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Apple’s iPhone 14 Launch: The Biggest Surprise For Investors

September 7 was an action-packed day for Apple, as the Cupertino company unveiled the iPhone 14 and other products. Here’s what must have caught investors by surprise.

Apple  (AAPL) - Get Apple Inc. Report unveiled the anticipated iPhone 14 on September 7. The product lineup largely matched expectations as I had outlined in a recent article. The Cupertino company introduced a brand-new trim, the iPhone 14 Plus, and retired the largely unsuccessful mini model.

Among a barrage of product and feature announcements, one piece of news must have surprised attentive investors due to its potential financial impact. Contrary to expectations, Apple has chosen not to raise the price of the popular iPhone Pro and Pro Max.

Figure 1: Apple’s iPhone 14 Launch: The Biggest Suprise For Investors

Figure 1: Apple’s iPhone 14 Launch: The Biggest Suprise For Investors

(Read more from Apple Maven: Will Warren Buffett Buy More Apple Stock in Q3?)

iPhone Pro and Pro Max: 2021 Prices?

Several sell-side analysts had anticipated, prior to Apple’s event, that the company would bump the price of its iPhone Pro and Pro Max devices by $100. Among them were the most bullish of bulls, Wedbush’s Dan Ives, and the sole AAPL bear on Wall Street, ItauBBA’s Thiago Kapulskis.

Yet, the iPhone 14 Pro will continue to sell for $999 at the cheapest configuration, while the Pro Max will hit the market at the same starting price of $1,099 as last year’s comparable model.

2022 has been a year of historically high consumer and producer prices. While the headline CPI (consumer) and PPI (producer) numbers have reached peaks of 9.1% and 11.7%, respectively, the price of tech components has been propelled even higher due to supply chain disruptions.

It would be understandable for Apple to raise the price of the iPhone to fight inflation. Instead, it looks like the Cupertino company played it safe and did not put the burden on its consumers, maybe fearing that doing so during a period of economic deceleration could hurt demand.

Quantifying the Impact

But with so many new products and cool features coming out of Apple’s September 7 event, why should investors focus on the $100 price increase (or lack thereof)?

As we say in the industry, a change in price “flows straight to the bottom line”. Think about it: it costs the company something to sell an extra unit of a product. However, assuming no change to demand, an increase in price does not imply an increase in costs. In this case, earnings and margins benefit dollar for dollar.

According to MacRumors, about 30% of the iPhones sold earlier this year were Pro or Pro Max. And according to Wedbush’s Dan Ives, Apple should sell around 220 million units of the iPhone in fiscal 2023. Put these two pieces together, and one can estimate that some 66 million units of the Pro and Pro Max should be sold next year.

Here’s the math behind the impact of the $100 price increase that never happened, using a few assumptions that I find reasonable:

  • Apple could have made $6.6 billion extra in revenues, assuming no change in demand
  • Assuming an effective tax rate of 15%, the impact to net income could have been 5.6 billion
  • Assuming share count of 16 billion, 2023 EPS could have been higher by 35 cents, or roughly 6% of the current earnings per share estimate

Key Takeaway

On the surface, Apple’s decision not to increase the price of the iPhone 14 Pro and Pro Max looks like a negative to me, from an investor perspective. In times of inflation, the company may have signaled lack of confidence in its consumers’ discretionary spending power.

On the other hand, I trust that Apple, the largest consumer company in the world, makes pricing decision based on detailed studies of consumer behavior. Playing conservative on pricing today could help to maintain the red-hot demand for iPhones strong going into this important holiday season.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)