Analysts at Bank of America have repeated their ‘Buy’ rating for Apple Inc (NASDAQ:AAPL, ETR:APC) as a third party analysis has confirmed their belief that the iPhone maker’s gross margins continue to move higher.
“Gross margins for Apple have been trending higher for the last several years and while Services mix has been a driver, the margins in iPhones have also been resilient despite the inclusion of increased features/functionality,” they wrote in a note to clients.
Based on a third party analysis, the analysts estimate the total cost to manufacture the iPhone 16 Pro Max is 5% less than the iPhone 15 Pro Max which adds 320 basis points to the iPhone 16 Pro Max gross margins relative to the iPhone 15 Pro Max.
However, there is less improvement in costs for the non-Pro models, they added.
“Our analysis of the teardowns of iPhone 16 Pro Max and comparison versus 15 Pro Max suggests that Apple has been very focused on driving lower costs across the Pro lines where the mix of the iPhones is steadily increasing,” they wrote.
The analysts estimate the total cost to manufacture the iPhone 16 versus the iPhone 15 is higher.
“Given that iPhone 16 has improved processing power for Apple Intelligence, improved camera lenses with macro photography, and the camera control button, there are additional costs in the bill of materials (BOM) in iPhone 16 versus 15,” they wrote.
“Based on third party teardown estimates, the cost to manufacture the iPhone 16 increased 10% from the iPhone 15. However, when adjusting for memory costs, this increase narrows to an increase of 6% in our opinion.”
Vertical integration should drive incremental upside, the analysts believe.
Apple spends around $250 on the integrated circuits (ICs) in the iPhone 16 Pro Max, which gives them a reason to bring more of the technology in-house, they noted.
The company is working on making its own baseband modem instead of buying it from Qualcomm, which could save at least $10 per iPhone. There is also speculation that Apple might start making its own Wi-Fi/Bluetooth chip, which costs about $10.
“At Apple's scale these add up to meaningful savings of $3.7bn for 250 million iPhones that can be a tailwind of greater than 100 basis points of product gross margins when fully ramped,” analysts wrote.
They awarded the stock a $256 price objective. Shares of Apple traded up 1.7% at about $237 in the early afternoon on Wednesday.