Sleepy now, but this Apple store in Palo Alto, California, will be packed when the iPhone 6 launches. Source: Apple
Everybody knows that Apple's (AAPL +0.30%) iPhone 6 is on its way for a release at some point in the fall. For consumers, this is going to be pure excitement -- they're going to get the amazing new phone that they've been waiting for. The tech press will go wild talking about performance, features, and the industrial design. But as investors, our jobs are much more difficult as the sales momentum from this once-per-year launch could very well set the pace for the stock for the following year.
Let's face it -- we want to profit from the iPhone 6 launch
Here at The Motley Fool, we believe in investing for the long term. And the success/failure of the iPhone 6 on a number of key economic vectors will not only give investors a pretty good sense of where the stock will be headed over the next year, but will give us useful perspective on the longer-term outlook of the company.
Alleged images of the upcoming iPhone 6. Source: Sonny Dickson
So, what's going to make or break the iPhone 6?
In particular, here are the things to keep an eye on as the next iPhone launches:
- The first weekend sales numbers. At the last iPhone launch, for the 5c and 5s, Apple reported selling 9 million units. This was a marked increase from the 5 million number that the iPhone 5 drove. If Apple's iPhone 6 can grow first-weekend sales at anywhere close to the year-over-year rate that 5s drove, then things will look pretty darn good for the iPhone 6's run.
- The teardown. One of those beautiful first iPhone 6 models will undergo the teardown treatment and the key components will be identified. While there will definitely be supplier plays here (more on those at a later time), the important thing to watch will be the cost structure of the device. Firms like IHS will provide bill of materials cost estimates, and if this is up significantly from the iPhone 5s, then robust unit growth will become more important to Apple's bottom-line growth.
- The reviews. The smartphone market is highly competitive with plenty of good devices from the likes of Samsung (NASDAQOTH: SSNLF) and LG Electronics. It'll be important to see how the iPhone 6 compares across the board with the flagship offerings from these players at the time. If the reviews are glowing, then any sales momentum could have legs. If not, then it'll pay to be cautious.
With some of the key things to watch laid out, how should investors think about their Apple investments in context of the upcoming iPhone 6 launch?
Sales growth matters more at this point than raw profitability
If the iPhone 6 ends up with a higher cost structure and Apple isn't able to raise prices, then it's not necessarily time to panic. If these incremental features can drive market share gains at the high end of the smartphone market, then as long as the incremental sales can drive overall higher gross margin dollars for Apple, everything should be fine.
Apple's iPhone 5s. Source: Apple
I realize this is a bit to take in, so let's work out an example. Suppose that the 16GB iPhone 5s costs $200 to make (this is per IHS iSuppli). Then suppose that the iPhone 6 is a bit pricier to make, coming in at $230 per unit (again for the 16GB version). Finally, assume both sell for the same tried-and-true $649 price-point.
With that in mind, for each 100 units of iPhone 5s sold, Apple will -- assuming a $30 higher BoM due to a faster cellular chip, more expensive apps processor, and more expensive chassis/display -- need to sell about 107 units to hit the same total gross profitability levels.
Of course, this number will vary based on what the actual manufacturing cost of the phone is, but you can get a sense of what's going on here. In order to support a more expensive-to-build phone, Apple will need to sell more units just to get to similar gross profitability levels...and then sell even more on top of that for growth.
Foolish bottom line
As a consumer, the iPhone 6 launch is going to be thrilling, but as an investor it's going to be a bit nerve-racking. It won't take much to drive higher gross profits, particularly if the larger iPhone(s) can drive share gains, but nothing is guaranteed in the world of subjective consumer tastes. But in the likely event that Apple does succeed with iPhone 6 in growing the top and bottom lines, it'll be yet another data point proving that Apple's business is on solid ground and set to grow steadily in the years ahead.
