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What's Next for iPhones After Strong Holiday Quarter?

Sejuti Banerjea

Apple AAPL shares jumped over 6% yesterday after the company returned to growth in the first quarter of fiscal 2017. A lot of the optimism was on account of iPhone sales, which grew 4.7% from last year to the highest ever tally of 78.3 million units or around two-thirds of total sales. Street estimates varied between 77-78 million units.

Apple Inc. Price and EPS Surprise

Apple Inc. Price and EPS Surprise | Apple Inc. Quote

 

“iPhone’s Best Performance for Over a Year”

Neil Mawston, Executive Director at Strategy Analytics, said in a statement that this was the iPhone’s best performance in over a year, putting it back on top as the world’s largest smartphone vendor. But he also said that the numbers were helped by the Samsung Note 7 fiasco. As a result, Samsung didn’t see as much of the fourth-quarter bump-up as it usually does (it still managed a 29% share in the U.S. compared to Apple’s 31%, according to Kantar Worldpanel).

Apple’s growth rate was also slightly lower than in the year-ago quarter, and was likely impacted by the stronger dollar and by stiff competition from local players in China like Huawei, ZTE, Lenovo, OPPO and Vivo that may have led to a loss in market share. Revenues from China were down 12% in the last quarter. Tim Cook used an optimistic tone: “I’m encouraged with the significant improvement but we’re not without challenges there.”

He also said that sales would have been stronger if demand for the more expensive iPhone 7 Plus hadn’t been underestimated. As it turned out, the more expensive device was more popular based on new features like better cameras and more RAM, which therefore led to a supply shortage. If it wasn’t such a competitive market, this may not have been such a bad problem to have.

However, it does reverse an earlier trend that saw the iPhone 6S Plus and iPhone 6 Plus growing slower than their less expensive partners. It also seems to indicate that customers are unwilling to upgrade without meaningful new features, but will pay more for them when they’re there.

As a result, the two new models that also came with water resistance while ditching the headphone socket accounted for 17% of iPhone sales, according to research firm Localytics, as reported in the media. This also raised the average selling price to $695 from $691 in the year-ago quarter.  

The Good and Bad Going Forward

Smartphone sales growth rates are not going to come back to where they’ve been the last few years. For example, consider that the iPhone 6 launch in Sep 2014 was followed by a 46% increase in shipments the following quarter. This kind of growth is history, because penetration continues to increase across the world.

Second, Apple’s growth rates have also been fueled by market share gains in China, which may not be repeated for a number of reasons including greater penetration, the stronger dollar, a more difficult operating environment, the increasingly strained relations between China and the U.S. and the abundant supply of local makes of varying price tags.

Third, Apple is likely to maintain or even grow share in developed markets and markets with higher penetration on the strength of its brand. But these upgrades will be dependent on innovation. Tim Cook says: "The smartphone is still in the early innings of the game," and "I think there's lots more to do... We've got some exciting things in the pipeline. I still feel really, really good about it." But if the upgrades over the past two years are anything to go by, it seems that there’s a limit to that innovation.

That of course brings us to the question of the upcoming iPhone 8 that is expected to have an all-new design, glass casing and other exciting features. Plus, it’s the iPhone’s 10th anniversary, so there’s some pent-up excitement there. If Apple delivers in line with the hype, it should have blockbuster sales. Beginning in the September quarter when it will launch that is and provided Apple doesn’t under-supply the things. Until then, we should expect customers to hold off purchases (more so than in earlier years because the excitement for the new phone is more this time).  

The other somewhat positive factor is India where Apple’s talks with government officials appear to be going well. India is a faster-growing market than China at the moment because of relatively lower penetration, a rising middle class and the Prime Minister’s stated goal of digitizing the nation. Once Apple starts building its stores in the region, its brand value is bound to appreciate and translate into increased sales for the company. But it’s not a done deal yet, especially considering the concessions Apple is asking for, so some uncertainty persists.

Apple shares currently carry a Zacks Rank #3 (Hold). Technology stocks with better potential are Anixter International AXE, Aspen Technology AZPN, KLA-Tencor KLAC or Inphi Corp. IPHI, all of which have a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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