Pricey IPhones Make Apple Inc Stock A Strong Buy

Riding on higher average selling price (ASP) of iPhones, Apple Inc (NASDAQ:AAPL) continues to capture a disproportionate share of industry's profits.

Apple Inc With Rising Profit Share, Is Apple Stock Still A Buy

It has been a great year for the tech giant Apple Inc (NASDAQ:AAPL). The company has delivered strong results which consequently has driven Apple stock higher. Company's flagship product, iPhone, continued to perform well. In the latest quarter, Cupertino based tech giant sold over 46.67 million iPhone units, which was 3% higher than last year same quarter and 14% higher on a sequential basis. iPhone generated revenue of $28.84 billion in the third quarter for Apple. Riding on this strong performance, Apple revenues swelled to $52.5 billion in the third quarter. Apple stock is part of our top stocks to buy portfolio which has outperformed the Nasdaq Composite by over 177%.
AAPL revenue chart

Apple Inc is likely to lose its second spot

However, when it comes to market share growth, Apple Inc has not been so successful. According to IDC, Apple will lose its second spot on the world's most selling smartphone brand list to Huwaei by the end of the year. In the second quarter, with the shipment of 38.5 million units, Huawei held 11.3% global market share, IDC data show. While Apple with 41 million iPhones shipment had a 12 % market share in the same period.

In the United States, according to estimates by Strategy Analytics, despite topping the list, Apple lost a couple of percentage points of market share in the United States. According to the report, Apple shipped 12 million iPhones for 30% market share in the US in Q3 2017, lower than 13 million units and 32% share in Q3 2016. However, while Apple lost unit market share, the company continues to grab a huge chunk of smartphone markets global profits.

iPhone us market share

Apple Inc is riding on rising iPhone ASPs.

Analysts estimate that Apple Inc captured 72% of the global smartphone industry profits, 600 basis points higher than 68% profit the company had captured in the July quarter. This was lower than last year third quarter when the company was responsible for almost all the profits of the smartphone industry. Apple's 72% is disproportionate considering that it just made up 12% of the global smartphone units shipped. Apple has always commanded disproportionate share in smartphone market's global profits due to its higher-priced iPhones. Rising iPhone ASPs over the years have contributed to Apple's higher profit margins and its huge profit market share.

And this trend is likely to continue in the coming quarters. With the launch of iPhone 8 and more importantly $1000 iPhone X, Apple is likely to see iPhone ASPs only rise from here. A good news for Apple investors, more customers are buying the higher priced iPhone X than the iPhone 8, which is good for Appel's bottom line. Moreover, a significant chunk of the people buying iPhone X are going for the 256 GB version which is priced at $1149 rather the $1000 64GB model. In a survey conducted by RBC capital more than 50% of the respondents who indicated an intention to buy the iPhone X said they’d choose the option with the higher storage. Apple has done away with 128 GB version in the iPhone X series, forcing many customers to choose the 256 GB version. Guggenheim expects a 17% Y/Y increase in iPhone ASPs to $770. This could be much higher if the demand for the 256GB version continues to remain strong. On the flip side, Apple continues to face supply shortage for its iPhone X models, which could be a dampener in the current quarter.

rising iPhone ASP 2018

Looking for a strong quarter

The higher ASPs for iPhones coupled with the strong demand for iPhone during the next fiscal year is likely to drive Apple's share of smartphone industry's global profits even higher. In a report, Canaccord Genuity's Mike Walkley noted that:

"We believe strong sales and mix of the iPhone X will sustain strong gross margin dollars given the high price points and likely improving manufacturing efficiencies. We believe Apple continues to grow its leading market share of the premium-tier smartphone market with double digit growth of its installed base during the quarter and believe the iPhone installed base will exceed 635M exiting C2017."

So what does it mean for Apple stock investors? Rising ASPs and consequently profit margins is good for Apple stock. While Apple Inc has several business segments which are showing strong growth, iPhone continues to contribute a significant portion of the company's overall revenues and profits. In the latest quarter, iPhone contributed 54% of the company's overall profits. Hence iPhone segment will continue to have a significant impact on Appel's performance. With good news coming from this segment, Apple stock is likely to perform well, despite the 50% rally.

Check out Amigobulls' top stock picks from the tech sector, which have beaten the NASDAQ by over 177%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by a whopping 272%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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