Can Apple Afford an iPhone Price Hike?

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In the perpetually evolving world of consumer tech, each of Apple's (NASDAQ: AAPL  ) iPhone updates has been more spectacular than the one that came before.

It's part of the plan, of course. If Apple can continue to refresh its iconic smartphone with bar-raising features, the buzz will attract new buyers and get existing owners to trade in their old iPhones.

Investors haven't really had to worry about what these updates mean for Apple's margins. The "technology gets cheaper over time" adage affords Apple the opportunity to provide more for less. However, what happens if that changes? What will Apple do if the next iPhone costs more to make than the one before? Will Apple have the flexibility to bump its prices higher?

What if this hypothetical situation is real? What if it costs Apple more to make the iPhone 5 than it did last year's iPhone 4S.

At least one analyst feels that it's what is happening right now.

Inflation catches up to Apple
Pacific Crest analyst Andy Hargreaves lowered his price target on Apple earlier this week, arguing that the cost of goods sold on the iPhone 5 is $370, up from his earlier estimate of $353.

This is obviously material. If Apple is making $17 less on each iPhone, it's going to hose down gross margins, and Hargreaves has them dropping from 40% to 38.8%. This will also naturally eat into Apple's profitability, and he's slashing his bottom-line estimate for the new fiscal year from $53.36 a share to $51.49 a share.

Most handset manufacturers would love to crank out Apple-sized margins, but the question here is: Will Apple have to stomach the seemingly growing costs to piece an iPhone together?

Apple has been frozen at $199 as the entry-level price point for its current model for several years now. Wireless carriers kick in another $350 or so for every iPhone sold, realizing that subsidizing the handset that's hogtied to a two-year contract is worth it.

What would happen if Apple would bump its price on the entry-level iPhone 5to $229, $249, or perhaps even $299? It could even lower the carrier subsidy in a move to get them to start promoting iPhones over what to the carriers are higher-margin Android phones.

Customers probably wouldn't flinch. Apple could still continue to offer the earlier generations of iPhones at free and $99 subsidized price points, covering its bases with thriftier smartphone buyers.

It certainly seems feasible, but don't bet on it happening.

Apple isn't alone
It's easy for Apple to feel cocky these days.

The iPhone 5 is another hit, and a new study this week shows iOS once again overtaking Google's (NASDAQ: GOOGL  ) Android in this country.

Kantar Worldpanel ComTech estimates that, during the 12 weeks ending in Oct. 28, iOS scored a 48.1% domestic market share to Android's 46.7% slice.

It won't last. Apple temporarily takes the lead around the time of the annual iPhone updates. It gets smoked the balance of the year since there's never a shortage of new Android devices hitting the market.

However, the battle isn't even close overseas. In countries where carriers don't subsidize smartphones, the iPhone's stiff price tag already limits the reach of Apple's penetration. Even a small price increase would send a dangerous message.

It also doesn't help that the non-Android competition is starting to heat up.

Nokia (NYSE: NOK  ) shares have been rallying in recent days -- nearly doubling off of its summertime low -- on reports of its Lumia 920 handset selling briskly. That's welcome news for Microsoft (NASDAQ: MSFT  ) after reportedly paying billions to Nokia to champion Windows Phone as its mobile operating system of choice.

The potential competition outside of the open source Android doesn't end there. Research In Motion (NASDAQ: BBRY  ) has slated a launch for its promising BlackBerry 10 platform for January.

BlackBerry and Windows Phone may seem too distant to matter, but any whiff of a price hike on iOS devices and it's easy to fathom Microsoft, Nokia, and RIM taking advantage of the situation.

Will there come a time for Apple to move up from $199 for subsidized devices? Absolutely. It would simply be catastrophic timing if Apple chose to pass on the component cost increase to consumers at this competitive juncture.

There is absolutely no argument that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (9) | Recommend This Article (2)

Comments from our Foolish Readers

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 November 28, 2012, at 8:48 PM, matthewluke wrote:

    Why would Apple need to pass the cost directly to consumers by charging $229 for the subsidized entry model?

    Apple can just pass the cost on to the carriers who will have to have to subsidize it even more to keep the price at $199. (At least in the countries where subsidized phones are the norm.) As Sprint showed when they negotiated the deal to get them the iPhone, Apple can basically demand whatever price they want from the carriers and they will pay it. The carriers and those carriers' shareholders won't like it, but as long as the iPhone is as popular as it is, the carriers will pay it and take the margin hit.

  • Report this Comment On November 28, 2012, at 9:28 PM, applefan1 wrote:

    Without actually having real numbers in front of you, it's kind of stupid to talk about it. Why not get an actual bill of materials and compare the actual costs.

    Maybe since they are going to make more iPhone 5's than 4S's and costs have gone down. Maybe they are making up the difference in more AppleCare warranty support contracts being sold than before.

  • Report this Comment On November 28, 2012, at 10:07 PM, HiramWalker wrote:

    If the author paid any attention to Apple, he would be aware of drops to margins on the introduction of new products, as costs are always higher in the initial stages of production. Expect big drops this quarter with so many new products. But as the products mature, production gets more efficient, and margins improve again. Any inflation due to costs of materials will affect all competitors, and Apple can afford to lose margin and still make much more profit than the competition.

    Why fret about Apple's margin, when everyone thinks it's too high already?

  • Report this Comment On November 29, 2012, at 7:56 AM, yacc143 wrote:

    Well, if the author would have researched it in more detail, he would have discovered, that even in markets with subsidies, e.g. Western Europe, Apple is loosing to Android devices despite having iPhones available at near 0€. E.g. an iPhone5 16GB with a 60-70€/month contract goes for 0€ locally.

    Despite that, Android is outselling in Europe (excluding UK) iOS devices.

  • Report this Comment On November 29, 2012, at 8:37 AM, GCshipbuilder wrote:

    "In the perpetually evolving world of consumer tech, each of Apple's iPhone updates has been more spectacular than the one that came before." Huh? Have you spoken to the rest of the world? The last in particular made people realized how hoodwinked they've been to pay hundreds of dollars for an almost identical phone every year. Short answer is a resounding NO, people have figured out that they are wasting their money buying new phones every year. Short of reselling their old ones (which is a bubble right now that will burst soon when the market is flooded) they are done.

  • Report this Comment On November 29, 2012, at 8:37 AM, jdmeck wrote:

    yacc143 -- To remind fools like you. We are talking 3 phones versus... how many... 25, 50. Do you really think that's a fair comparison?

  • Report this Comment On November 29, 2012, at 8:39 AM, jdmeck wrote:

    GCshipbuilder - They have been done about 5 or 6 years ago according to people like you who are wrong time and time again. It will happen some day. We may both be dead by then.

  • Report this Comment On November 29, 2012, at 6:18 PM, xetn wrote:

    I just purchased an unlocked Google Nexus 4 (which is now sourced from LG) with 16gb for 349.00 and I can use it in most countries.

    Since Android is essentially Google's version of Linux, it is open-source and mostly free.

  • Report this Comment On November 29, 2012, at 8:18 PM, rlcato wrote:

    @jdmeck: Thanks for that. I was trying to think of a way of presentation -it'll still probably go over their heads though.

    If Apple DO increase the price, it'll be for the following year. And also with Apple knowing most people take out 2-year contracts, that's a hit to the hip pocket to break so develop a new phone in 2 years and improve on the old thru software updates. At least you know you WILL get an update unlike Android -of which you may have to but a whole new phone to get an update.

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