Apple’s iPhone 6 Could Cost You $750

4/15/14 9:15AM EST

Apples iPhone 6 Could Cost You 750 Apples iPhone 6 Could Cost You $750

iPhone 5s. Image via Apple

Apple must be thanking God, or sluggish consumer spending, for the lack of inflation in recent years. The iPhone originally deputed at $499 for the 4GB model. In the last seven years the price of the base model has gone up to $649, a 30 percent rise. In the same period total inflation amounted to just 12 percent. The price of a new iPhone is rising faster than inflation, and Apple is earning dividends off of the discrepancy.

At the same time costs have increased at Cupertino. As Android smartphones have become closer and close in quality to Apple Inc. (NASDAQ:AAPL) offerings, the cost of each new iPhone has headed upward. Tim Cook is very conscious of the company’s gross margin, and, if costs are set to continue rising, another price rise may be on the way. Jeffries analyst Peter Misek reckons that the iPhone 6 could cost $100 more than the 5S.

iPhone Costs Spiral At Cupertino

Apple has been ambitious and creative in its rive to keep iPhone component costs down. The firm has spent billions on research and development, managing to produce its own chipset along with other internals. These have the dual benefit of reducing the price per component and using components that its competitors simply can’t get their hands on.

According to Misek, Apple may need to increase the price of the iPhone 6 by $200 because of compressing margins. Apple raised the price of the base iPhone model by $50 between the relelase of the iPhone 4S and the iPhone 5. Sales didn’t suffer from that jump, as carriers maintained their subsidies. A $100 rise may be too much for Verizon to handle, however.

Carriers have their own margins to worry about, and the industry is currently extremely competitive. Misek reckons a $50 bump in the price that Apple Inc. (NASDAQ:AAPL) gets for each iPhone could boost EPS by up to 11 percent, but that relies on the acquiescence of consumers, something that should not be assumed.

Apple Looks To Consumers For Margin Protection

If Apple does raise the price of the iPhone 6 to $749 its gross margin will certainly be protected, but the company may lose out in total profit. If carriers can’t keep the cost of a the iPhone 6 at $200 on-contract, demand at stores will surely fall. An increase of $50 will put the iPhone ahead of most Android competitors, making it a device with a premium feel and a premium price tag.

Most responses to the Jeffries report appear to be discounting the likelihood of a $100 price increase for the iPhone 6. It would certainly be a drastic move, but Apple is expected to surprise every once in a while. With a larger screen, along with other bleeding-edge tech, in the mix costs are spiraling at Cupertino.

Apple Inc. (NASDAQ:AAPL) is trying to reassure investors about the future of the company. A price increase will increase gross margin and, if carriers can be convinced to play along, the company might be able to keep sales at the same level. That’s the dream for Apple investors, but the companies ability to pull it off is still in question.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.

 
 

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