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Apple's iPhone 8 Dilemma

Jul. 11, 2017 10:39 AM ETApple Inc. (AAPL)56 Comments
Musings of a Banker profile picture
Musings of a Banker


  • A much higher bill of materials is projected for the iPhone 8 which will put pressure on Apple to increase pricing.
  • However, it will have to deal with a saturated market and rapidly growing Chinese OEM players like Oppo and Vivo.
  • Apple’s management will need to do a balancing act with its iPhone pricing while its true brand power will be revealed.

The next iteration of the iPhone will also be the 10 year anniversary of Apple's (NASDAQ:AAPL) first highly successful iPhone. The iPhone now contributes close to two-thirds of Apple's total revenue. In order to meet investor and consumer anticipation, Apple needs to deliver improved functionalities with the new iPhone 8. And as a result, the company's bill of materials (or BOM) will likely get pushed significantly higher.

This is not entirely surprising in an increasingly competitive market. Even the Samsung S8 recently saw a 16% increase in BOM (from $264.16 to $307.50) compared to its S7. Last year, the iPhone 7's BOM came in at $224.80 which was 20% higher than the iPhone 6S' BOM.

However, Apple now has less leverage when trying to pass through its component costs to the end consumer due to a more competitive market - specifically in China. So simply increasing the average selling price (or ASP) may no longer be an option for Apple.

But how much will the iPhone 8's BOM really increase?

iPhone 8's Expected Cost Increase

When looking at component prices, UBS recently estimated that the bill of materials for the iPhone 8 is going to be substantially higher than last year.

The components listed above show a cost increase of $71. The BOM of iPhone 7 was $224.80 and a bit higher for the plus model. Hence, BOM for iPhone 8 can easily be in the range of $300 to $325 and would represent at least a 30% increase.

Will the incremental cost be worth it? In this iteration, Apple will try to move ahead of other smartphone makers in terms of innovation and functionalities. But how much increased functionality will it actually provide? Apple has had difficulty being truly innovative as noted in this recent Huffington Post article.


This article was written by

Musings of a Banker profile picture
Finbox is an online stock research platform designed for individual investors and asset managers who care about understanding a stock’s fundamental value. The platform provides a quick sanity check so that investors can understand what they’re investing in and why.

Analyst’s Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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