Apple's Price Target Is Cut on Cheap iPhone Worries (Update 1)

Updated from 9:50 a.m. EST to provide analyst comments regarding second quarter results in the tenth paragraph.

NEW YORK ( TheStreet) -- Some days, the thought of a cheaper iPhone is good for Apple ( AAPL). Others, like today, it's not so good.

Piper Jaffray analyst Gene Munster cut his price target on Apple to $688 from $767, citing worries that a lower-cost iPhone could cannibalize sales as much as 30%.

"Factoring in 30% cannibalization, gross margin goes to 36.6% in CY14 vs. 38.6% in Dec-12," Munster noted in his report on Tuesday. A lower-cost iPhone could have gross margins as low as 30%, versus 55% for the version of the iPhone Apple currently sells.

Munster also cut his iPhone sales estimates for 2013, 2014 and 2015, by 10%, 15%, and 22%, respectively. He now expects Apple to sell 160.1 million, 223.5 million, and 277 million iPhones in those calendar years.

There's been concern that smartphones have become a mature market, and Apple is looking to do what it can to grow its primary revenue driver. In the past, Apple has said it would not make a crappy product, so a lower-cost iPhone would have to live up to Apple's high standards of product design.

"The only thing we'll never do is make a crappy product," CEO Tim Cook said at a Goldman Sachs conference in February. "We're going to make a great product. And so that's the only religion that we have is we must do something great, something bold, something ambitious."

Munster said he expects that a lower-cost iPhone would cost $300, versus his estimates of an average selling price (ASP) of $620, thus negatively impacting earnings.

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