Can Apple's New iPhone Answer Margin Calls?

TheStreet.com

NEW YORK (TheStreet) -- Apple's long-awaited "Sept. 10 event" is finally here!

Although the company hasn't officially confirmed the agenda for this affair, it is broadly expected that (among other things) Apple will unveil the new version of its iPhone -- presumably called the 5S.

But wait, there's more!

To compete more effectively with Samsung's hardware and attack Google's Android dominance, a cheaper version of the iPhone, called the iPhone 5C, is also expected to be revealed.

Now, I've always had mixed feelings about this. It's not because I doubt management's ability. Nor am I suggesting that Apple won't turn the iPhone 5C into a ranging success.

Aside from this being "unchartered territory" for Apple, I just haven't seen where management has communicated what the long-term strategy is. You see, Apple's ability to think light-years ahead of the competition has never come into question. That is, until recently. But the Street's reaction to Apple's lack of innovation has been overblown.

Still, I've developed some mixed feelings about the cheaper iPhone. Apple's always been known as a leader. And as an Apple shareholder, I can appreciate that Samsung has done well for itself in the low-end handset category. In fact, this market has catapulted Samsung to the worldwide leader in device sales.

But even with Samsung dominating hardware, it is Apple that's been money in the bank, amassing $150 billion in cash. So, entering the budget category seems reactionary, or playing from behind. It's un-Apple-like.

Essentially, Apple's business model and the company's mission has worked to perfection -- even if it meant what the critics described as "elitist" or "deliberately ignoring some markets." Yet, during that span, what Apple has been able to accomplish has been nothing short of remarkable. So it gives me pause to think that Apple is now a company in transition.

A "budget" iPhone serves as evidence of this changeover. But at what cost?

I say this because, one of the most popular cited bear argument against Apple, aside from its perceived lack of innovation, continues to be the company's compressing margins. It's as if $150 billion suddenly didn't matter.

I won't deny that Apple's operating leverage has lacked flair in its first three reporting periods of the year. But I don't think the company demonstrated underlying struggles in operation -- at least not to the extent they were exaggerated by the Street.

Now with a cheaper iPhone, which is said to come in various colors, I believe Apple is saying "to hell with your margins." The company is now going after market share -- something that Apple has never before cared about.

But is it the right strategy? It's worked for Samsung. But absent strong profitability, I'm not convinced Samsung's investors have benefited, when compared to shareholders of Apple. The idea that Apple may join Samsung doesn't sit well with me.

Again, I'm not saying that Apple won't be profitable. I just don't have enough information to get excited about this launch -- at least not from an investor's point of view. As a consumer, I applaud the decision. But until details are shared about production cost of the 5C and at what price point the phone will be sold, we can only speculate the effects on Apple's margins.

And with details about plastic casings and downgraded features, logic suggests the price can't be too high. I don't know much more than that.

But what I do know is that the iPhone is still Apple's best-selling product. And if rumors are true that Apple will finally land the world's largest carrier in China Mobile and NTT DoCoMo , it will be only a matter of time before Apple reemerge as a solid growth company, while shedding the hybrid/mature giant persona that it resembles today.

The only question that remains to be answered is growth at what cost?

Even with these questions, what is clear is that Apple stock at current levels still seems too cheap to ignore. It's true that Apple's glory days have yet to return. But I'm nonetheless certain that the worst days are in the rear.

Consider that even when adjusting out Apple's $150 billion in cash, and adding in just modest cash-flow projections, the stock still supports a fair value of $525 today. But given the growth projections of these new hardware launches, I'm betting that the stock reaches $650 a share in the next 12 months.

Can the 5C answer that call?

At the time of publication, the author has been long AAPL for several years.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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