Apple’s iPhone 6 Is Set to Break Records

Let's be real -- Apple's (NASDAQ: AAPL  ) iPhone launches aren't any ordinary product launches. These launches are once-per-year extravaganzas that garner investor, consumer, and media interest in a way that is quite unlike any product that has ever come before it. Samsung (NASDAQOTH: SSNLF  ) brags about selling in 10 million Galaxy S5 phones within 25 days, but Apple's iPhone 6 is likely to blow away even that number on "opening weekend" -- breaking Apple's own enviable record.

iPhone 6 will be the perfect compromise
While many harp on Apple for not releasing a large iPhone sooner, the financials don't lie – people are absolutely loving their 4-inch iPhones. If Apple has product that generates more profit than any of its competitors, and continues to defy the rather pessimistic expectations out there, why should Apple be in any rush to change it?

The iPhone 5 brought a new chassis that really propelled iPhone forward, and iPhone 5s refined and tuned that chassis, brought Touch ID and the world's fastest mobile processor, and led Apple to post record revenues, yet again. With the upcoming iPhone 6, Apple will most likely build upon this base of loyal customers and, in the process, likely gain share against large-screened competitors. If the rumors of a 4.7-inch iPhone are true, then this could very well strike a near-perfect compromise to win over those who enjoy the current 4-inch form factor, and those who want increased screen real-estate (but not too much).

What about the iPad? Won't this cannibalize iPad sales?
There is an argument out there that goes a little something like this:

  • People who buy large phones are less likely to buy tablets
  • If Apple releases a large iPhone, customers will be less likely to buy iPads
  • Therefore, Apple should avoid releasing a large iPhone

Now, hold up a second. First of all, if the above argument were true, then Samsung certainly hasn't gotten the memo; it sells many tablets and smartphones across all screen sizes and price points and both its smartphone and tablet sales continue to climb to new highs.

Applying this to Apple will likely yield the same results, except Apple is, if anything, further insulated from that cannibalization impact. iPad has significant market share in enterprise and in schools, and the usage models that drive that are unlikely to be satisfied by a 4.7-inch smartphone. Further, in settings such as education, getting each student (or classroom) a $650+ iPhone coupled with a cellular plan certainly isn't viable. The 7.9-inch and 9.7-inch iPads serve a different purpose than a 4.7-inch phone.

The cannibalization argument, while perhaps valid for a small subset of the population, just doesn't really hold water.

Market share opportunity is larger than cannibalization risk
More to the point on the cannibalization argument is simply that there is a very large market of Samsung Galaxy S/Note type products that Apple can begin to take share away from. Each win of a $650+, 40%-50% gross margin iPhone away from a Galaxy S or a Galaxy Note is worth about two to three iPad Mini with Retina Display gross margin dollars.

So, if Apple grows iPhone sales by 20 million-30 million units per year as a result of the larger iPhone, it would need to wipe away many times that in iPad sales given that the gross margins on the iPad are more along the lines of 20%-30%, and the ASPs are lower. Since a total wipeout of iPad sales as a result of a larger iPhone is extremely unlikely, Apple would be remiss to avoid a larger iPhone to "save" iPad.

Foolish bottom line
Apple's larger iPhone 6 is set to break records when it debuts. It will not only provide a compelling reason for folks with iPhone 4s, 5, and even 5s devices to upgrade, but it will likely bring back those who defected to Android in search of a larger screen. On top of that, thanks to a very efficient iOS, coupled with Apple adopting new technologies like 802.11ac and LTE-Advanced about a year after the component launches, Apple should see a pretty reasonable cost increase in moving from iPhone 5s to iPhone 6, limiting the initial gross margin hit.

Brace yourselves for what will probably be the biggest iPhone launch in Apple's history -- it's going to be epic. 

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Read/Post Comments (10) | Recommend This Article (67)

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 May 18, 2014, at 2:49 PM, fauxscot wrote:

    Good article. I think the reasoning is sound.

    Not that what I think matters, but Apple has been right more than the bears have been right. The diehard bears out there (Mr. MB, for one) will somehow spin a 10 million handset opening weekend into a disaster, but I think the theme of imminent Apple destruction is getting a little harder to sell quarter after quarter.

    Doesn't matter. There's really no better place to leave money, though there are more speculative and risky bets one could make, all the way to lottery tickets. Not my style. Apple isn't a sure thing, but it is a lot more certain than many alternatives.

    Thanks for the article and writing what a lot of us are thinking.

  • Report this Comment On May 18, 2014, at 3:59 PM, jhf678 wrote:

    In my opinion, the smartphone market has cooled down. People are not upgrading their hardware that much anymore because soon their will be wifi everywhere.

  • Report this Comment On May 18, 2014, at 5:21 PM, ronaldbaena wrote:

    You got that absolutely right dificial the apple has launch a big phone, because it would affect their sales on the other side and in turn competitiveness. excellent post.

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  • Report this Comment On May 18, 2014, at 9:11 PM, g8go09 wrote:

    Apple started the smartphone trend, Samsung and Google perfected it. I find it laughable that the Apple fanbois say the 4" phone stands on it's own, yet the boys in Cupertino are reaching for larger screens. FTR, I have a 4S for a company phone and a S3 for a personal phone so I'm well versed on both models. Apple has been a pioneer on many fronts, but others have come in and out done the company with improvements on their designs.

