Apple (NASDAQ:AAPL) shares sat out of the stock market rally on Tuesday, largely because of a downgrade from Barclays. Analyst Mark Moskowitz expects the smartphone market to stagnate this year. Moreover, unlike many other analysts, he doesn't see the upcoming 10th anniversary iPhone as a major growth catalyst.
Indeed, Moskowitz asserts that iPhone buyers are increasingly opting to buy older models like the iPhone 6s in order to save $100, rather than paying up for Apple's latest and greatest designs. If consumers are becoming more focused on price than design, they might not care that much about the major design changes expected in the next-generation iPhone.
However, there is very little evidence that iPhone buyers are actually trading down. As a result, investors shouldn't pay much attention to Moskowitz's bearish prognostications.
Customers haven't been trading down
iPhone users weren't trading down in a meaningful way during the first half of fiscal 2016. In Q1 -- the all-important holiday quarter -- Apple's average selling price (ASP) for the iPhone rose slightly year over year, despite a 6% to 7% headwind from the strengthening dollar. The increase in ASPs was boosted by a growing preference for pricier iPhones with larger screens and more storage. Still, the data aren't consistent with a big shift toward buying older models.
During Q2, the iPhone ASP slipped about 2.5% year over year, but it still likely rose on a currency-neutral basis. Furthermore, Apple faced a tough comparison that quarter because it had been catching up from an iPhone 6 Plus supply shortage a year earlier.
The iPhone ASP did fall 10% and 8% on a year-over-year basis in the third and fourth quarters, respectively. That provides some evidence of customers trading down. However, much of the decline was again caused by the strong dollar. Furthermore, the budget-priced iPhone SE launched early in Q3 last year. Thus, for most of the second half of fiscal 2016, Apple's newest iPhone was also its cheapest iPhone. This obviously weighed on ASPs.
iPhone unit sales did decline last year, perhaps due to perceptions that the iPhone 6s wasn't a big upgrade over the iPhone 6. Nevertheless, considering all of the evidence, it appears that those consumers who did buy an iPhone during Apple's fiscal 2016 continued to favor the newest models.
Apple's iPhone mix probably improved last quarter
We won't know for sure whether the iPhone ASP increased or decreased last quarter until Apple reports its Q1 earnings next week. However, the preliminary evidence derived from iPhone usage data points toward a solid increase.
First, the iPhone 7 and iPhone 7 Plus currently account for about 14.5% of total iPhone usage, according to Fiksu. That's exactly in line with the usage share of the iPhone 6s and iPhone 6s Plus a year ago. Given that the iPhone user base is probably still expanding at a double-digit annual rate, an equal usage share implies higher unit sales.
Mixpanel, another company that tracks iPhone usage -- but with more U.S.-centric data -- shows an even bigger sales uptick for the latest iPhones compared to last year's models.
Second, the popularity of the pricier "Plus" models continues to grow, even after Apple hiked its prices for the iPhone 7 Plus lineup by $20. (Demand was so strong that the iPhone 7 Plus was in short supply for most of last quarter.) The iPhone 7 Plus had a usage share of 4.4% at the end of Q1, compared to 3.4% for the iPhone 6s Plus a year earlier.
Partially offsetting this, the dollar has continued to rise against some key foreign currencies (mainly the British pound and Chinese yuan). But that just means that even a small ASP increase would indicate significant year-over-year improvement in the iPhone product mix.
Are expectations too low?
Since bottoming out around $90 in May, Apple's stock price has shot up by 34%. This suggests that investors are starting to become more optimistic about the company's prospects.
Nevertheless, many Wall Street analysts still have very low expectations. In fact, analysts expect Apple to report a year-over-year EPS decline next week, despite the positive iPhone usage data and strong growth in Apple's services business.
If Apple is able to beat the estimates by reporting modest earnings growth for Q1 and offering a solid outlook for Q2, shares of the tech giant could begin 2017 with another rally.