Apple Inc. (NASDAQ:AAPL) reported its first-quarter earnings yesterday evening. It’s a given that AAPL stock is driven by iPhone sales. And the company reported a 1.24% decline in the number of iPhones it sold compared to this quarter last year. So why is this still good news for Apple? The answer is iPhone average sale price, or iPhone ASP.
With the iPhone X starting at $999, the ASP for an iPhone has risen dramatically. As a result, Apple was able to report 1 million fewer iPhone sales than last year Q1, yet posted iPhone revenue growth of 13%.
AAPL popped last night after earnings, but it’s now down 1.7% in early morning trading.
Apple Has Always Positioned the iPhone as a Premium Smartphone
Apple competitors like Samsung go toe-to-toe with the iPhone. But their smartphone numbers are made up of more than their flagship models. The $750 Galaxy S8 competes directly with the iPhone, and Samsung sells more phones than anyone — other than a blip after the Galaxy Note 7 battery disaster where Apple briefly took the lead. But Samsung’s product mix includes a wide variety of phones, including mid-range and basic models. As a result, its ASP for a smartphone is in the $235 range.
Apple has always positioned the iPhone as a premium smartphone. There are no basic models. And until the iPhone SE debuted, the company didn’t even offer a mid-range phone. That meant a high iPhone ASP so iPhone sales translated directly into big iPhone revenue.
Apple iPhone ASP Has Been Growing, Thanks to Plus Models
Apple started to go big with the iPhone 6 Plus in 2014, which came with a $100 premium over the regular iPhone 6.
The plus-sized models really began to take off with consumers with the iPhone 7 Plus in 2016. Apple added a compelling dual camera system that made the bigger iPhone even more attractive. As a result, the Plus models took a bigger share of iPhone sales, raising iPhone ASP to a record $695 after the iPhone 7 launch.
iPhone X Helps Apple iPhone ASP Shatter Old Record, Post Record Revenue
With rumors that the new 10th anniversary iPhone was going to be priced at a mind-boggling $999, there were expectations that the iPhone ASP could top $750 this year.
Apple caught everyone off guard during its earnings report with the news that iPhone ASP for Q1 was $796. That’s an increase of over $100 compared to Q1 2017. And it’s big news for investors (thus the pop in AAPL stock).
That massive gain in iPhone ASP meant that although Apple sold 1 million fewer iPhones than last year, its iPhone revenue was $7.2 billion higher.
In other words, Apple has shown that softening demand for iPhones in a maturing market doesn’t have to mean the end of the iPhone cash cow. The iPhone X’s $999 price tag could have been disastrous had consumers refused to pay it.
Instead, enough people bought the expensive iPhone X (and iPhone 8 Plus) to increase that ASP to the point where the company set a new revenue record. In the fall, Apple is expected to release an iPhone X Plus. If it follows the pattern of other Plus models, that will mean a premium of at least $100 — and probably more. That means the potential for Apple’s iPhone ASP to continue rising.
Going forward, iPhone sales are obviously still important. As the iPhone X has shown, however, when demand softens, but you are able to command a premium price that iPhone ASP can continue propelling big revenue increases and AAPL stock growth.
Apple’s tag line for the iPhone X is “Say hello to the future.”
And the future means iPhone ASP may be as important to AAPL investors as units sold.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