  • Report this Comment On May 18, 2014, at 9:21 PM, normgarry wrote:

    The reasons why people buying large phones are less likely to buy tablets are very simple:

    #1 with the exception of iOS iCLOUD, no one wants to have to keep two devices synced. iOS allows automatic syncing of purchased apps and media.

    #2 The real problem - which also comes from problem #1 is that NO ONE WANTS TO PAY FOR 2 DATA PLANS.

    Why is it that carriers force us to pay extra for a Tablet data plan? Why isn't tethering between iOS devices FREE? Blackberry offered Blackberry Bridge to share the connection between a RIM Playbook and a Blackberry phone.

    If iPhone owners could share their internet connection with their tablets, they'd never bother buying an iPhone with a larger screen. An iPad mini would be enough.

    this is no surprise as I always knew Apple couldn't release a phablet without eating into iPad mini LTE sales.

  • Report this Comment On May 19, 2014, at 8:18 AM, Griff wrote:

    Can't argue about anything stated in the article..

    I currently use an iPhone 5 (plain 5) that I have used for almost 2 years

    BUT I do not intent to buy another iPhone unless Apple changes its policy of giving us their way or the highway... I'll buy an Android phone the next time aI buy a smart phone because I absolutely hate being restricted to the one and only keyboard you can use on their phones..

    While I am in my 70's the iphone is an old mans or womens phone...its simple and it works and does not require much thought to use maintance BUT you can't get under the hood and make it work your way and boy the battery life sucks .. no way can I make it thru the day without recharging via my $100.00 Mophie /battery case ...

    Bob G

  • Report this Comment On May 19, 2014, at 6:37 PM, Mega wrote:

    Bob

    The 5S was actually a big stride ahead in battery life. I can easily go 2 to 3 days without charging now, even if I use the navigation or facetime for a couple of hours.

  • Report this Comment On May 19, 2014, at 9:15 PM, FoolSolo wrote:

    It is no surprise that any post favoring or bashing iPhone will draw lots of praise and criticism. I already see the battle lines forming in the comments on this post.

    Whether you like or hate the iPhone (I don't quite get why so many are so passionate about it), you have to admire Apple's business achievements based on the iPhone. Published metrics convey that Apple still leads in margins, profits, loyalty to the brand and by every measure of usage, it also leads in Internet use and eCommerce. Considering the vast array of Android based competitors and total Android market share that is quite an accomplishment. It certainly justifies Apple's share price appreciation from $80 to $600 (since 03/2009 to today).

    There are plenty of skeptics, but many value investors seem to believe Apple is still a bargain. If the iPhone 6 does deliver a significant boost in sales, then a run on the previous high of $700 is likely before year-end.

    Frankly, I find the screen size debate boring and overblown. For my needs I find the 5s just about the perfect size. If iPhone 6 goes to a larger format, I hope Apple continues to offer a model with the same dimensions as the 5s. Of course, thinner and lighter is always welcome, but any larger and it would be too bulky to carry in my pants pocket, and too big to navigate with one hand. Honestly, when I see folks in public with their gigantic Samsung phablets trying to use it as a phone I have to laugh out loud. But I must admit Samsung makes a beautiful colorful screen, even if it is ridiculously large for a phone.

    As for tablets, I have the iPad 4, iPad Air and iPad Mini (retina), as well as a Nexus 7. From my first-hand experience, there is just no comparison between Nexus and iPad in ease of use, or in battery life. The Nexus can barely last through the day with full charge and moderate use, whereas all my iPads last several days or a week on a single charge. I don't know if this is a problem specific to the Nexus 7, but I know several friends with Samsung phablets and they can't go long without plugging in, so I suspect it is more common among Android. My understanding is Apple makes custom tweaks to their microcode to extend battery life, and it seems to work.

    Among the many rumors, one I am somewhat curious about is the use of sapphire. I have my doubts about iPhone 6 having an entire screen made of sapphire, but if Apple has managed to develop a light, inexpensive sapphire screen it could be rather compelling for many consumers.

  • Report this Comment On May 20, 2014, at 8:24 AM, KombatKarl wrote:

    My HTC One has a 4.7" screen, and that's probably as big as they should be for a phone. The iPhone doesn't need to go to 5" or 5.5". I'm an Android fan and think even that is ridiculous. But that's what makes Android so appealing compared to Apple's products. CHOICE and OPTIONS. The poster above may laugh at people using large phablets as phones, but that's their choice. They like a large screen on their phone. If they didn't there are other options. With Apple it's their way or the highway, and I never liked that about them going all the way back to the late 90's.

  • Report this Comment On June 09, 2014, at 4:04 PM, sidorg222 wrote:

    I think apple will be quite successful with their new iPhone 6. A larger screen will allow them to keep and even gain customers from Samsung and other Android phones makers. Yes, iPhone is a no brainer device, which is great for the majority of people. I prefer devices like the Samsung s5, which allows me more freedom. But even samsung is tightening up security, and therefore limiting freedom as well. So, another point in apples favor

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