iPhone shipments have been trending lower, driven partly by Apple’s (NASDAQ:AAPL) move to bump-up its flagship iPhone prices to $1,000+. Over Q2 FY’19, volumes fell 30% YoY to 36.4 million, per IDC, and we project that FY’19 figures will fall by 15%. In this analysis, we provide a scenario which explores the impact on Apple if it decided to drop prices on its flagship iPhones. While we note that the odds of this happening are slim, examining the impact on Apple’s EPS and valuation could be interesting for investors.
View our interactive dashboard analysis on Should Apple Consider Dropping iPhone Prices?
A Look At iPhone Shipments And ASPs In Recent Years And The Outlook
- iPhone shipments grew from about 150 million units in FY’13 to 231 million units in FY’15, driven by the iPhone 6 series.
- As shipments remained relatively flat between 2016 and 2018, Apple shifted its strategy toward boosting revenue per iPhone.
- For instance, ASPs rose 17% in FY’18 to ~$765 driven by iPhone X and 8.
- However, we now expect iPhone shipments to decline by about 15% this year, with revenues also falling by a similar amount, as customers are holding on to devices for longer due to higher pricing.
There Is A Strong Case For Reducing Flagship iPhone Prices
- Apple’s flagship iPhones are priced starting at $1,000 and $1,100 limiting their uptake beyond power-users/early adopters.
- Moreover, the strategy of offering all-new mid-range models such as the XR with lower specs hasn’t resonated with customers.
- We believe that the company could drop iPhone pricing by about $100, without hurting its overall revenues in the long-run due to three broad reasons: lower component prices, higher services upside, and the ability to drive greater ecosystem lock-in.
- Our scenario for the price reduction is shown in blue.
How Would A $100 Flagship iPhone Price Reduction Impact Apple?
- Our scenario assumes that Apple will drop prices on its flagships by $100, causing ASPs to fall to $680, versus our base case of $760 in FY’19. (We project ASP decline to be less than $100, assuming that other models hold their price points)
- We estimate that this could boost iPhone shipments to 210 million, versus our base case of 186 million.
- Under this scenario, iPhone revenues would decline by about $4 billion vs. our base case.
Apple Could See Upside From Services And Other Product Sales
- We estimate that each iPhone user brings in $30+ per year in services revenue.
- The lower iPhone price points could help to bring more users into Apple’s services fold, boosting recurring services revenue.
- Additionally, the iPhone is a stepping stone of sorts into Apple’s ecosystem.
- A lower price point could help to drive sales of other products such as the Apple Watch and Airpods, as well as the iPad and Mac.
Lower Component Margins Give Apple Headroom To Maintain Margins
- Component prices have been on the decline, with DRAM prices falling ~30% over the first 3 months of the year and NAND prices also trending lower.
- Manufacturing of once-expensive components such as 3D depth sensors is also likely to have reached maturity, leading to lower costs.
- This could give Apple room to maintain its net margins.
Apple Could Gain In The Long-Run
- Overall, we believe that a price reduction could help Apple maintain its revenues and earnings in the near-term while providing some long-term upside from stronger projected services and other products related earnings.
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