Apple (AAPL +0.10%) is packing a ton of advanced features into its new flagship iPhone X, which is why it's bumping the price all the way up to $1,000 for a base 64 GB model. That's a significant premium compared to the company's historical pricing model. Investors may think that at $1,000, Apple will be enjoying a lucrative gross margin on the device, but at least one analyst thinks the exact opposite will be true.
The iPhone X is going to be crazy expensive to build.
Image source: Apple.
At what cost?
Susquehanna estimates that the iPhone X bill of materials (BOM) totals an astounding $581, according to The Wall Street Journal. That's a huge difference compared to the estimated iPhone 7 BOM of $248. These estimates, if accurate, would represent the hardware margin associated with iPhone X. There are many other factors that go into overall gross margin, such as marketing costs, software development costs, warranty and return accruals, and amortization of manufacturing infrastructure.
|
Device |
Estimated BOM |
Retail Price |
Hardware Margin |
|---|---|---|---|
|
iPhone 7 |
$248 |
$650 |
62% |
|
iPhone X |
$581 |
$1,000 |
42% |
Data sources: Wall Street Journal and author's calculations.
Display panels are typically the most expensive component, and KGI Securities recently estimated that Samsung was charging Apple $120 to $130 for the new OLED panels, compared to traditional LCD panels that cost $45 to $55. That display is undoubtedly the most meaningful cost driver. Meanwhile, the vertical-cavity surface-emitting lasers (VCSELs) that are a core piece of the TrueDepth camera system are estimated to only cost about $4 to $5.
Even with a $1,000 price tag, the iPhone X may not be that profitable initially, but that should improve over time. Generally, Apple always starts at the height of the cost curve when it redesigns products, in large part due to investing in new manufacturing infrastructure, and iPhone X is no different. If anything, the impact should be more pronounced, since this is the most radical redesign in years, combined with significant increases in component costs.
A word of caution from Tim Cook on third-party estimates
It's also worth noting that CEO Tim Cook once advised investors not to put too much stock in the third-party BOM estimates that regularly appear (typically around product launches). On the Q2 2015 earnings call, Cook said (emphasis added):
And I haven't even seen this, but generally, there's cost breakdowns that come out around our products that are much different than the reality. I've never seen one that is anywhere close to being accurate. And so if that's the basis for your comment, I'd really dig on the data if I were you.
Cook was referring specifically to Apple Watch gross margin, but his sentiment applies generally. Even if Susquehanna's estimates aren't "close to being accurate," there should be little doubt that the iPhone X's cost structure is going to be elevated, and Apple is just passing along those costs on to consumers while potentially accepting lower gross margins in the process.
