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Apple, Inc.'s Robust Profit Margin: 2 Reasons to Expect Continued Strength

By Daniel Sparks - Sep 22, 2015 at 12:30PM

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Apple's uncanny profitability looks dead set on persisting. Even more, it may even improve.

Amid all the headlines that have predicted Apple's (AAPL 2.32%) doom over the last decade, one fact has stood out consistently in the company's defense: its unorthodox gross profit margins. Apple's gross profit margin during the last 10 years has ranged between 29% and 44% -- a range most other consumer electronics hardware companies couldn't even dream of. Its ability to maintain such robust profit margins has served as partial evidence to a number of Apple's competitive advantages, including pricing power, customer loyalty, and formidable economies of scale.

iPhone 6s has been a key driver for Apple's impressive levels of profitability. Image source: Apple.

But despite Apple's clear demonstration of its ability to maintain a high profit margin, it's occasionally worth considering whether this level of profitability can still be maintained under current circumstances. As it turns out, however, Apple's current situation seems to suggest it is as likely as ever to continue on with industry-leading profit margins.

Here are two reasons why.

Higher average selling prices
With the launch of iPhone 6 and 6 Plus last year, the company broke the mold for high-end iPhone pricing, testing its pricing power with customers. While the iPhone 6 was priced with its ordinary entry-level pricing for a new, flagship iPhone, at $650 without a contract, there was one thing totally out of the ordinary: The iPhone 6 wasn't the flagship iPhone. The iPhone 6 Plus, priced at a starting price of $750 was the clear flagship product.

As it turns out, iPhone buyers seemed undeterred by the higher prices. The new iPhone pricing has had quite an affect on the average selling price of iPhones. Case in point, iPhone ASP in Apple's third quarter was $660, up from $561 in the year-ago quarter. 

And now with Apple's newest iPhone lineup launching with the same pricing scheme, the company is maintaining its pricing at the high end while its one-year-old iPhone line offers higher priced options than ever before. Combing this with the fact that iPhones are selling as well as ever, it looks like Apple is positioned to benefit from a tailwind of continued pricing power.

Data for chart retrieved from respective quarterly filings. Image source: Author.

As its most profitable product segment, a higher average selling price for iPhone is likely to serve as a catalyst for the company's overall gross profit margin.

Apple's new iPhone upgrade program looks promising
When Apple announces its latest iPhones in September, it also made the surprise announcement about its own iPhone upgrade program for customers. The program allows customers to spread the cost of an iPhone over 24 months, with the option to get a new iPhone every year. The program comes with AppleCare+. 

RBC Capital Markets analyst Amit Daryanani believes (via AppleInsider) that the program will be a catalyst for the company's profit margins. It will bolster iPhone upgrades, encourage greater customer loyalty, and help Apple build a profitable business selling refurbished iPhones, he argues. Each of these trends could help Apple's profit margins. Daryanani predicts the positive effect on the iPhone's gross profit margin will be significant, boosting it from an estimated 50% today to as high as 55%.

With iPhones accounting for 63% of revenue and Apple's gross profit margin across all of its products at about 40% today (well below Daryanani's predicted target for iPhone gross margin), the impact on Apple's reported gross profit margin would be noticeable if the analyst ends up being correct.

Reviewing these catalysts for Apple's gross profit margin, its impressive profitability looks set to continue to help the tech giant rake in billions in cash every quarter for years to come.

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