Tech giant Apple (AAPL) takes centerstage Tuesday afternoon. The iPhone maker will be holding its Special Event in Cupertino, California, at 1 p.m. ET. Apple is expected to launch new versions of its flagship product, the iPhone, as well as a new Apple Watch. It is still unclear whether Apple will offer more information regarding its planned Apple TV+ service.
Wall Street analysts have muted expectations and anticipate few surprises. The new generation of iPhones set to be introduced this week will likely not be the 5G iPhones, which are expected to launch next year.
“Given the remarkable accuracy of the online rumor mill in recent years, we expect relatively few surprises next week,” Bernstein’s senior tech analyst Toni Sacconaghi wrote in a note to clients Thursday. “The main unknown is what incremental disclosures (if any) Apple will offer on its new services, including Apple TV+ (rumored for a November launch) and Apple Arcade (targeted for a "fall" launch).”
One of the main concerns surrounding the most recent iPhone launches is the ballooning price. “The increase in iPhone prices has resulted in negative demand elasticity over the last year, leading Apple to undertake widespread trade-in promotions, and to reduce prices in China and India,” Sacconaghi noted. “Despite such actions, iPhone revenues are expected to decline about 15% in FY 19, with iPhone gross margins declining by an estimated 150 bps, despite higher prices.”
But now that the new U.S. tariffs on Chinese imports are in effect, the looming question is around how the new tariffs will affect iPhone pricing going forward. “Our default assumption is that Apple will look to keep prices flat YoY, and potentially absorb the benefit from particularly steep component cost declines in DRAM and NAND (down 50%+ YoY) by keeping memory levels constant and storage pricing at similar levels for similar capacities,” Sacconaghi said.
His research found that if Apple keeps its memory levels and storage pricing consistent with last year, Apple could potentially create a good enough margin buffer to absorb a 10% tariff hit. He pointed out that it is important to note that the 10% tariffs would only apply to iPhone sales in the U.S., which is about 30% of total iPhone volumes.
Sacconaghi made note that investors should keep in mind that Apple’s stock tends to outperform in the one- to six-month lead up to Apple’s annual iPhone product announcement event. However, “[Apple stock] has exhibited mixed performance in the immediate days preceding the event, as well as in the 1-to-6 months afterwards.”
Apple shares are up 37% this year and 24% since the last Apple event on June 3. The ETF tracking the tech stocks, XLK, is up 31% so far in 2019.
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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