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

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

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.

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.

Posted in: Apple, Cheaper, Gene Munster, iPhone, Lower-cost, Piper Jaffray

• What a sell-side Apple analyst thinks the buy side is thinking

  The expectations of institutions that sell and those that buy are two different things.

  FORTUNE -- In a note to clients issued Monday afternoon, 24 hours before Apple (AAPL) is scheduled to release its earnings for the March quarter, Piper Jaffray's Gene Munster talked about something we don't hear much about: The so-called buy side.

  Buy side is Wall Street jargon for those investing institutions such as mutual funds, pension funds and insurance MORE

  Philip Elmer-DeWitt - Apr 22, 2013 7:17 PM ET
  Posted in: Apple, Buy side, Gene Munster, GM, Gross margin, iPhone, Piper Jaffray, Quarterly earnings, Sell side

• 48% of U.S. teens own an iPhone. 62% plan to buy one.

  23% are looking to buy an Android phone, up from 22% last fall.

  FORTUNE -- The results of Piper Jaffray's 25th bi-annual teen survey came in Tuesday afternoon. Once again, it showed Apple (AAPL) to be the most desired brand among American teenagers who care about things like smartphones and tablets, although Google's (GOOG) Android did make some gains.

  The key findings:

  91% of teens say they plan to buy a smartphone for MORE

  Philip Elmer-DeWitt - Apr 9, 2013 5:22 PM ET
  Posted in: Android, Apple, Google, Piper Jaffray, Teen survey, Teenagers

• By 5 to 1, Apple's iPhone 5 out-tweeted Samsung's Galaxy S4

  Ironically, the Galaxy tweets had more "positive bias" than the iPhone's

  FORTUNE -- Is Twitter the new measure of commercial buzz? Piper Jaffray's Gene Munster seems to think so.

  In a note to clients issued Wednesday he offers as evidence that Apple's (AAPL) smartphone "holds more mass appeal with consumers" the fact that there were five times as many tweets (2.4 million) about the iPhone 5 on the day of and the day MORE

  Philip Elmer-DeWitt - Mar 27, 2013 5:22 PM ET
  Posted in: Apple, Galaxy S4, Gene Munster, iPhone 5, Piper Jaffray, Samsung

• A long-time Apple bull tries to lower investors' expectations

  Piper Jaffray's Gene Munster says growth may not return until the back half of 2013

  FORTUNE -- In February, Gene Munster predicted that Apple (AAPL) would get a boost this quarter from product announcements in March or April.

  With March almost over and the quarter ending on Saturday, Piper Jaffray's senior Apple analyst issued a note to clients Tuesday warning that the company will have to get through a dry patch before MORE

  Philip Elmer-DeWitt - Mar 26, 2013 6:43 AM ET
  Posted in: Apple, Gene Munster, Gross margin, iPhone, Mac, Piper Jaffray, Revenue

• In Piper Jaffray re-test, Siri raises her grade from a D to a C

  In a quiet room, the latest version understood 91% of questions, correctly answered 77%

  FORTUNE -- Siri is a little like the weather. Everybody complains about it, but only Piper Jaffray's Gene Munster seems to do anything.

  In June he put the iOS 5 version of Apple's (AAPL) voice-activated personal assistant to the test -- asking her 1,600 questions, 800 in the streets of Minneapolis and 800 in a quiet room.

  The results MORE

  Philip Elmer-DeWitt - Dec 20, 2012 9:05 AM ET
  Posted in: Apple, Gene Munster, Google, Google Now, Piper Jaffray, Siri

• A guide to Apple's guidance

  Over the past 8 quarters, it beat its EPS estimate by 42%, revenue by 18%

  FORTUNE -- When it reports its results for the March quarter this afternoon, Apple (AAPL) will also release forward-looking statements about the June quarter in the form of three numbers: its guidance for revenue, earnings and gross margin.

  The numbers Apple issues tend to be laughably conservative; the company always prefers to under- rather than over-promise. Nonetheless its MORE

  Philip Elmer-DeWitt - Apr 24, 2012 8:15 AM ET
  Posted in: Apple, Bernstein, EPS, Gene Munster, Guidance, Piper Jaffray, Quarterly earnings, Revenue, Siddarth Dalal, Toni Sacconaghi

• Tell me again. Why do we think Apple will make a TV set?

  After four years of speculation there's still not a shred of hard evidence

  A lot of analysts talk about Apple's (AAPL) plans to make a television -- an actual TV set, not just a set-top box -- but last week, Jefferies' Peter Misek did something most have been careful not to do.

  Citing "increased confidence" that Apple's iTV is coming, he wrote into his published forecasts the revenue from its sales: 2 million MORE

  Philip Elmer-DeWitt - Apr 17, 2012 4:30 PM ET
  Posted in: Apple, Apple TV, Bloomberg Businessweek, Foxconn, Gene Munster, Hon Hai, iPad, iPanel, iPhone, iTV, Marco Arment, Peter Misek, Piper Jaffray, Sharp, Steve Jobs

• Teen survey: 34% own an iPhone, 40% want one

  Apple is the favorite -- once again -- in Piper Jaffray's 23rd semi-annual teen survey

  "The bottom line," writes Gene Munster in a note summarizing the results of Piper Jaffray's latest survey of the aspirations of American teenagers, "is that 40% of students plan on buying an iPhone in the next 6 months while 19% of non-tablet owners plan on purchasing a tablet in the next 6 months."

  Wishes, of course, can't MORE

  Philip Elmer-DeWitt - Apr 3, 2012 5:52 PM ET
  Posted in: Amazon, Android, Apple, Gene Munster, Google, iPad, iPhone, Kindle Fire, Mobile, Piper Jaffray, Tablets, Teen survey, teens

• Munster: How Apple becomes the first $1 trillion company

  Its market cap today is $577 billion. Where do the next $400-plus billion come from? 

  In a note to clients issued early Tuesday, Piper Jaffray's Gene Munster raised his Q2 iPhone estimate (to 33 million), set a new 12-month price target ($910 per share) and -- most provocatively -- laid out a roadmap for Apple's (AAPL) market capitalization to go from $576.79 billion as of Monday's close to $1 trillion by MORE

  Philip Elmer-DeWitt - Apr 3, 2012 7:06 AM ET
  Posted in: Apple, Dell, Gene Munster, Hewlett-Packard, HP, Market Cap, Market capitalization, Microsoft, Nokia, Piper Jaffray, RIM, Sony