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Google Inc (GOOG), Apple Inc. (AAPL): ‘Low-Cost’ is a Relative Term

I would be shocked if it doesn’t work. So far, Google Inc (NASDAQ:GOOG)’s purchase of Motorola has looked like a failure — last quarter, the unit lost Google $342 million and contributed to the search giant missing earnings estimates — but the Moto X should be a winner, and that could bring Motorola back to profitability.

If the Motorola division was to go from being $342 million in the hole to breakeven, it would increase Google Inc (NASDAQ:GOOG)’s earnings by about 10%. Apple’s iPhone 5C could also sell well, but it isn’t clear if that would be to Apple’s benefit. If it cannibalizes the sales of the more expensive iPhone, it will pressure Apple’s margins.

Investing around the budget iPhone

While it seems pretty clear that a budget iPhone is coming, questions still remain. First, how expensive will the phone actually be? Will it be cheap enough to appeal to consumers in the emerging market, or will it strictly serve as a slightly less expensive alternative to the full-cost iPhone?

If it is the former, investors shouldn’t expect the phone to add much to Apple’s bottom line. Rival Samsung sells its budget phones near-cost, with little profit margin. If it is the latter, it could actually hurt Apple’s earnings in the near-term. Cannibalization from consumers eager for a brightly colored iPhone will weigh on Apple’s gross margins.

Either way, investors shouldn’t expect the cheap iPhone to boost Apple’s earnings. While it may make sense longer-term (it could be crucial to defending Apple’s market share), investors shouldn’t expect the budget iPhone to be a short-term catalyst.

The article 2 Key Questions About Apple’s Cheap iPhone originally appeared on and is written by Sam Mattera.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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