Will the weak smartphone market cause Apple’s new iPhones to fail?
apple (AAPL 0.26%) It is about to update its smartphone lineup this month, with the next batch of iPhones expected to be unveiled at the tech giant’s event on September 7.
This event will be significant to Apple because the iPhone is the company’s largest source of revenue, generating nearly $163 billion in revenue in the first nine months of fiscal 2022 and representing nearly 54% of its top streak. It is noteworthy that the last two generations – iPhone 12 and iPhone 13 – were a huge success.
Driven by the rapid adoption of the 5G wireless standard, these devices have done well despite the novel coronavirus pandemic and supply chain constraints. However, Apple now faces a new opponent, this time in the form of inflation that is severely affecting the global smartphone market. Will these headwinds take out Apple’s upcoming iPhones? Let’s find out.
Inflation is hurting the smartphone market – but not Apple
Global smartphone shipments have fallen for four consecutive quarters, according to IDC. In the first quarter of 2022, shipments fell 8.9% year-on-year due to weak demand as consumer spending slumped amid concerns about economic uncertainty and rising inflation. The story continued in the second quarter as smartphone shipments fell 8.7% compared to the same period last year with inflation and weak consumer confidence playing the spoiler again.
IDC expects smartphone shipments to decline 6.5% in 2022, due to lukewarm demand. That wouldn’t be surprising since high inflation is said to be forcing consumers to cut back on discretionary spending such as smartphones. However, Apple has defied the slowdown in the smartphone market. Its shipments rose 2.2% year-over-year in the first quarter to 56.5 million units, followed by a flat performance in the second quarter.
It is interesting to note that Apple’s sales have remained flat this year, while its likes xiaomiVivo and Oppo have seen a sharp drop in shipments despite offering cheaper smartphones that comply with the latest wireless standards. For example, customers can buy a 5G smartphone from Xiaomi for as low as $150, while Apple’s two-year-old iPhone 12 mini starts at $599, and the entry-level iPhone SE, now equipped with 5G, starts at $429. .
This is proof that Apple has strong pricing power in the smartphone market, allowing the company to perform well at a time when inflation is roiling the industry.
Why the next iPhone could beat inflation
Apple is expected to price the rumored iPhone 14 models from $749, according to market research firm TrendForce. While that’s higher than the $699 price tag that the iPhone 13 mini launched last year, it’s worth noting that Apple is expected to ditch the mini this year. The base model of the next iPhone is expected to have a 6.1-inch screen instead of the 5.4-inch screen of the mini.
The 6.1-inch iPhone 13 was introduced at $799 last year. This suggests that Apple may become aggressive about pricing its upcoming models, which could help the company improve device shipments. Of course, other analysts, such as popular Apple analyst Ming-Chi Kuo, believe that Apple could raise the prices of its new iPhones by 15% to account for higher input costs.
Kuo estimates that Apple could raise prices by 15% this year, with the base model expected to go on sale for $799. However, this will be equal to the launch price of the 6.1-inch iPhone. This means, in effect, that upcoming iPhones can be purchased at similar or even lower prices than last year’s models.
Another thing that could play in Apple’s favour is the growing adoption of 5G smartphones, which carry a higher average selling price (ASP) than the smartphone industry in general. IDC estimates ASP at $616 for 5G smartphones this year, which is significantly higher than the total ASP for smartphones of $413.
The market research firm also reported that smartphones priced over $800 are not affected by factors such as inflation. It also notes that the share of premium smartphones over $800 has grown to 16% of the overall smartphone market, an increase of four percentage points over the previous year.
These trends suggest that Apple’s new iPhones could continue to set sales records. Not surprisingly, Apple has asked suppliers to make 90 million units of its new iPhone lineup, which will be in line with the initial production batch for iPhone 13 models last year.
All in all, Apple can continue to weather the smartphone market slump and close the year at an all-time high, and this could inject some life into this tech stock that has been a normal year so far amid a massive sell-off in the market.
Harsh Chauhan has no position in any of the stocks mentioned. Motley Fool has and recommends positions at Apple. Motley Fool recommends the following options: long calls in March 2023 worth $120 on Apple and short calls in March 2023 worth $130 on Apple. Motley Fool has a disclosure policy.