Why This 1 Number Is So Important to Apple Investors

By Adam Levy Markets Fool.com

Image source: Apple.

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The iPhone is by far the most important product in Apple's (NASDAQ: AAPL) lineup. The device accounted for over 69% of the company's first-quarter sales. After three consecutive quarters of unit sales declines, Apple righted the ship with the release of the iPhone 7 last fall, driving a near-5% increase in unit sales.

But more important than the growth in units is Apple's ability to sell its higher-end device, the iPhone 7 Plus. CEO Tim Cook revealed the newest model was the best selling Plus model it's released yet during the company's first-quarter earnings call. The ability to sell higher-end devices is key for the company going forward as it becomes increasingly difficult to grow unit sales.

A look at selling prices

Data source: Apple quarterly reports.

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The first thing that stands out in the chart above is the huge drop in average sales price (ASP) during the previous three quarters. The drop coincides with the release of the lower-priced iPhone SE, which starts at just $399. After a late second-quarter release, sales of the model seemed to peak in the third quarter, resulting in a low $595 ASP for all iPhone units.

Apple also faced significant foreign exchange headwinds over the past year. CFO Luca Maestri noted the dollar has strengthened 25% against the basket of currencies where Apple does business since June 2014. That led Apple to raise some of its prices in foreign countries last year.

But more iPhone shoppers opted for the high-end iPhone 7 Plus last quarter, leading to a record ASP of $695. That's even more astonishing considering the inclusion of the iPhone SE in those sales.

What's so telling about the popularity of the iPhone 7 Plus?

Unlike in the two previous Plus models of the iPhone, the 7 Plus included a higher-end camera compared to its smaller-screened sister. That point of differentiation may be what led more consumers to opt for the more expensive device last quarter.

The significant demand for the 7 Plus shows that Apple has the potential to drive sales growth by further differentiating the Plus lineup from the standard iPhone model. Instead of just offering a larger screen, Apple can keep its best innovations exclusively for its highest-paying customers before letting them trickle down to the lower-priced models.

Such a move would strengthen the position of the Plus model in the simple good, better, best price positioning Apple uses. Just as importantly, the upsell is easy thanks to installment plans -- just $4 more per month gets you the best ever phone, camera, mobile gaming machine, Snapchat device, and so on.

But don't get excited just yet

There's no doubt that Apple benefited from one of its biggest competitors running into some technical difficulties late last year. Samsung (NASDAQOTH: SSNLF) had to recall its Galaxy Note 7 after units started randomly exploding due to battery malfunctions.

Many Note 7 customers likely ended up buying an iPhone 7 Plus for its similarly sized screen. Cook noted it saw the highest Android switcher rate of any quarter.

Obviously, Apple can't rely on Samsung or one of its other major competitors having problems with their large-screen phones every quarter. That's why investors must pay attention to the iPhone ASP going forward to see if last quarter was a fluke or if Apple's differentiation strategy is paying off. If ASP continues to rise, it could bode well if Apple further differentiates its newest Plus model even more from the standard model in the fall.

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Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.