Will IPhone 7 Revive Growth For Apple Inc.?

  • Apple is due to launch iPhone 7 next month.
  • There is some excitement surrounding the launch, with some saying iPhone growth is inevitable in the future.
  • But is iPhone growth really inevitable?

With Apple Inc. (NSDQ:AAPL) due to launch its latest iPhone iteration next month, the debate about the future of the iPhone is already heating up among investment circles while Wall Street is weighing in too. Lately, there seems to be a general positive buzz surrounding iPhone 7 that has helped AAPL stock to climb close to 12% over the past one month. AAPL stock is, however, up just 2.7% YTD.

Apple Stock Price 30-Day Returns

AAPL stock chart

Source: Apple stock price chart by amigobulls.com

iPhone 7 and Strong Q3 Results Drive Apple Stock Higher

Part of that rally has of course been triggered by Apple's better-than-expected FQ3 results. Apple reported revenue of $42.4B, down 14.2% Y/Y, but a good $310M higher than Wall Street consensus. Diluted EPS of $1.42 was 39% lower than a year ago but still managed to beat Wall Street estimates by 4 cents. Apple managed to ship 40.399M iPhones during the quarter against expectations for 40.02M units, and 51.2M shipped during the previous quarter.

The excitement surrounding the launch of iPhone 7 is however largely to thank for the decent rally in Apple stock price. This appears to be a surprising turnaround in sentiment since investors have all along been apprehensive about the new iPhone--and for good reason. iPhone 7's overall design will be pretty similar to those for iPhone 6 and iPhone 6s, and will mark the first time Apple will use the same iPhone design for three consecutive years. Maybe that has something to do with Apple trying to replicate the success of  iPhone 6/6s models, which have been some of the most successful models in the iPhone lineup.

But what has been particularly interesting is the commentary coming from Wall Street about the future of the iPhone. UBS analyst Steven Milunovich now says that some iPhone growth is now inevitable at some point in the future:

"The question of iPhone growth is a matter of when, not if."

The analyst anticipates iPhone unit growth to clock in the modest single digits in FY 2017, and as much as 20% in FY 18. Mr. Milunovich says that despite the current challenges of an extended refresh cycle that have badly depressed sales, the installed iPhone base has already reached maturity and future upgrades will be enough to drive single-digit growth. Milunovich is confident of his projections and raised his FY 2017 iPhone growth from 207M units to 222M units and from 240M units to 264M units for FY 2018.

iPhone Growth Might not be Inevitable

There is a good chance that Apple will record some iPhone growth in the coming year thanks to the launch of iPhone 7 as well as easier comps set up by this year's lackluster sales (analysts expect unit sales to dip below 200M in the current year).

But long-term iPhone growth is anything but guaranteed. First off, investors cannot brush off the failure of iPhone SE to revive flagging iPhone sales. Apple launched the cheaper iPhone SE in April to help it compete with lower-priced smartphones in the Android camp. But Apple's latest results suggest that the 4-inch iPhone has done little to stem the decline. iOS adoption tracker Fiksu puts SE adoption rate at just 1.8% of iPhone installed base, the lowest at this point in its lifecycle since Apple launched iPhone 5. You can view the Fiksu tracker here.

Then there's the nagging question of growing competition from camp Android. Samsung Electronics (OTC:SSNLF) has now become a formidable Apple competitor in the U.S., and the smartphone momentum has swung from Cupertino to Seoul. The Galaxy S7 smartphone family has lately been outselling iPhone 6/6s in the U.S., Apple's biggest market. In the three months period ending May, Samsung accounted for 37% of U.S. smartphone sales compared to 29% for Apple. The same trend rings true for their respective flagship models, with Samsung S7/S7 Edge claiming 16% of U.S. smartphone sales compared with 14.6% for iPhone 6s/6s Plus over the period. Although Apple loyalty remains high with 88% of Apple users saying their next smartphone will be an iPhone compared with 86% for Samsung, Apple's smartphone share in the U.S. has been on a decline while Samsung's has been in the ascendancy. Analysts say as many as 5% of iPhone users have been defecting to the Samsung camp, although traffic in the opposite direction is still stronger.

Meanwhile, Chinese smartphone makers Xiaomi and Huawei have launched an offensive on Apple's U.S. home turf with the aim of stealing some market share from the incumbents. Given the growing popularity of the two brands, we can be sure they are going to give both Apple and Samsung a run for their money in the coming years.

Investor Takeaway

Apple is likely to see some iPhone growth in the coming year or two primarily due to easier comps set up by an abysmal 2016. As Mr. Mulinovich suggests, a large installed base is certainly a good thing when the upgrade cycle goes a full circle and a new one kicks in. But Apple's U.S. consumers now appear more willing to try rival brands than they previously did. Although this trend might get nipped in the bud, I believe it's still too early to conclusively say that iPhone growth is inevitable at some point in the future.

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