Apple (NASDAQ:AAPL), which competes with Research in Motion (RIMM), Nokia (NYSE:NOK) and Motorola (MOT) in the mobile phone market, released the latest version of its popular iPhone recently. Apple moved 1.7 million units of the new iPhone 4 in the first three days of its launch, an all-time record for any new Apple device.
Market research firm iSuppli recently estimated the material costs of each iPhone 4 at around $188. The iSuppli estimate implies gross margins of around 63% for iPhone 4. This healthy margin could mean an upside of 5% to Apple’s stock. How do we figure that? Read on…
iPhone Gross Margins Expected to Decline
We estimate that iPhone sales account for more than 50% of the $296 Trefis price estimate for Apple’s stock. In the past Apple has been able to maintain gross margins of around 61% for the iPhone. However we expect that declining iPhone prices will drive gross margins down to around 40% by the end of the Trefis forecast period. In another article, we explained why iPhone prices are likely to decline.
iPhone 4 Pricing for Apple Could be Around $650
Over the past two years, the total price of an iPhone has averaged around $590. This price includes the subsidy that AT&T pays Apple, which we estimate to be around $400. The retail prices for iPhone 4 are $199 for the 16GB model and $299 for the 32GB model. We estimate the total price at around $600 for the 16 GB iPhone and $700 for the 32 GB model. If Apple sells equal quantities of the 16 GB and 32 GB versions, Apple’s average pricing for the iPhone 4 could be around $650.
iPhone 4 Expected to Boost iPhone’s Gross Margins
The iSuppli report estimates that Apple spends about $188 in component costs to produce each iPhone 4. Adding an estimated $50 in royalty costs, Apple’s total direct cost for iPhone 4 comes to $238 per unit.
Given estimated average pricing of around $650, we derive a gross margin of around 63% for iPhone 4. We previously expected overall iPhone gross margins to decline to 57% in 2010. Based on higher margins for the iPhone 4, we are revising our 2010 iPhone gross margin estimate to around 61%.
Potential 5% Upside to Apple’s Stock
There could be an upside of 5% to the $296 Trefis price estimate for Apple’s stock if iPhone gross margins stay at around 61% for 2010 rather than decline as we forecast. However, we do expect gross margins to narrow in the long term due to declining iPhone pricing. You can modify our gross margin forecast in the chart above to see how changing iPhone margins impact Apple’s stock.
Disclosure: No positions