Apple (AAPL 0.68%)iPhone users' tastes have evolved over the years. Thankfully for Apple investors, the company has found a way to keep up with the trends and it has been more profitable because of this ability. Over the last few iPhone cycles, customers have shown little interest in its Mini version. The smallest iPhone versions represented only 9% of iPhone 13 purchases. However, the Pro version has piqued the interest of iPhone buyers. Apple first introduced the Pro version in 2019 with a better camera and the newest chips, and it has represented a surprising 41% of iPhone 13 shipments since then.
Apple eliminated the smaller version from its newest iPhone 14 lineup. Instead, the newer lineup includes two different versions of the Pro for its fanbase. At first glance, the change may not seem like a big deal, but here's why it could prove to be a genius move.
Upgrading to Pro
According to estimates, Apple has sold 189.2 million iPhones since the Pro version was introduced to customers nine months ago. Based on the $163 million in iPhone revenue disclosed by Apple over the same period, the company produced an average selling price of $861 for all models. Just by launching the Pro version, Apple experienced a 12% pop from Apple's 2019 average selling price before the Pro version was introduced.
This move by Apple is increasing its revenue, but there's more to it then that. What makes this move genius is that the upgrades come at a minimal cost to Apple. One of the main attractions of the Pro model is its 48-megapixel camera, which has four times the previous number of megapixels. The advanced camera allows for higher-resolution pictures and greater zoom, which is perfect for those customers constantly snapping selfies and videos of their kids. The higher-resolution photos require more memory to operate, which is available only with the Pro model -- and the memory is cheap.
Apple reaps a gross margin of around 90% when customers trade up to higher-memory Pro versions. Since Apple launched the Pro version three quarters ago, gross margins have reached nearly 37%. That's Apple's highest iPhone gross margin since it first broke those numbers out in 2018. Now that Apple has eliminated the Mini version from the 14 lineup, the company can move toward increasing gross margin on its iPhones beyond its recent record.
The company, of course, generates revenue from products other than iPhones. Take for example, its Macs, iPads, and wildly growing services. But iPhones are its bread and butter. Its smartphones make up over half of Apple's revenue. So expanding the gross margin of its most significant product makes a noticeable difference in the company's bottom line.
The key risk to smartphone makers is the possibility of a global recession. The global smartphone market has already seen a steep 9% drop in shipments during the second quarter. The fall in shipments may suggest that folks are already tightening their belts. In a demonstration of the company's strength, Apple's smartphone shipments increased modestly amid the global pullback. Although the gain was small, it occurred toward the end of the iPhone 13 cycle. With the iPhone 14 cycle afoot, Apple will be in a great position to continue outperforming the overall market.
Apple has earned a stellar reputation and has grown to be one of the largest public companies in the U.S. Genius moves like this should give investors confidence that Apple's management is not resting on its laurels. It's fulfilling its duty to shareholders and making the company more valuable at each opportunity. Apple stock is down 16% this year, which means now could be a great time to add shares or establish a position in the world-class company.