How Rapidly Declining NAND And DRAM Prices Could Benefit Apple

Apple (NASDAQ:AAPL) is poised to see its growth slow down over 2019, amid a mixed response to its latest iPhone XR and XS models and increasing saturation in the smartphone market.  That said, Apple could see tailwinds from fast-declining prices for both DRAM and NAND memory, which form a significant cost component for the company. In this note, we take a look at the potential impact of the declining memory prices on Apple’s margins using the iPhone XS Max (256 GB), likely one of Apple’s most popular products, as a proxy.

View our interactive dashboard analysis on What’s Driving Our $225 Price Estimate For Apple. You can modify any of our key drivers and forecasts to gauge the impact on the company’s valuation and arrive at your own price estimate. Our price estimate is about 25% ahead of the current market price.

The Memory Cycle Is Turning

While the market for both DRAM and NAND performed well over the last few years, the cycle is turning. While NAND flash prices have declined by close to 50% year-over-year, as major vendors brought new 3D NAND capacity online, prices are projected to fall by another 25~30% in 2019 as capacity expands further. While DRAM prices held up this year, DRAMeXchange projects that prices could decline by between 15 – 20% in 2019, although the drop could be steeper if smartphone or server demand falls further.

Impact Of DRAM Price Reductions Will Be Minimal

Apple is one of the world’s largest buyers of memory. However, the impact of the DRAM price declines on Apple is likely to be relatively minimal, considering that the company offers less DRAM on its devices compared to its Android rivals. For instance, while the iPhone XS Max and XR offer 4 GB and 3 GB of DRAM respectively, most Android flagships have 6 GB or more of DRAM. Using data from IHS and Bloomberg, we estimate that the DRAM on the XS Max costs Apple roughly $17, or 1.4% of the average selling price of the 256 GB model (see below table). A 20% reduction in prices could reduce Apple’s BoM costs by about $3.50, bolstering margins by about 30 basis points.

NAND Price Drop Will Have A Notable Impact

The impact of the NAND price declines is likely to be more pronounced for Apple. Apple has been very adept at monetizing storage tiers, by offering consumers a better perception of value on its higher-tier devices, while significantly improving its dollar margins. On the 256 GB version of the iPhone XS Max, the NAND memory likely costs Apple about $66, or 5.3% of the selling price. A 30% reduction in NAND prices could help to bolster Apple’s gross margins by close to 1.6% on the 256 GB iPhone XS Max, as the company is unlikely to pass on savings to customers. The savings could be even higher as a percentage of revenues on products such as the iPhone XR (which has a lower average selling price) and the 512 GB versions of iPhones (which have higher memory costs).

Overall Impact On Apple 

Accounting for the impact of both NAND and DRAM price movements, Apple could see its BoM costs as a percentage of revenues drop by roughly 2%, directly benefiting its margins and bottom line. However, we don’t expect Apple’s overall gross margins to expand by these levels, as the company is likely to face foreign exchange headwinds next year with the dollar poised to strengthen.