Apple (AAPL +1.18%) is about to refresh its smartphone lineup this month, with the next set of iPhones expected to be revealed at the tech giant's Sept. 7 event.
This event will be important for Apple as the iPhone is the company's biggest source of revenue, producing nearly $163 billion in revenue in the first nine months of its fiscal 2022 and accounting for almost 54% of its top line. It is worth noting that the last two generations -- the iPhone 12 and the iPhone 13 -- have met with massive success.
Driven by the rapid adoption of the 5G wireless standard, those devices did well despite the novel coronavirus pandemic and supply chain constraints. However, Apple now faces a new adversary, this time in the form of inflation severely impacting the global smartphone market. Will this headwind knock the wind out of Apple's upcoming iPhones? Let's find out.
NASDAQ: AAPL
Key Data Points
Inflation is hurting the smartphone market -- but not Apple
Global smartphone shipments have declined for four consecutive quarters, according to IDC. In the first quarter of 2022, shipments were down 8.9% year over year on account of soft demand as consumer spending dampened under fears of economic uncertainty and surging inflation. The story continued in Q2 as smartphone shipments fell 8.7% over the year-ago period with inflation and weak consumer sentiment playing spoilsport once again.
IDC expects smartphone shipments to decline 6.5% in 2022, owing to tepid demand. That won't be surprising as high inflation is reportedly forcing consumers to cut back on discretionary spending such as smartphones. Apple, however, has defied the slowdown in the smartphone market. Its shipments were up 2.2% year over year in Q1 to 56.5 million units, followed by a flat performance in Q2.
It is interesting to note that Apple's sales have remained steady this year, while the likes of Xiaomi, Vivo, and Oppo have seen sharp declines in shipments despite offering cheaper smartphones that conform to the latest wireless standard. For instance, customers can buy a 5G smartphone from Xiaomi for as low as $150, while Apple's two-year-old iPhone 12 mini starts at $599, and the entry-level iPhone SE, which is now equipped with 5G, starts at $429.
This is proof that Apple is enjoying strong pricing power in the smartphone market, allowing the company to do well at a time when inflation is stinging the industry.
Why the next iPhone could beat inflation
Apple is expected to price the rumored iPhone 14 models from $749, according to market research firm TrendForce. While that's higher than the $699 price at which the iPhone 13 mini was launched last year, it is worth noting that Apple is expected to do away with the mini this year. The next iPhone's base model is expected to sport a 6.1-inch screen instead of the 5.4-inch screen of the mini.
The 6.1-inch iPhone 13 was introduced at $799 last year. This indicates Apple could go aggressive concerning the pricing of its upcoming models, which could help the company improve device shipments. Of course, other analysts, like noted Apple analyst Ming-Chi Kuo, believe Apple could raise the prices of its new iPhones by 15% to account for higher input costs.
Kuo estimates Apple could hike prices by 15% this year, with the base model expected to go on sale for $799. However, that would be equal to the launch price of the 6.1-inch iPhone 13. This, in effect, means the upcoming iPhones can be bought at similar or even lower prices than last year's models.
Another thing that could play in Apple's favor is the growing adoption of 5G smartphones, which carry a higher average selling price (ASP) than the overall smartphone industry. IDC estimates an ASP of $616 for 5G smartphones this year, much higher than the overall smartphone ASP of $413.
The market research firm also reports that smartphones priced above $800 are not being affected by such factors as inflation. It further points out that the share of $800+ premium smartphones has grown to 16% of the overall smartphone market, a jump of four percentage points over the prior year.
These trends indicate that Apple's new iPhones could continue to set the sales registers ringing. Not surprisingly, Apple has reportedly asked suppliers to make 90 million units of its new iPhone lineup, which would be in line with the initial production batch of the iPhone 13 models last year.
All in all, Apple could continue beating the smartphone market's downturn and close the year on a high, and that could inject some life into this tech stock that has had an ordinary year so far amid the market sell-off.
