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The next test for Apple’s iPhone will come with 5G

Heidi Chung

Apple (AAPL) posted a better-than-expected second quarter and soared back to $1 trillion in market cap on Wednesday, but Wall Street isn’t convinced that the flagship iPhone’s recent woes have completely abated.

The company has been shifting away from reliance on its hardware to services and has recently ramped up that bet. Apple’s Services business is growing quickly. It hit a new record and grew 16% year over year to $11.5 billion in the second quarter.

However, Apple is still mainly a hardware company, as the iPhone still commands a massive chunk of total sales. Revenue from the iPhone accounted for about 53% of Apple’s overall revenue in the second quarter. That is a smaller percentage than previous quarters, but more than half of total sales is still a meaningful amount. iPhone revenue exceeded analyst estimates but fell 17% year over year to $31 billion. iPhone sales in China, a region of concern, fell 22% year over year.

Analysts agree that the worst may finally be in the rearview mirror for Apple, and iPhone sales may have bottomed, but they also argue that the next real test will come with 5G. The race to 5G has been on fire, and Apple’s recent settlement with chipmaker Qualcomm (QCOM) put them back in the running.

“While Apple highlighted the success of its iPhone trade-in program, in part driven by its higher incentives, we think anticipation of a 5G iPhone in 2020 could impact upgrades,” Wells Fargo analyst Aaron Rakers wrote in a note to clients Tuesday.

When Apple CEO Tim Cook was asked on the earnings conference call about 5G, he replied, “This is one that I’m going to largely punt on, as you can guess. We look at a lot of things on different technologies and try to select the right time that things come together and get those into products as soon as we can.”

Apple’s next product lineup will likely be revealed this fall, but there are no expectations for a 5G compatible phone just yet. However, investors won’t be patient forever.

Piper Jaffray analyst Michael Olson explained in a note that investors while investors aren’t really worrying about 5G quite yet, those worries will come very soon. “Looking at the remainder of FY19, we expect limited excitement around this year's iPhone launches, however, we believe that as long as services revenue continues to perform at or above expectations, this will tide investors over until anticipation for 5G iPhones begins to build, which is likely to start happening in 2H CY19.”

Raymond James analyst Chris Caso argued, “we remain concerned about estimates through the 2019/20 cycle as we believe a lack of compelling products will negatively affect mix, pressuring ASP and margins. The Qualcomm settlement however opens the possibility of a catalyst from a 5G cycle in 2HC20, but we think nearer-term expectations need to be reset first.” Raymond James analyst Chris Caso explained in a note Tuesday.

Even if the rollout of a 5G iPhone takes a while, Nomura analyst Anne Lee predicts that the ultimate launch of the 5G iPhone will lead to a surge in upgrades. “We believe the worst is over (Jun-Q should mark the bottom) for Apple’s iPhone supply chain. The recent settlement between Apple and [Qualcomm], in our view, should lead to a stronger 5G iPhone portfolio for 2H20F, together with a major design architecture upgrade for iPhone in 2HCY20F.”

Apple shares jumped more than 6% higher midday Wednesday and were trading at six-month highs. The stock has been on a monster run and has soared 50% from its January low.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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