makes a killing charging more for iPhone models with extra storage space. In fact, Bernstein’s Toni Sacconaghi estimates this practice will contribute $18 billion in revenue for fiscal year 2019.
But as 5G networks and cloud storage continue to improve, the clock could be ticking on Apple’s physical storage gravy train, Sacconaghi notes.
What’s new. Bernstein’s Toni Sacconaghi wrote in a note this week that upselling storage space in the iPhone beyond the base model has become more important to Apple’s profits than it was seven years ago, when it added about 20% to Apple’s operating profits. Today, it’s 26%.
“It has been Apple’s longstanding business model to offer consumers a selection of iPhone, iPad, and MacBook models at different price points, which differ almost exclusively in NAND storage,” he wrote.
He notes that 5G networks and cloud-based storage could mitigate the need for better memory chip configuration, undermining Apple’s upselling efforts.
“While possible, Apple is somewhat hedged with its iCloud storage offering—although iCloud has lower margins than upselling NAND and takes ~4 years to reach break-even on a revenue basis,” he wrote.
Looking Ahead. Sacconaghi maintained a Market-Perform rating with a $205 price target. Apple shares closed at $209.19 on Wednesday.
Sacconaghi noted that Apple is vulnerable to the continuing trade war, but noted that could be partially offset by the falling cost to produce memory chips. And, for now, Apple should maintain some pricing power when it comes to storage.
“Especially with the introduction of new iPhones in September, Apple likely does have some flexibility to retain its relatively high prices on storage upgrades in its next generation phones,” he wrote.
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