An Unexpected Catalyst For Apple Inc (AAPL)’s iPhone 8 Super Cycle

Pricing will be at the core of the iPhone 8 Super Cycle, driving Apple Inc. (NASDAQ:AAPL)’s profit margins and ASPs higher.

 – Apple is expected to release three iPhone tiers in the next year.

 – Component costs for the OLED screen may contribute $25 to the bill of materials.

 – Furthermore, the iPhone 8 will likely be priced $100 higher than the 7S Plus to offset the incremental component cost.

Apple Inc. (NASDAQ:AAPL) is expected to increase pricing on the iPhone 8 model. The recent spate of rumors is suggesting upside to ASPs, which is broadly positive for Apple shareholders. There’s some credibility behind them, as they’re driven by reports from Mac Otakara and Ming-Chi Kuo. The two sources have leaked salient news ahead of a formal public announcements by Apple in the past.

While it’s early to speculate on Apple’s FY’18 performance, I come away with the impression that there’s room to grow shipments/ASPs upon launch of iPhone 8. (See also: Apple Stock: Will Apple Inc. (AAPL) Stock Regain Momentum In 2017?)

So what are the feature/pricing implications

It’s expected that the iPhone 8 model will be launched alongside a refreshed iPhone 7S model. The iPhone 7S models are expected to come with marginal improvements in line with prior S-cycle launches, whereas the iPhone 8 will come with a new iconic design that’s not going to include the home button, but rather a finger print sensor that spans the full scope of the screen. Furthermore, it’s anticipated that the iPhone 8 could get a boost in screen size, and an OLED display (contributing to a thinner form factor and better color contrast). The refresh to internal components will be in-line with the 7S, but perhaps Apple will introduce a couple of additional hardware features in the iPhone 8 (like a curved screen) and may bundle the handset with Air Pods to help substantiate a better value proposition.

It’s really hard to speculate on what other additions Apple will make to the iPhone 8. But, it’s likely that gross margins will improve, as the cost increase of premium components aren’t too substantial relative to Apple’s premium pricing. Of course, Apple could face tougher compares once we move through the current iPhone 7 cycle, as revenue growth is mostly driven by iPhone 7/7 Plus mix with buyers favoring the iPhone 7 Plus. ASPs are expected to increase by more than 10 percentage points to offset flat y/y shipments and currency headwinds.