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UBS says Apple's iPhone 8 unlikely to cost $1,000, upgrades earnings outlook

Apple's upcoming anniversary edition iPhone 8 is unlikely to cost $1,000 as has been speculated, with new models expected to see a "bulge of buying," UBS said in a note on Tuesday as it upgraded its outlook on the U.S. technology giant's earnings.

UBS said it now expects Apple's earnings per share (EPS) for fiscal 2018 – which begins in the December quarter of 2017 – to be $10.55, up from its previous estimate of $10.25. The iPhone average selling price (ASP) is likely to be $692, up from a prior estimate of $667, the investment bank added.

Driving this upgrade is UBS's expectations of a higher priced anniversary edition iPhone and a boosted upgrade cycle.

Apple is expected to release three iPhone versions later this year, with one of those models having an organic light-emitting diode (OLED) display. OLED offers brighter displays and better power efficiency over liquid crystal displays (LCD) currently in use.

iPhone 7 charging in an Apple store.
Zhang Peng | LightRocket | Getty Images
iPhone 7 charging in an Apple store.

UBS said the factory cost of the 64GB OLED iPhone will be $70 to $90 higher than the iPhone 7 Plus model with a sale price of between $850 and $900. The higher cost could weigh on Apple's gross margin which UBS said is likely to decline to 38.5 percent in the fiscal 2018 year, from its estimate of 38.7 percent for the current fiscal year.

But the 64GB OLED model priced at $870 would be good for earnings.

"We think an $870 price would be accretive to EPS but dilutive to gross margin, a dynamic Apple has said it would accept," UBS noted.

$1,000 iPhone unlikely

Samsung's flagship Galaxy S8 is priced at $720 while the larger screen S8 Plus costs $840. UBS's estimate puts the OLED iPhone above this. UBS said that it is likely consumers will be willing to pay the higher price if the hardware is considered innovative.

Analyst Steven Milunovich said Apple has been able to hold the average selling price of its Macs above $1,200 despite the industry ASP falling to near $600. He added that despite the high prices of Macs versus the broader industry, Apple has only posted two down years of Mac sales.

Even the iPhone 7 Plus, which saw a $20 price rise from the 6 Plus, "has had more demand than any other Plus model released" thanks to the dual camera, UBS said. The investment bank expects the Plus could account for over 40 percent of iPhone sales in fiscal year 2017 versus a historical average of 25-30 percent.

"Apple customers seem fine with paying more for products they feel are differentiated," Milunovich noted, adding that the OLED model could account for 45 percent of shipments in fiscal 2018.

Many market watchers expect that the iPhone 8 anniversary edition could cost $1,000, but UBS said this is unlikely given that Apple rarely ventures above competitors' price in the high end. At the same time, the OLED iPhone is expected to have a 5.2-inch display, whereas the Samsung Galaxy S8 and S8 Plus have a 5.8-inch and 6.2-inch screen respectively.

"Apple's top model will be at a display size disadvantage to Samsung's Galaxy S8 Plus. We still think Apple will choose to price its top model relative to Samsung's top model, but remain cautious on how much higher Apple could ultimately go on price given a smaller display," Milunovich wrote.

"Offsetting this display size differential is the fact that the OLED iPhone could have features not included in the Galaxy S8 Plus, such as a front facing 3D sensing camera, embedded fingerprint sensor and higher quality facial recognition."

UBS reiterated its $151 price target for Apple's stock, which is above the mean of $147, according to Reuters data. Separately, Pacific Crest on Tuesday raised its Apple price target from $140 to $150.