Apple

Apple: Potential major change for the upcoming iPhone (NASDAQ: AAPL)

Apple iPhone 11 Pro isolated on white background

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Tech giant Apple (AAPL) has seen its quarterly revenue hit new highs lately thanks to the strength of the iPhone. The 5G supercycle that analysts have been talking about for years appears to have materialized, helping the stock reach a valuation of nearly $3 trillion at its peak. A new report suggests that this year’s smartphone cycle could be completely different from what we’ve seen in the past, a change that, if permanent, could have a significant impact on the future of the smartphone.

A recently published article on Apple 3.0 explained how some issues in the semiconductor space may impact the release of this year’s iPhone 14. A delay with the release of TSMC’s (NYSE:TSM) new generation of process density means that the usual large annual gains in chip improvement will not be visible. As a result, a key Apple analyst said the following about the upcoming 2022 iPhone:

Apple’s legendary supply chain analyst Ming Chi Kuo has announced important news for fruit phone lovers. The not-so-successful iPhone Mini is dead, and Apple is replacing it with an iPhone Max instead. It would be a larger iPhone with a screen size similar to the flagship iPhone Pro Max. Additionally, Kuo said that the iPhone 14 and iPhone 14 Max will not get the new A16 chipset that will be launched this year, but will get the existing A15 chipset instead. Additionally, he said the Pro models would get 6GB of LPDDR5 instead of 6GB of LPDDR4X like the non-Pro iPhones.

If you exclude the SE versions of the iPhone as a separate item, it would be a drastic change for the non-Pro models of the smartphone to have a different chipset than the two Pro models. It would be surprising to see the two new “entry-level” type iPhones for 2022 have the same chipset as the two cheaper 2021 models, but apparently that’s where we are. However, I must point out that the two cheaper iPad lines are currently following a similar strategy, as only the Pro versions of the tablet as well as the recently unveiled Air model contain the powerful M1 chip. The chart below shows some key comparisons for Apple’s iPad lineup with the various processors.

iPad Specifications

Current iPad lineup (Apple iPad site)

It’s been about a year now that analysts have been talking about the iPhone mini leave with the release of this year, because apparently the sales have not been so good. The issue here is how Apple is going to move from a 5.4-inch screen to a 6.7-inch screen without a massive price increase, while ensuring (hopefully for consumers) that the new iPhone 6.1-inch-screen non Pro starts around the usual starting price of $699 for the new, cheapest version of the phone. This year’s 6.1-inch base model is $799, so Apple would have to cut costs a bit to lower the price of a new model by $100. Maybe Apple would revert to an LCD rather than an OLED display for the new 6.7-inch model to save on cost, but there haven’t been a ton of reports on that yet. element.

Keeping the older A15 chipsets on non-Pro models would likely allow Apple to have something like the following range: 6.1-inch model $699-$749, 6.7-inch model $799-$899, Pro model 6.1-inch $999 and 6.7-inch Pro model remains at $1,099. It would also probably mean that the two cheaper variants don’t get a ton of major updates this year, so maybe a limited camera upgrade that will keep the Pro versions with much better camera hardware.

For now, let’s assume there will be a chipset split. The big question here is whether this is just a one-time issue or a permanent change. If the shortage of chips and the problem in the semiconductor space only cause a slight delay, Apple may return to its usual pace next year. If so, this year’s iPhone sales may be a bit lighter for non-Pro models as consumers expect a bigger update next year for a potential “A17” chipset on the four models. The possible good news here is that some of this revenue loss could be offset if the overall sales mix pushes towards more Pro models for those looking for the best smartphone specs and the new chipset. On the other hand, consumers might choose to opt for the cheaper iPhone SE, which would be a headwind to average selling prices.

The bigger issue here would be whether this change would be the start of a new long-term iPhone strategy. So in 2023, for example, Pro models would get the new “A17” chipset, while non-Pro versions would get the A16. Apple could even use this potential separation also for future add-ons that pair with iPhones. We saw this with the iPad, where Apple Pencil compatibility was based on which tablet you were looking at. I think in this case Apple would lose some of its high-end branding if half of its new iPhone lineup used a year-old chipset, and that would certainly separate the Pro versions even further.

I am bringing this potential major change to the iPhone due to current expectations for Apple. As shown in the chart below, analysts expect year-over-year revenue growth to accelerate in this calendar year. Yes, Apple shouldn’t have as many supply issues for the 2022 holiday season, but consumers are also facing high inflation right now, especially due to rising energy prices. If Apple splits the iPhone chips and the entry-level devices aren’t that impressive, the potential loss of sales could hurt its chances of registering the more than $8.2 billion revenue boost currently expected for the December exercise. The only saving grace here might be if this trimester ends up lasting 14 weeks, but that’s a discussion for another day.

Apple revenue estimates

Current Earnings Estimates (Seeking Alpha)

I bring up this potential growth because Apple shares recently fell more than $25 from their all-time high. The market fell on the Russian invasion of Ukraine and anticipation of the Federal Reserve about to raise interest rates. The current average price target of $191 implies more than $35 upside from Tuesday’s close, but to get there, Apple needs to maintain revenue and earnings growth. A weak iPhone sales cycle later this year would be a significant headwind for those who think the stock is heading towards $200.

Ultimately, a new report released recently suggests that Apple will make a major change to its iPhone lineup this year. Due to issues with the semiconductor industry, a key Apple analyst has suggested that the company will only give its Pro models in this year’s iPhone lineup the new A16 chipset. As we’ve seen recently with the iPad, the more expensive tablets get the better chips, so this has the potential to be a major long-term change if Apple decides to split iPhone chipsets in the future. There could certainly be a financial impact this year if two versions of the smartphone aren’t really major upgrades, and that will mean that Apple is looking to push more consumers towards the more expensive Pro models over time. This doesn’t seem like the best strategy in my opinion to maintain the notion of a premium brand, so hopefully that would be unique.