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Apple iPad Prices Are 'Insane'

Stocks in this article: AAPL

CUPERTINO, Calif. ( TheStreet) -- Apple's (AAPL) fanning the iPad fad, so get it while it's hot and relatively cheap.

With the international debut of the iPad coming Friday, Apple is set for another leg of its tablet sales journey. And if it's anything like the first million iPads sold, the overseas sales will put an even bigger dent in Apple's gross margins.

Apple's $500 price tag on the iPad isn't exactly a steal for a fancy media reader that isn't quite a notebook, but the price is painfully cheap compared to the usual markup Apple enjoys on its Macs and iPhones.

Apple iPad

But before you get weepy for Apple, you should know that the company has been clear in telling Wall Street that it is willing to sacrifice significant profits in order to get iPads in as many hands as possible.

"We will take advantage of our first-mover opportunity here," CFO Peter Oppenheimer told analysts on an earnings call last month. "We have priced this extremely aggressively and we did that because we believe there is a huge market for it."

More on Apple
Verizon iPhone: No-Go at Apple Show

The big question however, is how long Apple can bear the margin crushing pain of this tablet land grab. And apparently the cost of this iPad assault is higher than initially thought.

Speaking to investors Tuesday, CFO Peter Oppenheimer disputed a recent part-by-part analysis by iSuppli that put the total cost of a base iPad at $229.35. Oppenheimer outlined four areas where Apple's iPad expenses run higher than the iSuppli estimate reported:

  • Component prices
  • Customer service
  • Transportation
  • Refunds
  • So instead of a 100% mark up, Apple may be taking it on the chin a bit.

    This wouldn't be total shocker, since Apple warned investors last month that gross margins, which had widened to nearly 42% on strong iPhone sales last quarter, would drop six percentage points in the current quarter to 36%. The iPad accounts for 25% of that decline.

    Apple has a few choices. The company could opt to curb the margin erosion by raising prices, but that might be bad for the iPad fad. Or Apple could fall below its gross margin target and let investors decide if it's worth it.

    More on iPad
    Apple Faces Supply Constraints

    --Reported by Scott Moritz in New York

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