Apple 2.0

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How much damage a cheaper iPhone does to Apple's profit margins

May 10, 2013: 7:16 AM ET

Fears of 30% by 2015 are overblown, says Gene Munster, but he's lowering his target.

Source: Piper Jaffray. Click to enlarge.

Source: Piper Jaffray. Click to enlarge.

FORTUNE -- So confident are analysts that Apple (AAPL) is getting ready to launch a lower-cost iPhone that some have started building the new device -- which none have ever seen -- into spreadsheets like the one at right issued Thursday by Piper Jaffray's Gene Munster.

What these analysts are not so sure about is what kind of damage a cheaper (and presumably lower-margin) iPhone would do to the product's enviably high gross margin -- currently about 55%. The fear on the Street, according to Munster, is that Apple's overall gross margin could fall from its record high of 47.4% in March 2012 to 30% by 2015.

That fear, he says, is "overblown." If he tries really hard he can imagine a scenario where profit margins come down to 32% by 2015. But that, he writes, "would require a nuclear meltdown in Apple's model including 50% cannibalization of the regular iPhone from the cheaper iPhone, a 15% margin on the cheaper phone, and a 10% margin on the TV."

That last item -- the TV -- is another product no analyst has ever seen, and Munster shows enough forbearance not to include it in his financial model for the company.

Screen Shot 2013-05-10 at 6.43.54 AM

Click to enlarge.

But his new spreadsheet does include the first two "nuclear meltdown" assumptions -- a 50% drop in regular iPhone sales and a 15% margin on the cheaper ones -- and when he crunches the numbers it spits out the two sets of highlighted results in the chart at right: GM and EPS of 35.8% and $46.77, respectively, in fiscal 2014, going to 33.9% and $54.48 in 2015.

Sticking with his assumption that Apple should trade with a P/E of 14, Munster is forced to reduce his 12-month price target to $655 from $688.

Apple closed Thursday at $456.77 with a forward P/E of 10.36.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for

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