Quantifying iPhone Lite's Potential Revenue- And Stock-Boosting Prospects For Apple

Jul.31.13 | About: Apple Inc. (AAPL)

Many retail investors comb through the news at day's end and/or beginning only to be reading the next sensationally worded article about Apple's (NASDAQ:AAPL) future. Analyst are consistently making bullish and bearish recommendations; rumors are springing up from little known websites, iWatch, iPhone Lite etc. This list goes on. The coverage on Apple is so extreme that it would not be surprising to see an article about an executive eating lunch at a particular restaurant and extrapolating that to some sort of article relating to the future prospects of Apple.

The rehashing of facts, rumors and analyst comments is getting to be quite boring and unimpressive. As many subscribers and readers note, the articles both within and outside of Seeking Alpha regarding Apple sing a familiar tune. This article aims to provide a quantitative aspect on the famous iPhone Lite rumor. The iPhone Lite seems like the most probable rumor based on market demands and corporate strategy and capabilities. Furthermore, enough data points exist to properly estimate the cost out such a rumor, thus providing a quantitative analysis and not simply an anecdotal bedtime tale.

The aim here is to not justify why or why not the rumor is true or false. That will be up to the reader to decide for himself or herself. A series of analysis in conjunction with justified assumptions will put forth the thesis that IF the rumor is true, one can expect the following quantitative effect on the financial statements. The potential effect on the share price will be provided as well.

Historic iPhone Component Costs

The component breakdown is courtesy of and sourced from isuppli.com. Click here for component breakdown.

3GS Component CostClick to enlarge

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Discussion of Component Costs

Apple's cost per iPhone has been growing slowly, but surely, since the iPhone 3GS model to the current iPhone 5. The increases over the years are attributed heavily towards the cost of processors, radio frequency component costs and the display and touchscreen cost.

The objective of this article is not an analysis of the business, or operations. There exist a plethora of articles that can provide those who are curious about those subjects to analyze. The provided data of historic component cost is to provide a historical and justified basis to which to model out the potential component cost of the rumored iPhone "Lite."

The assumptions in the model and the related component cost will be solely based on historic components. The reason for this is to hypothesize the general price range of a phone with similar specifications. To speculate not only on the components, which this article does but on from an educated basis, and then to further attempting to rationalize the cost per component detracts from the goal of generating a realistic bill of materials.

Costing Model for 16 GB iPhone Lite

Subsection

Part Description

iPhone 3GS

iPhone 4

iPhone 4S

iPhone 5

Application Processors

Application Processor

$14.46

$10.75

$15.00

$17.50

DRAM

$8.50

$13.80

$9.10

$10.45

Misc. AP Components

$1.30

$0.50

Memory

Flash

$24.00

$27.00

$19.20

$10.40

Misc. Memory Components

$0.30

Radio Frequency

Baseband

$13.00

$11.72

$23.54

$34.00

Transceiver

$2.80

$2.33

Memory

$3.65

$2.70

Power Mgmt.

$1.25

$0.00

Misc. RF Components

$1.35

$8.25

Power Management

Main PM Device

$2.03

$7.20

$8.50

Misc. Power Management

$1.90

Connectivity

WiFi/BT

$5.95

$7.80

$6.50

$5.00

GPS

$2.25

$1.75

Misc. Connectivity Components

$0.80

Interface & Sensors

Touchscreen Controller

$1.23

$6.85

$6.50

Audio CODEC

$1.15

$1.15

E-Compass

$0.70

Accelerometer

$0.65

Gyroscope

$2.60

Misc. I&S Components

$3.80

Display/Camera

Display

$19.25

$28.50

$23.00

$44.00

Touchscreen

$16.00

$10.00

$14.00

Camera

$9.55

$9.75

$17.60

$18.00

Camera (Secondary)

$1.00

Battery

Battery

$5.80

$5.90

$4.50

Other

Mechanicals

$10.80

$33.00

$33.00

Electro-Mechanicals

$14.40

Misc.

$48.00

$5.50

$7.00

$7.00

Totals

$172.46

$187.51

$187.89

$198.85

Click to enlarge

Note: A 15% discount was taken off the aggregate of components due to depreciation of prices of legacy technological components. This stems from newer updated technologies as well as potentially optimized production yields for components.

Discussion of Assumptions

The highlighted components represent the anticipated and rumored components for the iPhone Lite. Based on these assumptions, the total component cost for the iPhone Lite would be: $155.13

The assumptions of the model are very broad and overarching. The reality is that the general public, such as myself, does not know the specifics nor the existence of the iPhone Lite. The assumptions are generated on the basis of the perceived likelihood of the anticipated specifications. As with any thesis, individuals must take the time to conduct one's own due diligence, adjust inputs as necessary and generate a thesis and opinion.

Unless discussed in further detail below, the most recent component or expensive will be selected for the purposes of costing out the iPhone Lite.

Processor:

The most likely candidate overall for components of the iPhone Lite are from the iPhone 4S. The performance of the phone, though not industry leading by current standards, is a very capable phone. The likelihood of selecting the iPhone 4S processor is much greater than the iPhone 4 as the 4S's dual core chip is a significant improvement over the 4. The iPhone 4S possess a dual-core chip versus the single-core found in the preceding generation. Furthermore, as developers continue to create a plethora of complex applications, the processor demands will need to keep pace. As noted by authors and analysts alike, Apple is much more about the ecosystem and apps than just the hardware on a standalone basis. Therefore the iPhone Lite's hardware must still support the majority of apps currently available.

