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How the iPhone Air Gives Apple a Boost

Stocks in this article: AAPL GOOG

The iPhone is Apple's primary revenue driver, accounting for more than half of Apple's revenue in its most recent fiscal quarter. Hargreaves said he believes that the iconic smartphone, introduced by Steve Jobs in 2007, will account for nearly 70% of Apple's gross profit in fiscal 2014, with replacement sales accounting for nearly 70% of all sales in 2014, and then growing to 80% in 2015.

Should Apple sell a 4.7-inch iPhone (and potentially a 5.5-inch iPhone as well), Apple could sell the 4.7-inch iPhone at a subsidized price of $299, $100 more than the subsidized cost of the iPhone 5s. Though the next iPhone would be more costly to consumers, it would be to Apple as well. Hargreaves estimates the next iPhone could cost as much as $60 more per phone to make. Assuming an additional $100 price raise for the iPhone, that would boost Apple's industry leading gross margins a tad, which are currently around the 37% range.

Given the weak sales of the iPhone 5c, Hargreaves believes this actually increases confidence Apple can raise prices on the next iPhone and not hurt itself.

"We believe the 5c sold poorly because a huge percentage of iPhone sales are subsidized, and a $100 difference in device price is simply not enough to compel Apple customers (who are relatively rich) to buy an inferior device," Hargreaves penned in the note. This suggests Apple customers are relatively insensitive to price, so a higher price is not likely to dissuade potential iPhone 6 consumers who are attracted to the device's features."

On Apple's fiscal first-quarter earnings call, CEO Timothy D. Cook noted the skew for iPhones was towards the 5s. "And so the mix was stronger to the 5s, and it took us some amount of time in order to build the mix that customers were demanding," Cook said on the call. "And as a result, we lost some sort of units for part of the quarter in North America and relative to the world, it took us the bulk of the quarter, almost all the quarter, to get the iPhone 5s into proper supply."

As Apple continues to be reliant on the iPhone for the majority of its revenue and its earnings power, it has to come up with ways to boost its power in smartphones, as the industry matures and the growth simply isn't there like it once was. A higher-priced iPhone, coupled with new ways to use it such as CarPlay, and new features, including mobile payments, gives Apple a leg up on the competition in an increasingly slowing market.

-- Written by Chris Ciaccia in New York

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