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 - Get Report). 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.

"While we has previously had estimates in 2014/2015 for revenue and EPS above the Street, we are now below the Street for both metrics and we believe the Street numbers still do not reflect the cheaper phone," the analyst wrote.

There's also concern that Apple may miss estimates for its June quarter, as the company gets set to refresh its product lineups. Analysts polled by Thomson Reuters are looking for Apple to earn $9.19 a share on $39.3 billion in revenue. Munster now believes Apple will guide to a range of $34 billion to $36 billion, as iPhone growth slows to a halt.

Apple could mitigate any impact of a June quarter revenue miss by increasing its dividend next week, when it announces results. Munster believes Apple will raise its yearly dividend to approximately $14 a share, up from $10.60 a share currently. He is not expecting Apple to increase its buyback next week, though he notes Apple could use debt in the future to fund a buyback, taking advantage of its massive overseas cash hoard.

Apple shares were higher in Tuesday trading, up 0.93% to $423.77.

-- Written by Chris Ciaccia in New York

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