How Apple Could Maintain Its Valuation If It Decided To Cut iPhone Pricing

by Trefis Team
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The iPhone business remains the biggest driver of Apple’s (NASDAQ:AAPL) valuation, accounting for over 50% of the stock price per our estimates. The iPhone’s high ASPs and margins are especially crucial to this valuation, and Apple has been raising iPhone prices over the years, with ASPs growing from just about $605 in FY’14 to an estimated $730 in FY’18, as its new flagship devices sport higher starting prices. However, Apple appears to be seeing some resistance to this pricing strategy in recent quarters. For instance, Apple is reportedly scaling back production of the new $1000 iPhone X for the quarter ended March 2018, as the initial wave of demand from early-adopters and holiday shoppers dies down (related: Why Investors Shouldn’t Worry About iPhone X Shipment Forecast Cuts). Moreover, based on device activation data ahead of the 2017 Christmas holidays, it appears that Apple’s older and lower-priced iPhones such as the iPhone 7 (starting price $550) and iPhone 6 are actually eclipsing sales of newer models like the iPhone X and 8. This brings us to a question: Can Apple maintain its lofty valuation if it were to reduce prices for the iPhone to stimulate sales?

We have created an interactive analysis, which estimates that Apple could maintain its overall price per share if it reduces its iPhone ASPs by $50 across the board while managing to boost sales by about 20 million units through 2022. Gross margins would also likely compress by about 200 bps with this pricing strategy by 2022, per our estimates. With the larger base of iOS users, we also estimate that Apple would be able to increase its services revenues by about $6 billion per year as these users would likely spend more on services including the App Store, Apple Music and iCloud storage. You can modify our assumptions to arrive at your own price estimate for Apple stock.

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