DRAM:

To ensure educated assumptions are inputted into the model (as much as possible), the DRAM from the 4S was selected to match the processor needs. The model is not meant to be a specification-building machine, rather a starting point to predict the cost of the rumored iPhone Lite. Furthermore, it is common for DRAM to be mounted onto the application processor; therefore the assumption was to go with the DRAM from the 4S.

Memory:

It was assumed that due to a combination of improving technology and economies of scale that the most recent memory iteration should be taken. As such, the memory from the iPhone 5 was selected.

Radio Frequency:

If the rumors of the iPhone Lite are true, China must be the market it is targeting. India is important, but piecing together news headlines over the last year indicate that the creation of this phone is for the Chinese market. China Mobile's construction of LTE towers point towards an iPhone Lite with LTE capability. It would seem that the lower priced iPhone Lite would void the need for massive subsidy, which is suspect to be the reason why China Mobile has not inked a carrier deal with Apple. Based on this analysis, the only LTE option is found in the RF components of the iPhone 5.

Interface & Sensors/ Display & Camera:

The iPhone 4S component was selected based on the selection of the display and touchscreen from the iPhone 4S. To stay true to the low-cost rumors, the election was to select a smaller screen size. Therefore the 4S display and touchscreen were selected.

In respects to the camera, the iPhone Lite would have two cameras, front and back. The components are assumed to be the same as those from the iPhone 4 due to cost and reasonable quality/performance.

Gross Margin of iPhone Lite

Price

Gross Margin

$300

48.292%

$325

52.269%

$350

55.679%

$375

58.633%

$400

61.219%

Click to enlarge

The price range for the iPhone Lite are generated based on various rumors as well as a 50% discount of the current 16 GB iPhone 5. These margins are significantly lower than a 16GB iPhone 5 as expected. Premium products will always command a higher gross margin, even within the same model. For instance a 32 GB iPhone 5 commands a 73% margin versus 69% for the 16GB iPhone 5.

Top-Line Growth

The anticipated unit sales for the smartphones priced $450 and up are approximately 296 Million in 2013. For phones priced under $200, it is expected to be around 400 Million units. For estimate sake, the average unit sales for phones priced at $325 would be 348 Million units. Assuming the market of this size, the following table was created. The top row indicates market share percentage.

Sales vs. Market Share % vs. Unit Price

In Millions ($)

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

300

3,654

4,176

4,698

5,220

5,742

6,264

325

3,959

4,524

5,090

5,655

6,221

6,786

350

4,263

4,872

5,481

6,090

6,699

7,308

375

4,568

5,220

5,873

6,525

7,178

7,830

400

4,872

5,568

6,264

6,960

7,656

8,352

Click to enlarge

Median Sales Estimate: $5.699 Billion

Average Sales Estimate: $5.786 Billion

Share Price Effect

The complexity involved to arrive at a net margin % is inherently difficult to forecast or estimate with a reasonable basis. This is due to many operational factors, including economies of scale among others. Ideally a P/E Ratio would be used; however, due to the aforementioned difficulty in calculating EPS, P/S will be used as a suitable alternative to illustrate the potential effect on share price.

AAPL Price / Sales Ratio TTM Chart

AAPL Price / Sales Ratio TTM data by YCharts

Current P/S: 2.484

5 year P/S Average: 3.545

P/S Ratio

Market Share %

2.25

2.5

2.75

3

3.25

3.5

3.75

4

4.25

3.50%

$10.56

$11.73

$12.90

$14.08

$15.25

$16.42

$17.60

$18.77

$19.94

4.00%

$12.07

$13.41

$14.75

$16.09

$17.43

$18.77

$20.11

$21.45

$22.79

4.50%

$13.57

$15.08

$16.59

$18.10

$19.61

$21.12

$22.62

$24.13

$25.64

5.00%

$15.08

$16.76

$18.43

$20.11

$21.79

$23.46

$25.14

$26.81

$28.49

5.50%

$16.59

$18.43

$20.28

$22.12

$23.96

$25.81

$27.65

$29.49

$31.34

6.00%

$18.10

$20.11

$22.12

$24.13

$26.14

$28.15

$30.17

$32.18

$34.19

Click to enlarge

Note: A price of $350 per unit was used in this table to generate the values in the table.

The table above shows the additional price per share that would be added given the estimates and analysis conducted above.

Based on the table above and the conservative estimates, there exist a real distinct material addition to the stock price if the rumor comes to fruition. As noted by the disclosure, I'm long Apple and expect this to be at least one of the new products that continue to feed this cash cow going forward.

Concluding Remarks

This article is meant to provide a starting basis for a quantitative analysis of the popular iPhone Lite rumor. Out of the # of rumors that are being tossed around, the iPhone Lite seems the most logical and probable given the opportunity and Apple's ability to address this market in the immediate future.

The hope here is that this article sparks more hard analysis and individual investors developing their own models based on their respective investment thesis and opinion on various rumors.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.