Delayed AI Rollout and Rising iPhone Production Costs Dishearten Investors. Is Now Still Not a Good Time to Buy Apple Stock?

Since Apple's shares hit a new high in July, its stock price has been hovering around $230. The delay in the release of the Apple Intelligence feature, along with rising manufacturing costs for the iPhone and weak sales, are the main reasons why Apple's stock price has not been able to break through.

▶ Material costs of iPhone 16 Pro Max are 7% higher than its predecessor

Research firm TD Cowen's latest survey shows that the total material cost of manufacturing a 256GB iPhone 16 Pro Max phone, including components, product assembly, and packaging, is $485. In contrast, the bill of materials (BOM) of the Apple iPhone 15 Pro Max is $453, so the cost of the iPhone 16 Pro Max is $32, or 7% higher.

For the iPhone 16 Pro Max, the most expensive components are the display and rear camera module, each costing $80, accounting for 16% of the total cost. The camera is also the component with the largest increase compared to the previous generation, increasing by $10. Memory and storage costs have increased by $5 each.

The material cost for the standard iPhone 16 has also risen, reaching $416, compared to $395 for the iPhone 15, a difference of $21.

Besides, CFRA Research technology analyst Angelo Zino observed that the iPhone 16 and iPhone 16 Plus models, which are lower priced, seem to have attracted more demand compared to the higher-priced Pro and Pro Max versions. This trend could impact the average selling price and overall revenue from iPhone sales. Zino highlighted that the basic models of the iPhone might be enough appealing.

"Considering that this cycle primarily involves software upgrades, I'm worried that there has been a higher proportion of sales for the lower-priced iPhone 16 compared to the more expensive models," he stated.

This may further squeeze Apple's hardware gross profit margin since its sales price is the same as the previous generation, although its quarterly services gross profit already accounts for 45%, and the importance of hardware profitability is also declining.

▶ AI feature release constantly delayed

Apple shares have risen by more than 30% since their April low, largely fueled by optimism that AI features will entice consumers to upgrade their devices, potentially reinvigorating revenue growth. However, Apple sold just an estimated 37 million units in the first weekend of iPhone 16 pre-sales, down more than 12% compared to the same period last year. The delayed release of Apple Intelligence has prompted many consumers to adopt a wait-and-see attitude.

After the release of iPhone 16, Bloomberg Mark Gurman expects that the image, expression generation and ChatGPT functions will only be launched in some English-speaking countries as early as December. Consumers in non-English speaking countries will have to wait until next year for the launch of more AI features.

Here is the timeline of Apple's AI iteration plan and hardware product release timeline:

▶ Analysts say Apple's stock price is fairly priced

Piper Sandler's "Taking Stock with Teens" Fall 2024 survey shows a slight dip in upgrade intentions for Apple's iPhone 16 compared to previous years. After gathering responses from about 13,500 teens, the survey found that 22% plan to upgrade to the iPhone 16 this Fall or Winter, a decrease from 23% in Fall 2023 and 24% in Fall 2022. Despite many users having iPhones that are three generations older on average, the anticipated aggressive upgrade cycle may not materialize. Piper Sandler holds a neutral position on Apple stock and has set a price target of $225.

Jefferies analyst Edison Lee described the high expectations for the iPhone 16/17 as premature. He explained that the lack of significant new features and limited AI coverage means that the anticipated market expectations of 5%-10% unit growth are unlikely to be met.

Lee acknowledges the long-term potential of AI, viewing Apple as "the only hardware-software integrated player that can leverage proprietary data to offer low-cost, personalized AI services." Yet, he believes the stock has already been reasonably valued. He also pointed out that "Smartphone hardware needs rework before being capable of serious AI," with a potential realization "likely timeline of 2026/27."