Will Apple's iPhone 6 Cost Too Much?

The high end of the smartphone market -- one in which Apple plays pretty much exclusively -- appears to have saturated. Now, while some may mistake this for "on the decline," the fact of the matter is that this segment as a whole isn't growing anywhere nearly as much as the broader smartphone market. In order to grow, Apple needs to gain more share at the high end. The upcoming iPhone 6 is Apple's best shot at a return to profit growth.

The iPhone 6 will be more expensive to make
A faster processor, more RAM, larger chassis, bigger/higher resolution screen, and other goodies don't come cheap. Apple needs to pay for it. Now, there's no doubt that it will squeeze its suppliers to the extent that it can, but even still, it would be remarkable if Apple actually found a way to keep the cost of its next-generation iPhone 6 flat relative to the 5s.

That said, despite an increase in the bill of materials, Apple could end up growing its sales pretty significantly as a result of share gains at the high end against Samsung, HTC, and other Android players. So, just what kind of market share gains does Apple need in order to offset a bill-of-materials increase? This is tricky to forecast as we need to come up with good estimates for the following:

  • The underlying secular market growth at the high end
  • What kind of potential market segment share gains at the high end Apple could get with a 4.7" iPhone
  • How much more expensive the iPhone 6 (4.7") will be relative to the iPhone 5s.

Projected iPhone 6 specifications
To help understand (3) above, it's worth building upon the analysis presented in "Apple's iPhone 6 Specs Revealed" to try to come up with a potential bill-of-materials cost for the iPhone 6 relative to the iPhone 5s (iPhone 5s numbers from IHS iSuppli).

Components

iPhone 5s (16GB)

Cost

iPhone 6 (16GB, Projected)

Cost (Projected)

NAND flash

16GB NAND

$9.40

16GB NAND

$9.40

DRAM

1GB LPDDR3

$11.00

2GB LPDDR4 (?)

$25.00

Display + touch screen

4-inch 1136x768 touch display

$41.00

4.7-inch, 1600x900 touch display

$52.00

Processor

Apple A7 + M7 co-processor

$19.00

Apple A8 + M8 co-processor

$22.8

Camera(s)

8MP + 1.2MP

$13.00

8MP + 1.2MP

$13.00

Wireless (Cellular)

Qualcomm MDM9615 + WTR1605L + RF Front End

$32.00

Qualcomm MDM9x25 + WTR1605L + RF Front End

$35.20

UI + sensor

Touch ID

$15.00

Touch ID

$15.00

Connectivity

Broadcom-based, Murata 802.11n module

$4.20

Broadcom-based, Murata 802.11ac module

$5.00

Power management

Dialog + Qualcomm

$7.50

Dialog + Qualcomm

$7.50

Battery

~1570 mAh

$3.60

~2300 mAh

$5.00

Mechanical/Electro-Merchanical

 

$28.00

 

$34.00

Box Contents

 

$7.00

 

$7.00

Total cost

 

$190.70 + $8 manufacturing

 

$230.90 + $8 manufacturing

Data source: IHS.

Now, if Apple ends up selling these at the same $649 (16GB) price as the iPhone 5s, then it is clear that there will be some margin compression in going from a device that costs about $200 to build against one at $240. However, the effects of this margin compression diminish with the size of the flash memory on board as the $40 delta becomes a smaller part of the selling price. Also, it is likely that Apple will offer a 128GB version at an even higher price point that'll carry even better margins to help offset the decline in the smaller ones.

How much volume does Apple need to grow?
For simplicity's sake, let's assume that 80 million of the 150 million iPhones sold in a given 12-month period is the latest and greatest. A $40 increase in cost over 80 million units suggests a hit to gross profit on the order of $3.2 billion a year. However, given that the iPhone 6 will still likely generate at least $400 in gross profit per unit, Apple needs to sell at most 8 million incremental iPhone units to maintain similar levels of profitability (in reality it could be less depending on the mix of 16/32/64GB models).

Now, 8 million incremental high-end units imply approximately 10% growth. The 4.7" screen should entice buyers of Android handsets to switch (as the iPad Mini did in tablets vis-a-vis the Android tablets of the time), and hitting that target is likely more than achievable. The question is whether Apple can do more than that in order to grow gross profits.

Foolish bottom line
At the end of the day, even a more expensive to make iPhone 6 will probably drive enough revenue growth to at least hold the line on raw gross profitability. Of course, to command a meaningfully higher multiple, Apple will need to grow high-end units in excess of that 8 million mark, but this should be achievable given the underlying secular trends and the market share growth opportunity. 

Is the iPhone 6 even the most interesting thing going on at Apple?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

The article Will Apple's iPhone 6 Cost Too Much? originally appeared on Fool.com.

Ashraf Eassa owns shares of Broadcom. The Motley Fool recommends and owns shares of Apple. It also owns shares of 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.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

Investment Strategies

What's your investing game plan?

View Course »

Add a Comment

*0 / 3000 Character Maximum