Apple's Big iPhone Could Defuse the Samsung Threat

Apple's Big iPhone Could Defuse the Samsung Threat

Apple wasn't the first to build a smaller tablet, but when it finally released its iPad Mini, it was an overnight hit. Unfortunately due to a lower-than-corporate-average gross margin on these devices, Apple's overall gross margin took a hit -- and stopped Apple's monstrous bull-run right in its tracks.

That being said, there is an important lesson to be taken away from the iPad Mini launch, and it's a simple one: when Apple does something, it does it better than anybody else and sells a lot of that new product. The same principle is very likely to apply to Apple's rumored "big" iPhone, which could turn the tide against Samsung's high-end smartphone efforts and, at the same time, solve Apple's China problem.

Apple still has a China problem
It is very likely that many would-be iPhone buyers have been buying competing "phablet" products simply because Apple doesn't have a hat in the ring today. While the smaller iPhone is well-loved by many users, there are those who simply prefer a bigger phone. Here in the United States, LG, Samsung, HTC, Nokia, and Motorola serve those customers looking for larger phones. Samsung has the largest marketing budget by far and tends to pack a lot of whiz-bang features into its devices, so it snatches up the majority of the market.

The bigger issue is overseas. While Apple's market share in the U.S. is quite high, the same can't be said for, say, China -- one of the largest global markets for smartphones. Here, Samsung is the clear leader with the likes of Lenovo, Coolpad, ZTE, and Huawei on Samsung's tail. Apple is struggling to breach the 5% share mark in China. This is a problem that Tim Cook and his team absolutely need to address as soon as possible.

The big iPhone could kill two birds with one stone
There is little doubt in this Fool's mind that a larger iPhone would allow Apple to capture a non-trivial part of Samsung's high-end smartphone share in the U.S., which makes next year's iPhone launch particularly important. However, the bigger iPhone is probably going to be more instrumental in winning over share overseas, particularly in the Asia-Pacific region where larger phones are what's in.

Apple's ultimate goal shouldn't be to compete on price -- that's a race to the bottom as far as the bottom line goes, and nobody's going to want a crazy top-line growth story with a flat or lower bottom line. What Apple needs to do, however, is to lock down the portions of the high-end handset market that it doesn't already own.

China Mobile deal could really help
It seems that the Apple-China Mobile deal is always just on the verge of happening with each iPhone release -- and yet it still hasn't materialized. China Mobile has a subscriber base of about 700 million users. To put this in perspective, Apple's current subsidy deals with China Unicom and China Telecom combined only give it exposure to about 35% of the Chinese subscriber base. A deal with China Mobile could seriously amp up Apple's top and bottom lines.

It seems likely that if Apple expands its iPhone lineup with a larger phone -- perhaps an iPhone Air? -- and signs a subsidy agreement with China Mobile early in 2014, then all bets are off with respect to current Street estimates. The 7.70% top-line growth expected in 2014 could simply prove to be too low, and the shares would have substantial upside from current levels. Although nothing is certain when it comes to predicting consumer tastes, it's tough to ignore how powerful Apple's brand and products are.

This could defuse the Samsung threat
A larger iPhone is probably enough to make things difficult for Samsung at the high end across the world. But such a phone coupled with a China Mobile deal would help secure the high end while Apple attacks the mainstream segments with iPhone 5c. That could not only do great things for Apple investors, but could lay to rest many of the worries that Samsung will eat Apple's lunch. In this case, Apple would likely be rewarded with a meaningfully higher multiple.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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