Upselling is a large and growing contributor to Apple’s bottom line, says analyst Toni Sacconaghi, but 5G could reduce the need to load up on NAND.
From a note to clients that landed on my desktop Tuesday:
Apple makes a LOT of money from upselling consumers to higher storage configurations in its products – in fact, we estimate that Apple will generate $18B in revenues (at ~90% GMs) from upselling consumers to higher NAND configurations in FY 19 – contributing roughly 26% of total company operating profits…
We performed a similar analysis 7 years ago and found that upselling NAND added about 20% to total company operating profits, (vs. 26% today), despite the emergence of Apple’s large, high margin services business. We believe that the principal reason that NAND is such a large portion of the profit stream is that handset OEMs have increasingly shifted profits to add- ons in the spirit of keeping base prices competitive.
A key question/risk is whether 5G networks and cloud-based storage may mitigate the NAND upgrade imperative going forward, thus undermining Apple’s profitability. While possible, Apple is somewhat hedged with its iCloud storage offering.
Maintains Market-Perform rating and $205 price target.
My take: With Apple trading for roughly $205 as I write this, Sacconaghi is basically treading water.