1 Way Apple Could Boost iPhone Sales, Revenue, and Profits

1 Way Apple Could Boost iPhone Sales, Revenue, and Profits

Despite a tough quarter in Greater China, I believe Apple's growth story is far from over in the region. But can the Chinese-speaking world alone really provide meaningful upside for Apple stock? And if so, to what extent? After all, it's tough to move the needle for the world's most valuable company.

The low-cost iPhone's potential
In order for sales in Greater China to begin to trend meaningfully upwards again, Apple would have to reinvigorate iPhone sales in the region. Accounting for more than half of its revenue, iPhone sales have a large influence on the company's results.

If Apple does introduce the rumored low-cost iPhone, I think it's realistic that Apple could boost iPhone units sold by at least 40%. Considering recent data from Canalys that suggests Apple's share of second-quarter smartphone shipments in China was just 4.8%, I think 40% growth in unit sales is a conservative assumption. Apple's lackluster performance itself is evidence that lower price points have far greater success in the region. Furthermore, at just 4.8% of the market, Apple certainly has room for improvement.

The magnitude
I often use what-if scenarios as a way to visualize long-term opportunities. Sure, the result is nothing but a ballpark figure, but it serves an important purpose: It puts a number on vague references. In this case, it puts a number on Apple's opportunity in China if it launches a low-cost iPhone.

What exactly are we looking for? Apple should at least break even on the bottom line if it decides to introduce a low-cost iPhone. Otherwise Apple's attempt at attracting new users to its ecosystem comes at a questionable cost. If the company does manage to boost the bottom line and grow its user base while it's at it, then a low-cost iPhone sounds like an excellent strategic move.

Let's give it a shot. To what extent could a low-cost iPhone in Greater China boost Apple's bottom line?

First, we'll need a few assumptions, which I'll attempt to keep as conservative as possible.

  • Apple's product category sales mix in China is the same as its overall sales mix.

  • Apple's iPhone sales mix in China leans toward a greater number of iPhone 4 sales, resulting in an average selling price, or ASP, for iPhones that is currently about 5% lower in Greater China from its overall ASP of $581.

  • The new low-cost iPhone will retail for approximately $490, per a recent rumor.

  • Apple will boost year-over-year iPhone units sold in the Greater China region over the next 12 months by 40% due to the launch of a low-cost iPhone.

  • A low-cost iPhone will significantly cannibalize sales of premium-priced iPhones and account for 90% of Apple's iPhone sales in the region.

  • The low-cost iPhone's gross profit margin will be 37% -- about equal to its third-quarter corporate gross profit margin and significantly lower than Dediu's estimate of the iPhone's current gross profit margin of 46%.

All else equal, this scenario would yield Apple about an additional $3.6 billion in revenue from its Greater China segment over the next four quarters.

Best of all, despite cannibalization and likely lower gross-profit margins on low-cost iPhones, the scenario would yield an incremental increase in EPS of $0.21 over the next 12 months. Small compared to Apple's trailing-12-month EPS of $40.04, but any gain is a bonus. If Apple can double its reach in Greater China, introducing many new customers to Apple, all while growing EPS, I'm all for it.

Keep in mind, this is just Greater China. Other regions may benefit from a low-cost iPhone, too. Furthermore, I didn't factor in the accompanying iTunes sales that would inevitably rise as a proportion of new net iPhone customers.

Unsatisfied with my guesswork on Apple's potential low-cost iPhone? That's fine. If Apple manages to launch a phone at a lower price point than the $490 used in this model, outsized gains in incrementally more units sold might still outweigh lost gross profit margin on a per-unit basis.

Finally, iPhone unit sales will grow by 40% easily if the introduction of a low-cost iPhone helps Apple finally land an agreement with China Mobile.

The investor takeaway
Greater China isn't a lost market for Apple. In fact, a low-cost iPhone may enable the company to double its reach and grow profits in the important region. And the more customers Apple recruits to its "sticky" ecosystem, the more comfortable I am as a long-term Apple shareholder.

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The article 1 Way Apple Could Boost iPhone Sales, Revenue, and Profits originally appeared on Fool.com.

Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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