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Apple's Next iPhone Cycle Should Bolster Margins, ASPs

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Apple is expected to launch three new iPhones at an event next Wednesday. We expect the new line-up, which is likely to include a second generation 5.8 inch iPhone X, a plus-sized version of the iPhone X and a slightly more affordable 6.1-inch all-screen LCD-based device, to set off the biggest upgrade cycle for the company since the iPhone 6. We also believe that there is a possibility that Apple’s gross margins and average selling prices, which stood at about 38% and $724, respectively, over fiscal Q3, will see a boost from this upgrade cycle. Below we take a look at some of the reasons underlying that expectation.

Our interactive dashboard on What’s Driving Our Price Estimate For Apple details our expectations for the company through the rest of the year and the factors influencing our price estimate. You can modify any of our forecasts or key drivers to see the impact that changes would have on Apple’s earnings and price estimate.

How The New Devices Could Impact Margins And ASPs

The all-new 6.1 inch iPhone is expected to feature a design similar to the flagship iPhone X, marking a significant departure from the iPhone 6 design language, which Apple has used since 2014. While reports indicate that the all-new device could have a comparatively affordable price tag, we expect that it will be priced closer to the iPhone 8 and 8 Plus models, which currently start at $700 and $800, respectively. We believe that Apple will be able to pull off this pricing and still manage to attract buyers of lower- and mid-range iPhones, as the visual appearance of the device plays a big role in a consumer’s purchase decision. Apple should be able to maintain thick margins on the new iPhone, as it is expected to eschew some costly features, including OLED screens that it has had trouble procuring in favor of widely available LCD displays. The device is also unlikely to offer the 3D touch pressure-sensitive display that has been a staple of most iPhones launched since 2015, while only sporting a single camera, as opposed to the dual rear camera setup on the current iPhone X and 8 Plus models.

At the same time, the company should be able to provide reasonably strong product differentiation for the iPhone X models, which could cater to users looking for better displays and camera technology. It’s possible that the follow up to the 5.8-inch iPhone X, potentially called iPhone X S, will start at $900 to $1000, while the 6.5-inch device will be priced at a $150 premium. Apple should have room to improve margins on the iPhone X lineup, considering improved yield rates on components such as FaceID sensor and casings. Moreover, the decline in NAND memory prices (which could decline by 10% in Q3 alone) may help the company bolster profits on its higher storage tier models.

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