Apple (AAPL) Considering Raising iPhone 6 Prices

April 14, 2014 7:41 AM EDT
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Apple (NASDAQ: AAPL) has been negotiating with carriers on a possible $100 iPhone 6 price increase, according to Jefferies analyst Peter Misek. While the initial response has been "no", there seems to be an admission among the carriers that there is no other game-changing device this year and the analyst thinks Apple can get at least some of the increase. Even a $50 increase would offset most of the negative iPhone 6 gross margin impact and remove a major bear argument, according to Misek.

While the idea may seem wild at first glance, Misek said it is not as crazy as it seems. "The possibility may at first seem far-fetched in light of investor concerns regarding possible carrier subsidy and handset price cuts due to smartphone saturation and lack of differentiation," Misek comments. "But we think this general lack of differentiation could be the reason why Apple may be able to get a price increase. Carriers realize that the iPhone 6 will likely be the only headline-worthy high-end phone launched this year and that they will lose subs if they do not offer it."

Commenting on who will pay for the potential increase, Misek notes Jefferies US Telecom Services analyst Mike McCormack and European analyst Jerry Dellis believe that the carriers have limited ability to resist and would take much of the hit themselves; however, the growth of EIP plans would mean that the consumer would take the brunt of the price increase and might opt for cheaper handsets. McCormack ests that in 2015 that 92% of TMUS's postpaid device sales will be on EIP vs. 43% on T, 25% on S, and 6% on VZ (VZ changed their plans recently and is not very aggressive with them).

An ASP increase could offset iPhone 6 gross margin headwind, according to Misek. "Our prelim iPhone 6 BOM est indicates GM could be up to 450bp lower than the 5s (pricier display/AP partially offset by general 5%-10% price concessions)," he notes. "Our current estimates assume a 430bp decline, which we feel is conservative unless some of the components run into yield issues. We estimate a $50 ASP increase on the iPhone 6 would raise GM by 375bp and $100 by 700bp so a $50 ASP increase would offset most of the iPhone 6 COGS pressure."

Misek said a $50 iPhone 6 ASP increase would raise revenues/EPS by 2%/11% and a $100 increase by 6%/24%.

The firm reiterated their Buy rating and price target of $625 on Apple.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $519.61 yesterday.

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