How The iPhone 8 Could Impact Apple’s Stock Price

by Trefis Team
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Apple (NASDAQ:AAPL) is likely to unveil a completely redesigned version of its flagship iPhone in early September. While the company is also expected to launch upgraded versions of its iPhone 7 and 7 Plus, we believe that the new iPhone 8 could emerge the biggest driver of the Apple’s smartphone business. In this note, we take a look at the potential impact of the device on Apple’s iPhone shipments (market share), average selling prices and gross margins.

We have a $164 price estimate for Apple, which is slightly ahead of the current market price.

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Volumes and Market Share:  Apple is likely to see an upgrade super-cycle for the new iPhone on account of pent-up demand, as the device is expected to sport the company’s first new industrial design since 2014.  The visual appearance of the iPhone remains very important to Apple’s customer base, particularly in emerging markets, as the device is viewed as a status symbol of sorts. Apple will also have a much larger base of iPhone users to drive uprgrade sales. For instance, Bernstein estimates that the iPhone’s installed base is likely to stand at close to 800 million at the end of FY 2017, roughly 80% larger than the iPhone user base at the beginning of the iPhone 6 cycle. Additionally, users from other platforms could also switch to the new device, as it is expected to sport innovative features such as a 3D-sensing front-facing camera, along with some more mainstream upgrades such as edge-to-edge OLED displays and wireless charging that Apple has refrained from offering thus far.

Pricing: We believe Apple will significant pricing power for the iPhone 8 (related: Apple May Have Unprecedented Pricing Power For The iPhone 8). There have been reports that peg the starting price for the new phone at $1000, which would mark a $350 jump over the base iPhone 7 model, and we largely believe that Apple should be able to pull off the increase. iPhone users are generally not very price-sensitive, and they have been spending on more expensive versions of the device with bigger displays and more memory. For instance, IDC estimates that roughly half of iPhone customers now choose iPhone 7 Plus models, compared to under a third of customers who chose the Plus model during the iPhone 6 cycle. Moreover, the starting price on the new device will only be slightly ahead of the top-end 256 GB 7 Plus, which is currently priced at $969. There are some tailwinds from the wireless market, such as a decline in monthly service bills and the availability of equipment financing schemes that allow customers to buy a smartphone with no down payment.

Gross Margins:  Margins on the iPhone have come under some pressure over the last year despite a steady increase in pricing, on account of an increasing amount of proprietary components (such as pressure sensitive screens and taptic engines), higher semiconductor pricing and foreign exchange headwinds.  While the iPhone 8’s significantly higher price tag could help Apple mitigate some of these pressures, component costs are also likely to be higher. For instance, the pricing of OLED screens that the device is expected to sport could be a constraint in the medium-term, with rival Samsung Electronics controlling over 90% of the mobile OLED market. Apple’s early manufacturing yield on the new device could also be lower compared to devices such as the 6S and 7, which have a form factor that has been in production since 2014.

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