There’s been a lot of talk about Apple Inc. (NASDAQ:AAPL) and the effect that the low-end smartphone market will have on it. Some say it’s good and diving in is a necessity, while others are more concerned about falling gross margins. But the fact remains that the smartphone market is changing and the low end is growing faster than the high end.
So what’s a company like Apple Inc. (NASDAQ:AAPL) to do? Analysts at two firms take a closer look at what these changes mean for Apple Inc. (NASDAQ:AAPL).
Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More
Apple’s place in the used market
Bernstein Research analysts A.M. (Toni) Sacconaghi, Jr., Jonathan Cofsky and Eric C. Garfunkel have been examining the used smartphone market and its implications for Apple Inc. (NASDAQ:AAPL). They believe the used market will climb from 53 million to 257 million units over the next five years, reaching as much as 15 percent of the size of the new smartphone market at that time.
Statistics indicate that Apple Inc. (NASDAQ:AAPL)’s iPhone is the most popular resold smartphone, and thus carries the highest resale price. They estimate that the iPhone makes up about half of all used smartphone sales. Over time, they believe it will fall to about a third of used sales.
Apple might already be feeling the effects
The analysts estimate that the cannibalization rate of new iPhones from used ones is only about 20 percent and that most used handsets are sold to those who otherwise would have purchased a low-cost handset from another manufacturer. Apple Inc. (NASDAQ:AAPL) did say on its most recent earnings call that sales to Hong Kong resellers were especially weak, falling 20 percent year over year.
According to the Bernstein analysts, a significant percentage of used iPhones are sold to Hong Kong resellers and distributors. As such, they believe this is one area worth monitoring because Apple Inc. (NASDAQ:AAPL) might already be feeling the impact of used smartphone sales.
They believe the cannibalization risks for Apple Inc. (NASDAQ:AAPL) moving forward will increase significantly, especially if the rumored low-cost iPhone is released. However, they believe that if the used iPhone market stimulates faster replacement cycles of 1.8 years rather than 2, the effect from cannibalization could be offset completely.
Apple’s gross margins could increase with a low-cost iPhone
Neil Hughes of Apple Insider reports on a research note from Brian Marshall, an analyst from ISI Group. Marshall thinks that even though a low-cost iPhone would offer a lower entry price for those interested in Apple Inc. (NASDAQ:AAPL)’s products, the company’s gross margins could actually increase.
Gross margins dropped from 42.8 percent last year to 36.9 percent this year, and Marshall thinks this was because of the formed limitation which is placed on production of Apple Inc. (NASDAQ:AAPL)’s older models. The market wants low-end products more than high-end ones, and he sees this as being a major constraint on production for Apple Inc. (NASDAQ:AAPL)’s older, less expensive iPhones.
By switching to a new low-cost iPhone rather than continuing to substitute older models, he estimates that Apple Inc. (NASDAQ:AAPL) could see its gross margins for just that single handset climb to about 40 percent. He said this implies spending $160 in materials and offering a wholesale price of $340 for the handset.