Apple Inc. Faces Its Biggest Challenge Yet

By Markets Fool.com

On Jan. 15, Xiaomi announced the Mi Note Pro smartphone. The phone reportedly features a 5.7-inch IPS display at a 2560-by-1440 resolution, a Qualcomm Snapdragon 810, 4GB of LPDDR4 memory, and a whole host of other goodies. On paper, it looks to be one of the most impressive smartphone designs that I have seen yet. Yet Xiaomi is selling it for the equivalent of $515 -- well under what Apple charges for even its cheapest iPhone 6 Plus.

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Let's take a look at how these two phones compare, and what it could potentially mean for Apple.

The specs -- Apple's iPhone gets crushed
In the table below, I compare the specifications of Apple iPhone 6 Plus with the Xiaomi Mi Note Pro. If the subhead didn't already spoil it for you, the iPhone 6 Plus gets crushed in almost every meaningful metric:

iPhone 6 Plus

Xiaomi Mi Note Pro

Processor

Apple A8

Snapdragon 810

Cellular

Cat. 4 LTE-Advanced (150 Mbps download/50 Mbps upload)

Cat. 9 LTE-Advanced (450 Mbps download/50 Mbps upload)

Display

1920-by-1080 5.5-inch

2560-by-1440 5.7-inch

Camera

8MP rear-facing, 1.2MP front-facing

13MP rear-facing, 4MP front-facing

Memory

1GB LPDDR3

4GB LPDDR4

Storage

64GB

64B

Price (USD)

$849

$515

Source: Apple, GSMArena

You don't need to be much of a techie to see that Xiaomi is offering a substantially better specifications than the 6 Plus. The competitive situation for Apple's flagship gets even worse when we consider that Xiaomi is selling this device for the equivalent to $515, while Apple is charging $849.

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So, about Apple's and Xiaomi's margins ...
While longtime Apple rival Samsung has often piled in rich features and specifications to fight Apple at the high end, it has tended to offer a different (and arguably less "premium") industrial design. Additionally, Samsung has tended to price its phones far closer to Apple's asking prices than what Xiaomi seems to be doing.

Xiaomi is basically selling a device that looks like an iPhone but has better internals than an iPhone and sells for cheaper than an iPhone.

Now, I'm not under any delusion that Xiaomi is going to actually make much money selling these phones: packing in those specifications isn't, by any means, cheap, and selling the phones at bargain-basement prices isn't a recipe for huge profits. In fact, Forbes contributor Chuck Jones points out that Xiaomi's pretax margin was just 2% last year. Apple's, Jones notes, was 29.3%.

One could point to these numbers and say, "Well, this just means that Apple runs a better business and that you're just trying to scare Apple shareholders with all of this spec talk?"

Well, yes to the first, and not-quite to the second
I think the launch of these Xiaomi phones will give investors a very meaningful data point. If the launch of the Mi Note/Mi Note Pro phones doesn't dent Apple's iPhone sales/margins in the coming fiscal year, then that's pretty strong evidence that Apple's "moat" is far wider and deeper than just fast hardware in a shiny metal slab. If Apple sees pressure in the regions where Xiaomi competes, then that would be a very bad sign for Apple's long-term margin profile.

I look very much forward to seeing how this all plays out. My view -- and it is hardly a new one -- is that Apple shouldn't be viewed as a hardware vendor. Rather, it is a software vendor more in the vein of Microsoft that just happens to distribute iOS and the various software and services on a far more expensive distribution medium (iPhone/iPad hardware) than a digital download or a DVD.

If Apple exits the next fiscal year with record revenue and stable margins, then I think the Apple bear thesis will be seriously broken. If the Xiaomi Mi Note Pro can't hurt the iPhone 6 Plus, then I don't think any phone from any vendor could hurt the 6 Plus or future iPhone models. If not, then the Apple bull thesis will need to be reevaluated.

The article Apple Inc. Faces Its Biggest Challenge Yet originally appeared on Fool.com.

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Microsoft and Qualcomm. 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.