For Apple Inc's iPhone, the Best Is Yet to Come

The iPhone is posting strong growth, even though Apple is fighting with one hand tied behind its back in the smartphone market.

Apr 26, 2014 at 11:30AM

Apple (NASDAQ:AAPL) reported a huge earnings beat this week, with EPS coming in 14% ahead of the average analyst estimate. The iPhone was by far the biggest driver of Apple's strong performance.

Fortunately for Apple shareholders, iPhone sales and earnings growth is likely to continue at a strong pace in the next few years. Apple is attracting plenty of new users, and a larger-screened iPhone 6 should accelerate that trend, while also driving a major replacement cycle.

G

Apple is posting strong iPhone sales growth even without a "big-screen" phone (Photo: Apple)

Most importantly, Apple's iPhone product roadmap positions it well for strong growth in China in the next few years. Larger-screened phones should help Apple gain share from Android among wealthy Chinese consumers. Meanwhile, as lower-cost phones become available through top carrier China Mobile (NYSE:CHL), sales will probably surge.

The iPhone is crushing sales expectations
Last quarter, Apple sold 43.7 million iPhones, up 17% year-over-year. This set a new March-quarter record. iPhone revenue rose 14% or more than $3.1 billion, which accounted for more than 100% of Apple's total revenue growth last quarter.

Apple's iPhone sales total came in way ahead of what analysts expected. In a survey of 32 analysts (20 Wall Street professionals and 12 "independents") conducted by Philip Elmer-DeWitt of Fortune, the average iPhone sales estimate was 38.2 million units. The highest estimate was 42.5 million: still more than 1 million units short of Apple's actual sales tally.

Apple executives explained on the earnings call that the iPhone strength is broad-based. Apple fans are continuing to buy the new iPhone 5s in droves (it now accounts for more than 20% of all iPhone usage), but the iPhone 5c and the older iPhone 4S are also selling well. Apple estimated that more than 50% of iPhone activations in the last 6 months came from new iPhone users.

Images

Apple's older iPhone 4S is selling well in emerging markets like China.

iPhone sales in China hit a new quarterly record, driven in part by the addition of China Mobile as an iPhone carrier partner. However, that was not the whole story. Strong sales of the cheaper iPhone 4S -- which is not available through China Mobile -- also contributed in a big way.

The China opportunity is growing
Most signs are pointing toward Apple releasing a new iPhone (presumably the iPhone 6) with a 4.7" or 4.8" screen later this year. Apple may also add a "phablet" with an even bigger screen within the next year. Larger screen sizes have been popular in China, and so Apple could significantly improve its competitive position there with a bigger iPhone.

Furthermore, Apple clearly saw some sales lift last quarter from its recent agreement with China Mobile, which is the world's largest wireless carrier. However, the short-term sales lift pales in comparison to the long-term opportunity at China Mobile.

First, Apple's iPhone is one of the first devices to be promoted for China Mobile's new LTE service. China Mobile is in the midst of expanding LTE from just a handful of key cities at the beginning of 2014 to (hopefully) hundreds of cities by the end of the year. As LTE service improves, Apple's sales through China Mobile should rise.

G

A cheaper iPhone 5c at China Mobile could drive big-time sales growth next year (Photo: Apple)

Second, most Chinese consumers cannot afford to buy a top-of-the line iPhone, which can cost the equivalent of nearly $1000. That's why Apple has seen such strong sales of the older iPhone 4S in China and other developing markets. However, the iPhone 4S does not have LTE and it doesn't work with China Mobile's 3G network either.

When the next iPhone comes out, Apple will probably stick to its policy of slashing the price on its older models. That will move the LTE-equipped iPhone 5c to a more affordable price point at China Mobile. (Apple took a step down this road last month by putting an 8GB iPhone 5c on sale in China at roughly 10% off the price of the 16GB version.) This will make Apple competitive in a huge market segment that it's not competing in today.

Foolish bottom line
Today, Apple is fighting in the smartphone market with one arm tied behind its back. It doesn't have a big-screen iPhone yet, let alone a phablet. It can't sell its current entry-level phone at China Mobile -- the world's largest carrier -- because of compatibility issues. Lastly, the China Mobile LTE rollout, which is one of the biggest long-term iPhone growth catalysts, is still in its early stages.

In spite of this, Apple's iPhone posted double-digit growth for the 3rd time in the last 4 quarters. With Apple set to fix some of its weak points in the smartphone market later this year and into 2015, the iPhone is positioned for even stronger growth going forward. This momentum should carry Apple stock higher as well.

Is this incredible product Apple's next growth driver?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers