Digging Into Apple's iPhone Blowout

Many still believe that high-end smartphone growth is slowing significantly, but seeing the results of Apple's (NASDAQ: AAPL  ) iPhone 5s/5c launch calls into question whether Apple can get by simply by continuing to take more share at the high end. In particular, in the same year in which we saw signs of Samsung's Galaxy S IV sales fall short of expectations, we've just witnessed a veritable blowout in the iPhone 5s/5c sales. That being said, despite some impressive numbers, it's worth taking a deeper look into the recently announced blowout iPhone sales numbers.

Are these numbers comparable to last year's?
Each year, Apple announces the three-day sales results of its latest iPhone. This year, the combined sales of the iPhone 5s/5c hit a record 9 million units – far exceeding last year's 5 million. Now, keep in mind that this year, Apple's phones went on sale in China at the initial launch (which hasn't been the case in previous years – last year, the later Chinese launch led to 2 million units sold in the first weekend), so this means that the year-over-year comparison isn't quite comparable.

Another thing to keep in mind is that these are sales of the iPhone 5s and the 5c combined. What's interesting here is that, traditionally speaking, whenever a new flagship iPhone launches, the previous flagship gets a price-cut to a $99 starting price with a two year contract. This, of course, draws in buyers of the previous year's model. With the launch of the 5c, the iPhone 5 gets discontinued (and taken out of the spotlight) which means that a solid portion of folks who would have bought the last generation flagship on the price drop are now going to pick up the 5c, and are probably going to do so at launch rather than wait.

So, while the numbers are certainly impressive, it's important to realize that they're not quite comparable to the numbers from previous years. That being said, there are still some important positives here.

Guidance raised, iPhone 5s selling like hotcakes, but uneasiness remains
I'm most certainly encouraged by the fact that Apple's iPhone 5s stock has sold out and that it is rushing to build more to meet demand. For an investor, there's nothing quite as sweet as finding out the company that you're part-owner of can't sell enough of its flagship product. However, what I really liked was that Apple revised its forecast for the quarter to the high end of its previously issued $34 billion-$37 billion range. This means that for the third quarter, investors are most likely going to see modest sales growth from $35.97 billion in the same period last year.

However, I'm still concerned about how Apple will achieve material top-line growth from here. I expect that the company will do a nice iPad lineup refresh, and the new MacBook Pro lineup should be ready to go any day now. I'm also expecting that Apple may just introduce a few new device categories that could surprise investors, but there's still plenty of uncertainty there. That being said, sell-side estimates are calling for 8.4% top line growth this year with next year slowing down to just 6.5%, so it's not as though at 11.5 times forward earnings investors are expecting miracles.

Don't forget about Google's Android and Microsoft's Nokia
The more troubling trend that even the most bullish case for Apple can't ignore is the continued rise of Android devices. While Apple's momentum in the high end is clear, I'm not ready to count Google (NASDAQ: GOOGL  ) or Microsoft (NASDAQ: MSFT  ) out of the high-end race just yet. Google's acquisition of Motorola Mobility and Microsoft's acquisition of Nokia's handset business weren't frivolous--these ecosystem vendors mean business and are working on increasingly attractive designs. 

It's too early to tell what the competitive landscape will look like over the next 5 years, but Apple's going to have an uphill battle in trying to defend its dominant position in this industry, particularly as Google's Motorola X and the Nokia Lumia are compelling offerings in their own right and should only get better as time goes on. 

The Foolish bottom line
At the end of the day, Apple continues to be a cash-flow generating machine. Its products are best-in-class, and I don't expect that to change. What I do worry about – despite a very solid initial showing from the new iPhones – is that growth will continue to be a challenge going forward as the high end market slows down and competitive pressures pile on. That may keep the shares range-bound, and as a result, growth-oriented investors may want to look elsewhere, while income oriented ones may have fatter payouts to look forward to. 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2013, at 6:33 AM, H3D wrote:

    Ok, Apple sold 2 million in China last year at a separate launch. A

    Now this year the 9 million includes a couple of million 5s in China, but hold on.

    Last year the figure included preordered iPhone 5 which delivered for the launch weekend. Reportedly about half of the total.

    This year, because of stock constraints, we couldn't preorder the 5S and ordered placed at launch are for later delivery, so aren't in the 9 million.

    Not everyone wants to queue.

    So it looks like if Apple had launched in China later, those 2 million iPhone 5S would still have sold out through preorder in the remaining launch markets, using the stock freed up by the later China order.

    This 9 million IS a big increase on last years 5 million.

  • Report this Comment On September 26, 2013, at 7:16 AM, speechisntfree wrote:

    These so called analysts now attempt to reason why they were grossly incorrect in their apple sales forecasts. Some have even gone so far as to say that apple has published false numbers.

    Those same analysts have been spelling doom and gloom preaching apple's margins are decreasing and will surely cause their continuing demise.

    So to the analysts who say apple's selling 9 million is incorrect, I ask the following:

    Why would a company who you say didn't sell as many units as they reported, and now according to your predictions, makes less profit per unit sold, also at the same time, raise their earnings estimates to the high end of guidance? If what you say is correct, they make less money per unit, and sold less units, so how can they make more money?

    "Now, explain it to me like I'm a four-year-old."

  • Report this Comment On September 26, 2013, at 7:56 AM, Jjkiam wrote:

    Ashraf you are quite consistent in your analysis which always points to Apple being in decline. Your case on the total blowout number is weak as the previous comment points out. You are like the other biased analyst Gene Munster whose projections turned out to be the laughing stock of Wall Street and now keeps doubling down by insisting that over a 1/3 of the reported sales were channel fill when he knows that Apple applied the same accounting techniques as last year in reporting the number. What amazes me is that neither you nor your fellow biased "analysts" ever apply the same microscopic negative reporting on Samsung. Hmm I wonder why.

  • Report this Comment On September 26, 2013, at 8:11 AM, Cuftbll wrote:

    Stop it! There is no but. Apple showed world that they have the product that the masses want. The street knew there would be two phones, the street knew Apple was rolling out the phones to more countries so that was already baked in to their 5-6 million estimates. Face the facts! The street was completely wrong and got egg on their face. 9 million iPhones and that doesn't include preorder volumes.

    Why should there be any negative spin on this? The street was wrong last quarter too when Apple sold 31 million phones. Stop the hate! Just sit back and enjoy Tim and team.

    Oh I see Samsung is creating a gold phone and changing the color of their icons. Weird!

  • Report this Comment On September 26, 2013, at 8:22 AM, KGOldWolf wrote:

    Quite simply, your analysis is seriously flawed. You fail to see that not only did Apple outsell your predictions by a very material percentage, you fail to recognize that this increase in market share portends a ready made upgrade market in China as they complete their telecomm infrastructure improvements to 4g.

    Duh

  • Report this Comment On September 26, 2013, at 8:29 AM, demodave wrote:

    "... Apple's going to have an uphill battle in trying to defend its dominant position ..."

    Bwah-ha-ha-ha-haaaaa.

    Apple is the King of the Mountain. There is no "uphill battle" when you are on top!

    The authors poetic idiocy quoted here summarizes his entire argument. Wrong going in, wrong coming out. I hope the short position is hurting. If the author doesn't have the guts to take a short position before trashing a company, he should just bugger off or stay silent.

  • Report this Comment On September 26, 2013, at 11:49 AM, rcloud0 wrote:

    This Fool site has been so negative about Apple until $9m figure was out last week. They then became very quite for a few days. They wait for those 'analysts' and 'contributors' figures out what they can say now to bad-mouth about Apple and save their face! They do not do that to Google. In fact, there is only one article in Goolgle timeline in yahoo finance is this one - digging Apple! Your guys are true losers and real Fool!

  • Report this Comment On September 26, 2013, at 6:01 PM, bgk23 wrote:

    9 million phones is 9 million phones. Rationalizing not apples to apples or anything else doesn't make sense. I think any phone maker would be thrilled to have that kind of weekend. #500 on the Fortune 500 had about $4.8B in sales in 2013. If Apple's ASP is a bit over $500, their weekend qualifies for the Fortune 500.

  • Report this Comment On September 26, 2013, at 8:35 PM, Mega wrote:

    You don't need that much top line growth to produce substantial returns, now that the dividend and buyback plans are in place.

  • Report this Comment On September 27, 2013, at 8:56 AM, Mathman6577 wrote:

    No matter what Apple does the "analysts" will always find a negative thing to say about the numbers. I never see this when they discuss Amazon or any of the other "golden boy" companies.

    If this cloud in the sky stuff keeps up people are going to get disillusioned about investing and eventually tune out. I know I did that with the CNBC crowd and all their doom and gloom. Jim Cramer ? Who's that ?

  • Report this Comment On September 27, 2013, at 1:25 PM, KombatKarl wrote:

    "Apple's going to have an uphill battle in trying to defend its dominant position in this industry"

    Have you not seen marketshare numbers lately? Apple is getting destroyed in both the phone and tablet markets. The iPhone is the single top seller, but as a platform, Apple is way behind.

  • Report this Comment On September 27, 2013, at 1:31 PM, KombatKarl wrote:

    To continue on with my previous comment, many proclaim 9 million phones in 1 weekend is impressive. Sure. But remember that it is but one weekend. Android has 1.5 million new activations EVERY DAY. That means 4.5 million on average EVERY WEEKEND if you include Friday since the iPhone went on sale on a Friday. That how and why Apple is getting trounced in the market share battle. In a couple years, iOS may well be what the Mac was 10 years ago, about 4% of the market share.

    I know market share isn't everything. Apple is still making money like crazy and at the end of the day that's really all that matters from a business standpoint.

  • Report this Comment On September 27, 2013, at 1:33 PM, KombatKarl wrote:

    "What amazes me is that neither you nor your fellow biased "analysts" ever apply the same microscopic negative reporting on Samsung. Hmm I wonder why."

    Probably because Samsung isn't a rec anywhere in the MF services. I know Apple is.

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