The Apple (NASDAQ:AAPL) iPhone 6s is, in my view, the most impressive smartphone Apple has ever built and, indeed, the most impressive smartphone on the market today. Its performance is stunning, its display beautiful, the cameras are superb, and 3D Touch is really cool.
Indeed, Apple really went all-out with the 6s. Aside from the underlying LCD panel, seemingly every component was upgraded from the iPhone 6. From the perspective of a consumer, I couldn't be happier. However, from an investment perspective, I think that the substantial improvements that Apple has brought to the 6s might pose a risk to the company's overall profits during the 6s cycle.
Better may mean "more expensive"
In going from the 6 to the 6s, Apple made the following component upgrades (at least as far as I can tell):
- Larger applications processor built on a more advanced manufacturing technology
- Move from cheaper LPDDR3 to faster, more expensive LPDDR4 memory; doubling of RAM from 1GB to 2GB
- Upgrade from the Qualcomm (NASDAQ:QCOM) MDM9x25 modem to the MDM9x35
- Additional RF content to support the more advanced cellular system
- Upgrade of the metal housing from cheaper 6000-series aluminum to stronger, more expensive 7000-series aluminum
- More advanced front and rear cameras
- Better Touch ID
- 3D Touch support
Introducing new features and capabilities in each generation is par for the course for iPhone. However, the sheer number of upgrades that Apple introduced in going from iPhone 6 to 6s is seemingly unprecedented for iPhone.
Although Apple brings enough volumes to the table that it likely gets significant "volume discounts" on the components that it buys, I still think that the iPhone 6s is materially more expensive to build today than the iPhone 6 was at the beginning of its cycle.
Since Apple hasn't raised the prices of its iPhones, the increased cost structure in going from the iPhone 6 to the iPhone 6s may have an adverse impact on the company's per-unit gross profit margins.
Why I'd really like to see year-over-year unit growth with iPhone 6s/6s Plus
If I'm correct that Apple sees fewer gross profit margin dollars per iPhone 6s sold than it did with the iPhone 6, then that's not necessarily a bad thing. Indeed, if these additional features can compel buyers to upgrade and ultimately drive iPhone unit growth, then the gross margin dollars associated with the additional revenue can potentially more than offset the per-unit cost increases.
Let's use a "toy" example to understand this (note: the numbers I'm using here are made up and for illustrative purposes).
Suppose that Apple's iPhone 6 average selling prices were $700 and it cost the company $350 to manufacture the devices. Now also suppose that Apple sells 1,000 of these phones. This would imply $700,000 in revenue and $350,000 in gross margin dollars.
Next, suppose that Apple's iPhone 6s average selling prices are also $700 and that it costs the company $380 to manufacture each device. Obviously, if Apple sells 1,000 of these units, it will make less money than it did selling 1,000 iPhone 6 models last year. However, if these new features help the company grow sales by more than 9.4% from last year, then the company can grow its total gross profits.
The way I like to think of it is as a positive feedback loop: the faster Apple can grow its sales, the better it can afford to make its iPhones while still delivering increased profits to its stockholders.
There are many in the investment community that believe Apple will see flat-to-down iPhone sales during this cycle as a result of the massive success of the iPhone 6. If this turns out to be the case, then Apple's profitability in its coming fiscal year could decline, posing a risk to Apple shares.
Ashraf Eassa owns shares of Qualcomm and loves his new Rose Gold iPhone 6s. The Motley Fool owns and recommends Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.