It's mid-August, so that means it's time for rampant new iPhone speculation. Apple (AAPL +0.94%) as always has been pretty close-lipped about the newest iteration of its device -- in this case, the iPhone 6 -- but that hasn't stopped analysts and fans alike from weighing in. Current rumors seem to center on another dual release, with the main differentiator between the two being screen size rather than casing.
Of course, Apple's top line is highly dependent on iPhone sales. Over the trailing 12-month period iPhone revenue provided nearly 55% of Apple's total revenue. The pie chart below illustrates how dependent Apple is on the product.
Source: Apple's 10-Qs. Revenue figures in millions and on a trailing 12-month basis.
So as an Apple investor it makes sense to watch this particular product with a keen eye. After all, if the product isn't performing well, the stock price should eventually follow. Luckily for Apple investors, it appears the iPhone is performing quite nicely when compared to the company's overall growth over the past 12 months.
Source: Apple's 10-Qs. Right Y-axis is growth in percent and left Y-axis is revenue. All revenue figures are in millions.
Growth isn't as robust as Apple's iTunes/software/services category, but it's close. Even better, Apple is still producing admirable growth from a nearly $100 billion product line that is 7 years old and now faces strong competition on the high end from Samsung's Galaxy line powered by Google's Android ecosystem. Despite all those factors, Apple reported 10.6% revenue growth over the last four quarters on a year-over-year basis. Still, Apple investors should keep an eye on average selling prices, or ASPs.
What's going on with average selling prices?
On both an overall basis and by comparing each quarter to the corresponding year's quarter, you can see that the iPhone's average selling price is falling.
Source: Apple's 10-Qs. Figures in dollars.
Compared to the third fiscal quarter of 2012, ASP is down nearly $50 per unit. Or on a percentage basis, the average selling price is down nearly 4% annualized. Since the third fiscal quarter of 2012, no quarter has seen an average selling price higher than the same quarter of the previous year. The closest corresponding quarter in terms of ASP appears to be Apple's first quarter that includes its newest iteration and the seasonally heavy holiday season.
Trade downs, perhaps?
Falling average selling prices can happen for a couple reasons: product markdowns or customer trade downs. And while it is hard to ascertain the exact cause for the iPhone maker -- Apple doesn't release interproduct results -- it appears to be customer trade downs here. In the event that customers don't perceive incremental and additional value, it is entirely possible they will buy the cheaper version (in this case the 5c) or perhaps a version with less storage.
Another wrinkle in this relationship is the carrier subsidy. Apple's iPhone continues to benefit from carriers' generous subsidies intended to entice customers to sign contracts with lucrative data plans. Any shift, however minor, can cause average selling prices to fall due to the large percentage of iPhones sold with a subsidy. In addition, many carriers are trying to wean customers off of device subsidies. Right now, many are offering phone financing as a reasonable stopgap, but when faced with tangible numbers many customers may opt to go with lower-priced units.
Final thoughts
Apple has grown revenue over the last year by 5.1% on a year-over-year basis. That's outstanding for a company with a top line pushing nearly $200 billion. But I'd continue to watch iPhone ASPs, which present a headwinds of sorts to the investment.
As the average selling price comes down, Apple will need to sell more units to keep that product line's revenue growing. The end result is a "running to stand still" scenario that could hurt the investment. That said, Apple investors should be informed, not afraid. You can bet Apple's veteran leadership team is looking for ways to keep the company growing for years to come.
