updated 10:15 am EDT, Wed October 5, 2011
Apple may be holding onto profit margins
The announcement of the iPhone 4S is a good thing overall, even if yesterday's event was somewhat disappointing, analysts suggest. Sterne Agee's Shaw Wu remarks that many people were expecting an iPhone 5 with a larger screen and thinner shape. Needham's Charlie Wolf, by contrast, concentrates on the absence of an expected "iPhone Lite," even if Apple did drop the prices of older hardware. UBM TechInsights' VP of technical intelligence, David Carey, describes the 4S as a "modest technology bump," equivalent to the transition from the iPhone 3G to the 3GS.
He argues though that "the software experience" -- made possible by "good-enough" hardware -- is ultimately what people care about. In general the analysts note that the 4S is still a significant upgrade, including an A5 processor, an 8 megapixel camera and other perks like the Siri voice assistant technology. Apple should also benefit from the addition of Sprint and KDDI as carriers, plus iCloud and the arrival of iOS 5.
"The initial negative reaction to iPhone 4S reminds us of the launch of iPhone 4," says Wu. "We want to remind people that very few (if any) predicted the iPhone 4 would be successful. It had a rocky start in June 2010 with widespread press coverage on its controversial antenna design. But it turned out these concerns were overblown and misplaced as iPhone 4 went on to be the best-selling iPhone by a wide margin."
Carey mentions that Apple is probably holding onto the same "healthy" profit margins it achieved with earlier iPhone releases. The 4S' bill of materials is estimated to be the same as for the 4 at launch, roughly $203 for a 32GB device. This assumes a $26 pricetag for the A5 processor and $31 for a Retina display.
"While iPhone 4S may be seen as a mild disappointment by investors as it retains the form factor of iPhone 4, we believe the model features several important hardware upgrades," summarizes Canaccord Genuity analyst Mike Walkley. "Further, we believe compelling new capabilities in iOS 5 and iCloud will generate strong sales of iPhone 4S and increased iOS ecosystem stickiness to generate future recurring device sales." Walkley has raised his 2011 EPS estimate from $27.29 to $27.77, and a 2012 EPS forecast from $32.13 to $32.24.