, shares as overvalued at current levels

Abhinav Davuluri, CFA 11 September, 2019 | 9:31AM

On Sept. 10, Apple (AAPL) held its annual product showcase, where the firm announced the launch of three new iPhone models: the iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max, with the latter two devices featuring an OLED display and the former an LCD screen. We note Apple modified its pricing strategy with the iPhone 11 (the upgraded equivalent to last year’s iPhone XR), starting at a price of US$699, compared with the XR’s starting price tag of US$749. We think the US$50 drop in starting price for the newest least expensive model supports our belief that Apple’s switching costs have a limit, thus meriting a narrow moat rating in our view. In all, we consider the improvements in the iPhone 11 series to be relatively marginal and we suspect many users will opt to wait for a 5G-compatible iPhone in 2020. Thus, we are not forecasting a rebound in iPhone unit sales this year (particularly in China where we believe 5G will be a bigger factor with many Android devices already including 5G modems). All in, we are maintaining our US$200 fair value estimate for Apple, and we view shares as overvalued at current levels.

The iPhone 11 Pro and 11 Pro Max will start at US$999 and US$1,099, respectively, in line with the starting prices of their equivalents from 2018. For all three new models, we think the primary attractions were the new camera systems and improved battery life. The iPhone 11’s dual camera system boasts a wide and ultrawide view camera along with added features such as Night Mode (which we note the Google Pixel has boasted for multiple iterations). The Pro and Pro Max add a third telephoto camera, which brings in 40% more light. The emphasis on camera features is consistent with other Android-based smartphone vendors that have been also adding additional cameras and claiming superiority to Apple devices in the picture quality department.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Apple Inc388.23 USD1.65
Netflix Inc524.88 USD-0.12
The Walt Disney Co118.66 USD2.10

About Author

Abhinav Davuluri, CFA

Abhinav Davuluri, CFA  Abhinav Davuluri is a senior equity analyst for Morningstar.

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