The iPhone XS Max Could Be A Profit Machine

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Research firm IHS Markit recently published its preliminary bill of materials analysis for Apple‘s new flagship $1,100 iPhone XS Max, estimating that the 64 GB version of the smartphone costs about $390 to build. Although this makes the XS Max the most expensive smartphone Apple has built to date, we believe the device could have thicker margins compared to Apple’s 2017 flagship iPhone X, proving meaningfully accretive to Apple’s margins. Below, we take a look at some of the reasons behind this view.

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Gross Margins Could be Thicker Compared To iPhone X

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While Apple has previously dismissed the bill of material analysis as being an inaccurate representation of the cost it incurs in producing its smartphones, we believe that year-over-year comparisons from the same research firm can at least provide a sense of how Apple’s gross margins could trend. Last year’s iPhone X was priced at $1,000 and had a preliminary bill of materials estimate of $370, per IHS. However, the XS Max only sees $20 in incremental costs, despite its price starting at $1,100. This implies that component costs as a percentage of the device’s retail price would stand at 35%, compared to about 37% for the iPhone X and 36% for the iPhone 8 Plus. That said, the metric was more favorable for the iPhone 6 series when it launched in 2014, although absolute dollar margins are likely to be higher with the XS line, considering the escalating starting prices ($650 versus $1,000 plus currently).

Apple Continues To Effectively Monetize Storage

Gross profits on the $1,250 model with 256 GB of memory – which we believe will be the most popular premium iPhone – are likely to be higher still, since the incremental costs of the additional memory are well below the premium that Apple charges for the devices. According to Bloomberg, the 256 GB version costs just about $42 more to build compared to the 64 GB version, although it retails for $150 more. The top tier 512 GB device, which is priced at $1,400 (a $200 premium over the 256 GB model) is likely to be even more lucrative, as the incremental material costs are estimated to stand at just $66 over the 256 GB model. With NAND prices trending steadily lower, with major vendors adding 3D NAND capacity, Apple could also look forward to memory costs declining further for its top-tier versions.

Where Do The Other Two iPhones Stand?

While Apple is also offering a regular sized version of its flagship, dubbed iPhone XS, we believe that the Max will be the more popular of the two devices, considering that it offers a meaningfully larger screen and battery, at a price that is just about 10% higher. That said, things could get more interesting when Apple launches the $750 iPhone XR in October. Although the device offers the signature iPhone X features such as FaceID and all-screen design, margins could remain lucrative, as it eschews more premium features such as dual cameras, OLED screens and pressure sensitive touch technology.

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