The Apple bears underestimate brand

29 Apr 2014

A wonderful piece last Friday by SeekingAlpha’s Casual Analyst, who explains why the iPhone continues to soar and Apple’s share price isn’t over valued. What the critics (including myself) fail to recognize is the power of brand.

The Casual Analyst shares some human psychology: “When a brand becomes a cult or a religion, facts do not matter.

The fact that there are much less expensive, “comparable” alternatives (some with better specs) is irrelevant to most iPhone buyers. Formulating an argument of why iPhone sales have peaked based on logic is where the critics go wrong.

While the globally average selling price of smartphones dropped 13% last year -- and is heading toward just $265 by 2017 – demand for pricey iPhones hasn’t slowed. Yes, the average price of an iPhone did fall $41 in the last quarter (due to some extent to the popularity of the 4S in developing markets), but the 4S sells for $450 vs an average selling price of $262 for smartphones in Asia. That’s almost a $200 premium for its cheapest model. And a $41 decline won’t significantly dent its industry-leading 50% gross margin on iPhones, which is triple Samsung’s.

Given the cult-like following of the iPhone brand, the Casual Analyst sees limited downside on Apple’s shares. Smartphone prices may continue to fall sharply over the next few years, but don’t underestimate the Apple’s ability to charge a steep premium over Android models and all the rest. And as prices of smartphones drop overall, that just means the iPhone become more affordable to more people.

The outlook for the iPhone and Apple in the short-term is bright. The Casual Analyst noted that consumers give market leaders the benefit of the doubt for one or two product release generations – so Apple doesn’t need to hit a homerun with each iPhone launch. The last in September was underwhelming, but the company can afford it disappoint again this year without seriously damaging its brand.

Looking at Apple’s previous track record, it’s unlikely it will strike out two times, much less three.

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