Pricing will be at the core of the iPhone 8 Super Cycle, driving Apple's profit margins and ASPs higher.
- Apple is expected to release three iPhone tiers in the next year.
- Component costs for the OLED screen may contribute $25 to the bill of materials.
- Furthermore, the iPhone 8 will likely be priced $100 higher than the 7S Plus to offset the incremental component cost.
Apple Inc. (NASDAQ:AAPL) is expected to increase pricing on the iPhone 8 model. The recent spate of rumors is suggesting upside to ASPs, which is broadly positive for Apple shareholders. There’s some credibility behind them, as they’re driven by reports from Mac Otakara and Ming-Chi Kuo. The two sources have leaked salient news ahead of a formal public announcements by Apple in the past.
While it’s early to speculate on Apple’s FY’18 performance, I come away with the impression that there’s room to grow shipments/ASPs upon launch of iPhone 8. (See also: Apple Stock: Will Apple Inc. (AAPL) Stock Regain Momentum In 2017?)
So what are the feature/pricing implications
It’s expected that the iPhone 8 model will be launched alongside a refreshed iPhone 7S model. The iPhone 7S models are expected to come with marginal improvements in line with prior S-cycle launches, whereas the iPhone 8 will come with a new iconic design that’s not going to include the home button, but rather a finger print sensor that spans the full scope of the screen. Furthermore, it’s anticipated that the iPhone 8 could get a boost in screen size, and an OLED display (contributing to a thinner form factor and better color contrast). The refresh to internal components will be in-line with the 7S, but perhaps Apple will introduce a couple of additional hardware features in the iPhone 8 (like a curved screen) and may bundle the handset with Air Pods to help substantiate a better value proposition.
It’s really hard to speculate on what other additions Apple will make to the iPhone 8. But, it’s likely that gross margins will improve, as the cost increase of premium components aren’t too substantial relative to Apple’s premium pricing. Of course, Apple could face tougher compares once we move through the current iPhone 7 cycle, as revenue growth is mostly driven by iPhone 7/7 Plus mix with buyers favoring the iPhone 7 Plus. ASPs are expected to increase by more than 10 percentage points to offset flat y/y shipments and currency headwinds.
Kulbinder Garcha from Credit Suisse anticipates that ASPs would need to increase marginally to offset the incremental cost of OLEDs:
Specifically, we believe Apple will need to raise the ASP of the OLED iPhone 8 line by ~$50 and keep the mix new phones to ~35% (close to current levels) to keep iPhone GMs stable (assuming a $25 BOM increase from OLED). Additionally, we believe, the services growth can also help offset this.
However, investors should keep in mind that if Apple is releasing the iPhone 8 as a tier above the iPhone 7S Plus, the pricing may start $100 higher for the base iPhone 8 model versus the 7S Plus. Retail pricing may start at $869, and increase incrementally by $100 for the higher storage tiers. This suggests that pricing could cap at around $1,050 for the 256 GB iPhone 8 model, which would make the iPhone 8 not only the best, but most profitable iPhone ever released. (See also: AAPL Stock Vs GOOGL Stock: Better 2017 Pick- Apple Inc. Or Alphabet Inc?)
That being the case, some are speculating on even higher pricing, perhaps $1,200, according to Gordon Kelly from Forbes. But, I’m skeptical of such a high pricing premium for the iPhone 8 with 256 GBs of storage.
Furthermore, the incremental cost of an OLED screen is expected to be $25, so a $100 base price increase sufficiently addresses the component cost increase, and would be more in-line with Apple’s current pricing structure.
iPhone 8 is the main catalyst behind the iPhone super-cycle theory. Analysts remain divided on whether iPhone 7 will creep up in the back half of 2017, and will diminish demand for the 10-year anniversary iPhone. Nonetheless, if Apple were to institute a pricing premium for the iPhone 8, it’s likely $100 more at base storage when compared to iPhone 7S Plus. A pricing premium beyond that could dampen demand making the iPhone 8 a little too far out of reach even for the die-hard enthusiast.
I continue to reiterate my positive stance on Apple stock. While shares have underperformed the broader market, I anticipate excitement in the Apple trade will return upon strengthened outlook in the next quarter.
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