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Why Apple Inc. (AAPL) Is About to Squeeze iPhone Suppliers

Apple makes literally all the profits and then some in the smartphone industry, but it needs higher margins, so here comes the squeeze

By Brad Moon, InvestorPlace Contributor

http://bit.ly/2fdju3r

Apple Inc. (NASDAQ:AAPL) may be facing declining iPhone sales, but two reports show the company is dominating the industry profits and determined to remain in that position.

Why Apple Inc. (AAPL) Is Leaning on iPhone Suppliers
Source: Apple

In the last quarter, AAPL accounted for an astounding 103.6% of all smartphone industry profits. However, determined to maintain its fat margins — and provide a little tailwind for struggling Apple stock — the company also is said to be leaning on its suppliers to cut prices on iPhone components.

Apple Scoops Virtually Every Cent of Smartphone Profits

AppleInsider details a report by BMO Capital Market analyst Tim Long on the current state of Apple’s iPhone business in relation to the overall smartphone industry. It paints a striking picture of a company that has continued to see its marketshare erode, yet has managed to essentially shut out its rivals when it comes to actually making money off smartphones.

It’s always been clear from Apple’s earnings reports that the iPhone is critical to the company’s bottom line. In its last quarter, the iPhone accounted for $28.16 billion in revenue and was the biggest contributor to Apple profit.

Those numbers were down significantly compared to a year ago. This reflects the fact iPhone sales have slipped during the same time period. Compared to 13.6% of world smartphone sales in Q3 2015, this year AAPL has captured just 12.1% of the market. Rivals running Alphabet Inc’s (NASDAQ:GOOGL) Android rising to a commanding 87.5%.

However, market share doesn’t equal profitability, as Tim Long’s report shows.

Apple has historically punched far above its weight when it comes to making money from its mobile phones, but in Q3, the company absolutely dominated its rivals. While virtually every other smartphone manufacturer lost money, iPhone sales accounted for 103.6% of industry profits (the greater than 100% number reflecting the losses suffered by the competition).

Apple’s rival in the smartphone wars, Samsung (OTCMKTS:SSNLF), placed second with a mere 0.9% of smartphone profits.

The iPhone SE and Apple Profit Boosting Strategy

At roughly the same time the Apple Profit story was breaking, MacRumors published a report by KGI Security analyst Ming-Chi Kuo. In it, Kuo outlines two of AAPL’s strategies for maintaining such high margins on its iPhones.

According to Kuo, Apple will skip refreshing the iPhone SE next year. Its smallest and most affordable phone already has sufficient technical specs for it to remain a viable option for another year. If it’s good enough to satisfy demand, why spend the money on an upgrade? Having no new iPhone SE saves AAPL on development costs and manufacturing start-up costs.

However, Kuo predicts that Apple will go further.

In addition to not releasing a new iPhone SE model next year, he thinks the company will lean on its suppliers to cut their prices on iPhone components. Some — like Samsung — will push back, but others will likely cave in an attempt to retain Apple’s business.

If Apple achieves any success in its efforts to cut production costs, it not only avoids the cost of releasing a new iPhone SE, but it also makes the existing models even more profitable. Even if iPhone sales continue to slide going into 2017 (and the ramp-up to the 10th anniversary iPhone 8) as predicted, with better margins, Apple profit won’t take as big a hit.

And AAPL will continue to dominate smartphone industry profits despite a dwindling market share.

It’s worth noting that part of the reason for Apple’s incredible spike last quarter can be attributed to the hit Samsung took over the Galaxy Note 7 debacle. That doesn’t take away from the fact that no other other single smartphone manufacturer seems to have anywhere near the same leverage to command the combination of discounted components from suppliers and premium pricing from consumers.

Apple has never been shy about using that clout, and it shows.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/apple-inc-aapl-stock-iphone-suppliers-iplace/.

©2018 InvestorPlace Media, LLC