3 Reasons Why Apple's iPhone Still Has Room for Growth

Apple's (NASDAQ: AAPL  ) growth story is over, right? Critics argue that the company has exhausted the premium smartphone market, and that if it introduces a low-cost iPhone to combat saturation, lower margins will offset any revenue gains. Though critics could be right, I think the odds are against them.

iPhone sales accounted for more than half of the company's revenue in its most recent quarter. If any segment is going to meaningfully move the needle for Apple in FY 2014, chances are it's the company's iPhone segment.

Fortunately, Apple has three major drivers set to work in the iPhone segment's favor over the next year or so: a low-cost iPhone, a potential arrangement with China Mobile, and an Apple iPhone trade-in program. Let's discuss the potential of each.

A low-cost iPhone
Apple's rumored low-cost iPhone is pretty much inevitable at this point. With a likely Sept. 10 iPhone media event just around the corner, countless leaks continue to suggest that Apple will introduce a lower-cost iPhone along with a refreshed new premium lineup.

By how much could a lower-cost iPhone boost sales? In China alone, Morgan Stanley analyst Katy Huberty believes the so-called iPhone 5C could boost Apple's market share in China by 13.3 percentage points. That's a significant gain considering recent data from Canalys that said Apple's smartphone shipments in China in the second quarter of 2013 accounted for just 4.8% of all shipments in the country.

China Mobile
With 740.2 million wireless subscribers, the world's largest wireless carrier, China Mobile, is nothing to laugh at. If Apple lands a deal with the carrier to sell its iPhone -- and it looks very possible at this point -- Apple will surely benefit. According to Huberty, the arrangement could boost the company's market share another 6 percentage points (on top of a 13.3 percentage point gain from a low-cost iPhone).

Trade-in program
Apple's already piloting an in-store iPhone trade-in program, and sources told MacRumors that it is scheduled to launch on August 30.

Third-party trade-in programs for iPhones have been around for a long time. But an Apple-endorsed trade-in program at Apple retail stores is a whole different beast. Apple has 408 retail stores, worldwide, with average revenue per store of $10.1 million in the last quarter.

Even more, Apple plans to resell these iPhones in emerging markets, according to MacRumors' Eric Slivka.

It's already been done
All three of these potential growth drivers for the iPhone segment focus on Apple's opportunity in emerging markets. Fortunately, Apple isn't going into these markets blindfolded. It has already been testing this price range with the iPhone 4.

 So far, the company is pleased with the results. Apple CEO Tim Cook explained in the company's third-quarter earnings call that "the number of first-time smartphone buyers that the iPhone 4 is attracting is very, very impressive. And we want to attract as many of these buyers as we can."

For a company with Apple's retention rates, new customers are great for Apple investors. And as far as the argument that low-cost iPhones will hurt Apple's margins, I've already debunked that here.

So is Apple's iPhone segment at the end of its growth trajectory? I don't think so. But fortunately Apple isn't priced for much growth beyond inflation anyway, so if the segment growth doesn't play out as nicely as I hope, investors aren't doomed. If growth does resume nicely in Apple's iPhone segment, consider it a bonus.

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  • Report this Comment On August 28, 2013, at 7:51 PM, webguy76 wrote:

    That's probably the weakest three reasons I have ever heard of. You guys are just tryin to hold on to that Apple fad and its over. No-one cares anymore. Serious investors looking to make money are nt going to take any of these "suggestions" in consideration. The Motley Fool is truly a "Fool" and I'm sorry I ever started reading these dumb articles... Damn you Yahoo!

  • Report this Comment On August 28, 2013, at 8:39 PM, H3D wrote:

    @webguy76

    Well you obviously care enough to come here and attack the article.

    Since you don't attack it with any specific criticisms, but just vague generalities that don't require you to read the article, or even to have the intellect to analyse the article and develop specific counter arguments.

    I guess RIMs trolling budget it getting a little thin these days.

  • Report this Comment On August 28, 2013, at 10:38 PM, vernr75 wrote:

    As the saying goes, "The devil is always in the details". Everything looks nice and easy until you put it under a microscope.

    1- Lower cost iPhone coming? Yes...except it's not what you were hoping for. The lower cost is not for you; it's for Apple. They want the phones that they sell in the mid tier level to have a lower cost of manufacture so that they can get higher margins from it and, in doing so, correct their recent margin slippage issues. Unlike the other older iPhones that they've produced over the years, they clearly couldn't get the cost of making the iPhone 5 down in its current form, so they've re-engineered it a little bit to get it into a form that will cost less to make...and then gave it the name 5C. Apple will be the one saving costs, not you the consumer. I mean, seriously, are you guys so stoned that you think that Apple would just take an iPhone 5, put it in plastic housing and give it to you for hundreds less than the $650-$850 that you now pay for it? Wow! Such wishful thinking! Make no mistake, folks...Apple's in it for your paychecks and their own pockets; they're not your fairy godmother...

    2. China Mobile - Apple may get a tiny initial boost in Chinese sales from such a deal, but you have to understand that the poorest folks in China are the ones making up this 740 million subscriber base. That's why China Mobile has the lowest numbers of 3G users of the big 3 in China despite having twice the subscribers of the others. There are already at least 15 million iPhones that have been jailbroken and are in use on China Mobile's 2G service. In other words, Apple's current sales in China thus far already includes China Mobile users. So this possible deal with China Mobile may not have quite the potential for future growth that you imagine since China Mobile users are already a significant part of the current iPhone user base in China. In any case, surveys have demonstrated that interest in the iPhone is declining in large part because of increasing interest in Samsung's Galaxy phones and phones from several other local brands. And Apple has yet to solve the problem of Chinese jailbreaking their iPhones in large numbers - over 42% of iPhones in China are jailbroken and many of these are running apps not found on Apple's app store.

    3-Trade in program - Apple has more than 200 stores in the US, but just 8 in the developing world, and these are all in the wealthiest cities in China. In other words, Apple will struggle to get old iPhones into the developing markets because they don't have any market presence there. And because old used iPhones carry high prices in the US market, they'd end up costing hundreds more after being shipped to developing countries and import taxes are paid for them and passed on to buyers. And speaking of taxes, many of these developing countries have 'environmental' taxes that specifically target old electronics and cars being imported into their territories. Good luck trying to get around that one. Furthermore, iPhones use micro and nano sims but mini sims are standard in the developing world and the average person has never used or seen anything else. The developing world consumer would not be able to just buy a used iPhone and put their current sim card into it as they currently do with Android devices. These rare Sim cards would only be available from carriers selling new iPhones, and buyers of used iPhones would have to pay for a post-paid or prepaid data plan that carriers have aimed specifically at wealthy subscribers. What you have in the end is a used iPhone that is still rather expensive to purchase that most people still can't use because the data plans for these devices are priced to target the richest customers.

    Room for Growth you say? You say yes, but Apple has already given you the hint. Trade in programs are what you do when you recognize that's no longer the case.

  • Report this Comment On August 29, 2013, at 12:41 AM, GaryDMN wrote:

    I think Apple has some where between a quarter and a third as many carriers as Samsung, so obviously Apple has room to grow the iPhone market.

  • Report this Comment On August 29, 2013, at 1:01 AM, Risky88 wrote:

    vernr75

    Wow

    great counter argument!

    Something rarely seen, usually just the so calleds like the first guy commented.

    Time will test the victor!

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