What Does the iPhone 5 Cost Apple?

The chaps in Cupertino are probably going to be bathing in bills this weekend as the iPhone 5 has just been launched to the standard fare of crowds and around-the-corner lines. Just how much does Apple (Nasdaq: AAPL  ) stand to profit on these devices?

Bill me
IHS iSuppli has released a "virtual teardown" estimated the iPhone 5 bill of materials, and it pegs total component costs and manufacturing for the entry-level 16 GB model at around $207. Retailing at $649 puts its gross margin at 68%. The total bill is up from last year. Here are the initial estimates over the past two years and some of the more important (and expensive) ingredients.

Component

iPhone 4S (October 2011)

iPhone 5 (September 2012)

Memory $28.30 $20.85
Display and touchscreen $37 $44
Applications processor $15 $17.50
Camera $17.60 $18
Wireless section $23.54 $34
Total before manufacturing $196 $207
Unsubsidized retail price $649 $649
Gross margin 70% 68%

Source: iSuppli.

Remember that these estimates don't include other operating expenses like software development, licensing, royalties, or marketing, among others.

What's the difference?
The use of in-cell technology, integrating the touch sensors directly into the LCD, is one reason the display and touchscreen costs have increased substantially -- 19% higher relative to the initial estimates on the iPhone 4S last October. Being much smaller, it still costs much less than the iPad 3's Retina display and touchscreen, which iSuppli pegged around $97 in March.

Including 4G LTE functionality also drove up costs by approximately 44% for the wireless section. iSuppli also notes that Apple had to design several models to support various LTE bands around the world, unlike the single iPhone 4S model last year. By using Qualcomm's (Nasdaq: QCOM  ) newest MDM9615 baseband processor, the iPhone 5 reduces power consumption while still sporting LTE speeds. This is an even more advanced baseband than used in the iPad 3, but that device has more physical space for a beefier battery.

Flash memory prices continue to fall as economies of scale set in and manufacturing technology improves. On top of that, Apple is the largest buyer of NAND flash in the world, so it is usually able to strong-arm favorable pricing contracts. The iPhone maker isn't afraid to commit to big spending -- its total off-balance sheet third-party manufacturing and component purchase commitments totaled $13.6 billion at last count.

Getting a second opinion
These estimates actually differ from the numbers that Jefferies analyst Peter Misek came up with. He puts the iPhone 5 bill of materials at $293, which translates into gross margins of 55%. However, Misek does include some other soft costs like royalties in his estimate, which is why it's higher than iSuppli's best guesses.

Misek points out that Apple has moved to a two-chip touchscreen microcontroller solution, one from Texas Instruments (Nasdaq: TXN  ) and another from Broadcom (Nasdaq: BRCM  ) , adding to costs. He also believes Apple is diversifying its memory purchases away from frenemy Samsung and more toward other players such as SanDisk (Nasdaq: SNDK  ) and Elpida.

The Apple of tech's eye
These levels of sustained hardware gross margins are unheard of in the tech world. Here's how Apple's margins stack up against some of its PC and smartphone rivals.

Company

Gross Margin (TTM)

Net Margin (TTM)

Apple 44.1% 27%
Hewlett-Packard 22.3% (4.5%)
Dell 21.7% 5%
Nokia 27.4% (12.8%)
Research In Motion 31.9% (0.3%)

Source: Reuters. TTM = trailing 12 months.

With the iPhone being half of Apple's TTM sales, you can bet it has a lot to do with how much Apple has left over once it reaches the bottom line.

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Fool contributor Evan Niu owns shares of Apple and Qualcomm, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Qualcomm and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has 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 September 23, 2012, at 1:24 AM, JaanS wrote:

    Evan,

    Another good post.

    I might point out that not only is the iPhone 5 longer and lighter, but that the new A6 chip - especially designed by Apple - is pushing new speed records. While few buy a phone specifically for speed, it does help the overall user experience, particularly with the faster internet connection.

    I discuss this in detail in my post the 5 is a screamer:

    http://beta.fool.com/jaans/2012/09/22/understanding-apple-ip...

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