Earlier this month, Apple (NASDAQ:AAPL) introduced the iPhone 14 that could, yet again, help the tech giant outperform. Historically, Apple stock tends to do really well heading into the new iPhone launch before correcting in the following months.
However, investors will be hoping that Apple’s market position as a high-quality stock that reflects extremely strong free cash flow generation can help the relative outperformance. Moreover, the initial data shows strong demand for top-end iPhone 14 models that can also help boost margins.
Analysts Positive On iPhone Product Mix
The new lineup includes iPhone 14, iPhone 14 Plus, iPhone 14 Pro and iPhone 14 Pro Max. The first two models come in two different sizes, 6.1 inches,and 6.7 inches, and feature some major camera upgrades and new safety capabilities.
In terms of design, the iPhone 14 lineup is identical to its predecessor, the iPhone 13, known for its flat edges and glass back. iPhone 14 and iPhone 14 Plus represent the two more affordable models, priced at $799, while the other two models, Pro and Pro Max, are aimed at deep-pocketed consumers.
But even though the Pro and Pro Max are priced higher, the demand for these more expensive models has been on the rise since their debut, with customers now facing four- to six-week wait times, which are expected to increase further in November. This is one of the key reasons why analysts remain bullish on Apple as iPhone 14 Pro and Pro Max can help boost gross margins.
Some analysts believe that Apple is likely to face supply constraints if demand continues surging at such a rapid pace during the holiday season. As a result, Apple asked its supplier Han Haito to increase production of the Pro phones at the expense of the two standard iPhone 14 models, analysts told clients in a note.
The new lineup is also seeing strong demand in China, with Wedbush predicting that 30% of current iPhone owners in China will upgrade to the new 14 lines. Apple’s retail servers in China collapsed as consumers made a total of 2 million orders for the Pro duo in the first 24 hours.
Recent research by Morgan Stanley showed that the new iPhone 14 Max recorded the longest lead time of any iPhone model launched in the last six years, at 36.5 days.
Hiking App Store Prices To Defend Against Rising Costs
A few days ago, Apple announced it is hiking prices for in-app purchases on the App Store in several countries across the globe. The hike, expected to take effect on Oct. 5, will affect the entire Eurozone as well as Chile, Egypt, Japan, Malaysia, Pakistan, Poland, South Korea, Sweden and Vietnam.
While the tech giant did not disclose any particular reason behind the move, it comes likely due to the recent dollar’s gains against other global currencies. The price increases will vary across the regions, with in-app purchase costs in South Korea set to surge by 20-25%. In Japan and the Eurozone, the prices will increase by 30-35% and 8-10%, respectively.
The decision follows a report last week from the analytics firm Apptopia, which said developers have hiked App Store prices by 40% compared with last year, likely due to Apple’s anti-tracking feature.
The world’s largest company by market cap already hiked in-app purchase prices in South Africa, the U.K. and the Eurozone in August 2021, which means that some countries are facing a second price increase in two years.
Apple generated $19.6 billion in service revenue in the fiscal second quarter of 2022, which also includes earnings from the App Store. Still the revenue fell slightly short of analysts’ estimates of $19.7 billion.
However, laws in some countries, like Japan and South Korea, could force Apple to give up some of its revenue by taking a reduced cut from developers when they use alternative payment methods.
Summary
Apple shares are down 14% YTD (vs c-19% S&P 500) as investors are more reluctant to sell shares of a high-quality business that generates strong free cash flow. Apple bulls are also hoping that the new iPhone 14 lineup can deliver yet another massive revenue generation stream in times when securing new funding is getting more expensive.