GrayingWell

Apple investors bet cheap iPhone can offset China

Innovation to drive Apple's bottom line

Tom Forte, Telsey Advisory Group, believes Apple has opportunity in emerging markets and that the company's innovation will continue to drive profits.

In the meantime, Apple has been offering more affordable pricing in emerging markets in an attempt to boost sales. That's had a negative effect on average selling prices (ASPs). Peter Oppenheimer, Apple's chief financial officer, indicated that ASPs for the iPhone were down $27 year-over-year.

(Read More: Smartphone 'Saturation' Fears for Apple, Samsung)

Gross margins for Apple's third quarter fell to 36.9 percent compared to 42.8 percent in the year-ago quarter.

Meanwhile, Apple's revenues in China, Hong Kong and Taiwan, which compose Greater China, fell 47 percent over the previous quarter and were down 14 percent year-on-year.

But, Benedict Evans of consultancy firm Enders Analysis told CNBC there were several issues surrounding Apple's slump in China, such as weaker economic growth and sales being strong in the previous quarter because of Chinese New Year. In addition, Apple sales in Hong Kong had been affected because the company was now distributing products directly to China and other regional markets, rather than via Hong Kong.

The company has also been boosting distribution in emerging markets, helping it to post a more-than 400 percent sales increase in India. Sales in Turkey and Poland were up over 60 percent and sales in the Philippines were about 140 percent higher.

But Apple, and other smartphone makers, also face a growing threat from low-cost multi-function phones, often called feature phones, that are now capturing a larger share in emerging markets.

(Read More: Apple Faces $65 iPad Rivals in China)

"'Smartphone' is being redefined in developing markets. Increasingly it looks like a sub $100 device that is 'smart' enough. But this is a level Apple finds very hard to play in," Victor Basta, managing director of Magister Advisors, a boutique M&A advisor in the technology field, told CNBC.

"This world will belong to HTC and Huawei and others who can produce stripped-down devices. Apple's greatest fear in the region is that it stays that way even as the economies develop."

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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