Apple is expanding its price increase strategy from non-iPhone products to its core hardware. According to Morgan Stanley, this move is unlikely to significantly dampen demand and could instead become a driver for profit growth over the next several fiscal years.
In a research report dated July 14, Morgan Stanley stated that, based on historical demand elasticity analysis, supply chain tracking, and material cost calculations, Apple's core hardware products are generally less sensitive to price hikes. The recent price increases are not expected to materially impact sales volumes but are anticipated to alleviate cost pressures and enhance profitability.
Notably, Morgan Stanley has raised its expectations for price increases on the next-generation flagship models. The report suggests that a $200 increase in the starting price for the iPhone 18 Pro series has become the more likely baseline scenario, compared to a previous model assumption of a $100 hike. If implemented, and combined with a higher mix of premium products, this could boost Apple's earnings per share for the third quarter of fiscal 2026 (the September quarter) by 2% to 4% above current forecasts, with a potential upside of around 1% for the full fiscal year 2027.
iPhone Demand is Most "Price-Inelastic"
A review of Apple's historical major hardware price adjustments by Morgan Stanley and its quantitative team revealed significant differences in price sensitivity across product lines. iPhone demand elasticity is approximately 0.2 to 0.4, the lowest among all of Apple's major hardware products. Mac elasticity is around 0.8, while iPad elasticity is about 1.0, approaching unit elasticity.
A lower elasticity coefficient indicates a more limited impact of price increases on sales volume. Morgan Stanley's view is that the iPhone is closer to a "necessity" in consumers' daily lives, making its purchase intention less affected by price hikes. In contrast, Macs and iPads possess stronger discretionary consumption attributes.
However, the report also notes that because Apple has not implemented substantial price increases for the same iPhone generation in over five years, historical samples are relatively limited. This introduces some margin of error in the elasticity calculations, though the overall direction is considered highly indicative.
Supply chain data corroborates this assessment. As of July 9, delivery lead times for Macs and iPads remained largely unchanged following their price increases, and iPhone production plans have stayed stable in recent weeks. This suggests that neither consumer demand nor Apple's production cadence has been significantly impacted by the price adjustments so far.
Non-iPhone Products Lead Price Hikes, Primarily to Protect Margins
Apple initiated price adjustments on June 25, starting with Macs, iPads, and some accessories, with overall increases ranging from 14% to 54%.
Specifically, the starting price for the MacBook Air was raised from $1,099 to $1,299; the iPad (2025 model) from $349 to $449; the Mac Studio (M4 Max version) from $1,999 to $2,499; and the Apple TV saw a 54% increase. Prices for the iPhone, Apple Watch, and AirPods remained unchanged in this round.
Morgan Stanley believes the primary goal of this pricing action is not to expand profits but to counter rapidly rising memory costs. According to the firm's model, Apple's per-unit DRAM procurement cost is projected to increase by approximately 190% year-over-year in fiscal 2027, with NAND costs expected to rise by about 180%.
Taking the iPad (2025 model, 128GB) as an example, the $100 price increase corresponds to an incremental gross margin of about 40%, which is higher than the business segment's long-term gross margin level of around 25%. The $200 increase for the MacBook Air (M4, 256GB) corresponds to an incremental gross margin of roughly 27%, aligning with the Mac's historical profitability.
The report points out that Apple had pre-purchased some memory inventory, creating a lag effect for cost increases on the income statement. If memory prices remain elevated or continue to rise in the future, Apple may need to adjust prices again in fiscal 2028, though it is currently premature to predict the next round of increases.
$200 iPhone 18 Pro Price Hike Emerges as More Probable Scenario
Regarding the market's primary focus on iPhone pricing, Morgan Stanley suggests that if Apple aims to maintain a hardware gross margin of around 40%, raising the starting price of the iPhone 18 Pro (256GB) by approximately $200 has become the more realistic option.
Calculations indicate that the per-unit memory cost for the iPhone 18 Pro will increase by about $140 to $160 in fiscal 2027. Even with a $200 price increase, the corresponding incremental gross margin would be around 30%, still below the three-year average of approximately 41%, indicating that cost pressures would persist.
However, Morgan Stanley identifies three factors that could partially offset this pressure.
First, the iPhone 18 standard model, iPhone Air 2, and iPhone 18e are expected to launch in the spring of 2027. Therefore, the sales mix for the September quarter following the autumn 2026 release will be more heavily weighted toward premium models. Second, the foldable iPhone is anticipated to begin shipping in the fourth quarter of 2026, with expected gross margins higher than traditional iPhone products. Additionally, Apple is projected to synchronously increase prices for lower-end iPhone models in the spring of 2027, further improving the profitability of the overall product portfolio.
Considering these factors, Morgan Stanley forecasts that Apple is likely to maintain overall iPhone gross margins largely stable in fiscal 2027.
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