Another Good Sign for Apple's iPhone 6 Launch

Strong demand for the iPhone 5s bodes well for Apple's iPhone 6 sales in the upcoming year.

Jul 27, 2014 at 6:30PM

Apple (NASDAQ:AAPL) investors are eagerly awaiting the upcoming fall product cycle. While Apple CEO Tim Cook has been hinting for a year that the company is on the verge of entering new product categories, the launch of the next-generation iPhone, probably to be called the iPhone 6, will still probably hold the spotlight.

Investors are particularly excited about the launch of the iPhone 6, because it's expected to feature a larger screen size than previous iPhone models -- a feature that many consumers have asked for.

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The iPhone 5s will soon surpass the iPhone 5 as the most popular iPhone. (Photo: The Motley Fool.)

One encouraging sign is the strong demand Apple is seeing for the smaller iPhones it's currently selling. The iPhone 5s is on the verge of surpassing the iPhone 5 as the most popular iPhone model, as measured by usage share. Considering how well the iPhone business is doing with Apple's present limited product family, the addition of a larger iPhone 6 should drive impressive sales and earnings growth.

iPhone 5s usage share grows
Mixpanel publicly tracks iPhone usage trends by model. According to Mixpanel's data, strong early sales of the iPhone 5s following its September 2013 debut helped it grow to represent about 15% of all iPhone usage by the beginning of 2014.

Usage growth has trailed off over the course of the year, but the iPhone 5s has now reached a usage share of approximately 28%. That puts it on par with the iPhone 5, the previous top-of-the-line model. Including the iPhone 5c, which was also introduced last fall, the new iPhones now represent more than 38% of total iPhone usage.

Obviously, it's not necessary to rely on usage data to know that iPhone sales are growing. In the past year, Apple has reported consistent iPhone unit sales growth ranging from the high single digits to the low double digits. Tim Cook also recently told investors that Apple is seeing growth across all three iPhone price points.

However, the high usage share for the iPhone 5s shows that there is strong demand for Apple's most advanced products. If that's true, then with even bigger improvements expected for the iPhone 6, Apple could see explosive growth for some of its highest-margin products.

Two key things to watch
The expected introduction of new iPhone form factors should give a big boost to Apple's sales and earnings in the coming year, for two reasons. First, the arrival of highly differentiated iPhones should drive strong upgrade demand. Whereas previous iPhones have had 3.5- and 4.0-inch screen sizes, most observers expect Apple to launch a 4.7-inch iPhone 6 along with a 5.5-inch "phablet"-type device.

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Most recent iPhone sales have gone to first-time iPhone users. (Photo: The Motley Fool.)

In fact, Apple seems to have achieved solid iPhone sales growth this year despite relatively modest upgrade demand. In April, Cook noted that over half of the people registering iPhones in the previous six months were new to the iPhone.

If anything, this trend intensified last quarter. In Q3, Apple saw its weakest results in developed markets, where the bulk of demand is for replacements rather than new users. The iPhone 6 launch should persuade a much higher percentage of Apple's installed base to upgrade in the next year.

The second reason the iPhone 6 could be a game-changer for Apple is that it could really turbocharge the company's growth in China. Apple's position at the forefront of the shift to LTE in China is already paying off. iPhone sales grew 48% in China last quarter, double the rate of the market as a whole.

That's quite impressive, considering big-screen phones have become extremely popular in China and Apple isn't in that part of the market yet. Just as the launch of a larger iPhone 6 should catalyze upgrade demand in the U.S. and other developed markets, it will also give Apple a big leg up in the large, rapidly growing Chinese market.

Foolish wrap
One of the best signs for the iPhone 6's sales prospects is the strong demand Apple has seen for the iPhone 5s. After 10 months on the market, the iPhone 5s is on the verge of surpassing the iPhone 5 as the most popular iPhone model. The iPhone 5c has also carved out a nice niche for itself with a 10% usage share.

Apple bears complain that the company has fallen behind competitors in the smartphone market. If that's true, imagine how many more iPhones Apple might sell when it "catches up" by offering big-screen versions later this year. Higher upgrade demand and strong growth in China should provide a big boost to earnings as the next year unfolds.

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Adam Levine-Weinberg is long January 2016 $80 calls on Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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