Will Apple Choke on These Expensive iPad Parts?

Apple (Nasdaq: AAPL  ) doesn't like to talk about what's inside its various iDevices. In fact, the company goes to great lengths to keep its component choices as secret as possible. But that doesn't stop third-party analysts from ripping every new gadget apart to figure out Apple's secrets.

IHS iSuppli has a long-standing habit of taking the next logical step: The company matches its findings with pricing information and then reports on the bill of materials for every Apple device (and many fruit-free smartphones and tablets as well). And the new iPad turns out to cost Apple more than the iPad 2 ever did.

Comparing Granny Smiths to Granny Smiths, the total bill for a 16-gigabyte, Wi-Fi-only iPad 3 comes out to $316. That's 29% more than the $245 tab for making an iPad 2 at today's component prices. iSuppli didn't break down a completely comparable model last year, but the 32 GB 4G version today costs $375 to make, compared with $333 for the Verizon (NYSE: VZ  ) version of the iPad 2. That's a 13% increase.

So Apple won't make quite the profit margin it was used to. On the other hand, consumers are getting a great deal -- at least on the lower-end models. Quadrupling the new iPad's flash memory from 16 to 64 GB adds $50 to the manufacturing cost but $200 to the retail price tag. Likewise, adding 4G networking boosts the retail price far beyond the actual cost of the upgrade. The fatter your iPad choice, the richer Apple gets.

The biggest price jumps obviously come from that stunning ultra-HD Retina Display, which adds $30 to Apple's costs. The high-powered graphics engine in the new processor nearly doubles the price of the processor to $23, all in the name of feeding the pixel-packed display.

The battery is about 40% more expensive, but that's what it takes to light up all those pixels. In short, nearly every extra penny was spent on the screen, either directly or indirectly.

Until Sharp and LG Display (NYSE: LPL  ) sort out their high-resolution-display issues to join initial supplier Samsung, Sammy takes the lion's share of Apple's orders. Between the screen, making Apple's custom ARM (Nasdaq: ARMH  ) processor, supplying some memory chips, and reportedly even making the bigger batteries, Samsung stands for about half of the iPad's costs.

Aside from Samsung, iSupply contends that the biggest winner in the new design is Qualcomm (Nasdaq: QCOM  ) . The communications-chip expert provides the core 4G functionality, and it's significantly more expensive than the old 3G chips.

Will consumers overwhelmingly opt for high-speed data and huge memory configurations, or will they take the sensible route and pick the lower-end, less profitable versions instead? The answer, my friend, is blowing in the wind, but it will make a big difference to Apple's profits in the second quarter onward.

A handful of chip suppliers will pocket their profits no matter which iPad model turns out to be the crowd favorite. Check out these three hidden winners of the iPhone, iPad, and Android revolution, including one stock we already discussed here.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Qualcomm and Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2012, at 12:01 AM, Fruitfan wrote:

    The thing that is missed is the fact that Apple has a way of squeezing the suppliers for lower cost. I'm sure the iPad 3 is more costly to make but I would bet that the cost are much lower than reported. One thing that makes Tim Cook a genius is his supply chain management skills. The iPad 3 ( that's what I call it) is selling better than expected and the small amount of margin Apple gives up will be far exceeded by sheer volume of units sold (not shipped, Rimm, Amazon,etc)

  • Report this Comment On March 23, 2012, at 6:47 AM, oriorda wrote:

    Apple is concerned with establishing its complete eco-system in the user's hands, meaning the use of all its products operating within the embrace of its OSX and iOS software. For this to succeed it requires devices at every point of use selected by the user, and therefore iPad is an essential element. The strategy doesn't work if you leave iPad out of the equation as a competitive tablet would be required to fill the gap.

    If at various times one or more of the product groups has to provide a lower margin, then that will be accepted in view of the wider objective. Over time, Apple can work to increase that product's margin.

    It is not significant that the new iPad appears to be providing a lower margin, other than to demonstrate Apple's commitment to sacrifice neither functionality nor quality for margin.

  • Report this Comment On March 23, 2012, at 5:41 PM, winklerf wrote:

    Oriorda,

    Apple cutting margins is a very big deal. It could be that they are really squeezing component suppliers and are not cutting margins, but that is unlikely.

    Apple cutting margins means that they could have significant sales growth and have flat margins, which means that forward P/E will be more like their 17 trailing rather than their 12 forward. It also means no increase in cash flow. Apple isn't worth half a billion dollars with cash flow similar to Exxon Mobile when their business doesn't have remotely as steep barriers to entry. The consumer market is fickle and it is very easy to have your market share stagnate and fall. Just look at Motorola, Nokia, RIMM, Dell, Compaq, Sony and many others.

    The point is that consumer electronics companies have to deliver growth because the risk of losing business is high. Rising costs and stagnate pricing doesn't deliver growth, it kills it. The estimated costs might be wrong, but they most certainly aren't something to ignore.

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