How Will Apple Sell 343 Million Devices in 2016?

Investors may be underestimating what the power of compounding can do for Apple (AAPL 0.52%).

If Apple can just sustain its current market share in the coming years, the power of compounding will drive unit volume growth for its iDevices through the roof. According to IDC, Apple is expected to grow its iPhone unit volume by 18.8% a year, roughly in line with the smartphone industry. At that pace, in three years' time, Apple's iPhone unit shipments will have increased by 68% since the end of 2012. On the tablet side, it's expected that Apple will ship 20.9% more iPads per year until 2016, equating to a 77% increase from today's levels. Are investors missing something so enormous it's difficult to see? Or could it be that IDC's estimates are completely off the mark and shouldn't be trusted?

Breaking down the numbers

Source: Apple quarterly press releases.

By 2016, the smartphone industry is expected ship nearly 1.2 billion devices and the tablet industry should ship 282.7 million devices. What baffles me about these numbers is how Apple will manage to sell more devices than there are people in the U.S. Apple's iPhone 5 has already been made available in 101 countries, leaving me wondering how much untapped demand for the iPhone remains, or if all that future growth will just come from existing Apple loyalists. Judging by a survey conducted by Strategy Analytics, 88% of U.S. iPhone users and 75% of Western European iPhone users are willing to buy another iPhone. Cumulatively, Apple has sold "well over" 500 million iOS devices, giving it a massive (and highly loyal) user base for future sales.

On the tablet front, Apple believes that the iPad is "the mother of all opportunities" because the tablet market will one day become larger than the PC market. Apple supports this claim with the increasing evidence that the tablet market has begun cannibalizing the PC market. Over the long-term, as casual PC users continue upgrading to their next computing device, it sets the stage for new Apple customers coming onboard.

Reignite those rumors
In terms of iPhones, Apple needs new user growth to sustain the volume increases IDC is predicting. While it certainly can go higher end with a larger-screen iPhone, the more appealing option would be to release an iPhone suited for the low- to mid-range of the market. Given Apple's history of expanding product lines like it did with the iPod, iPad, and Macbook, it's all but certain that Apple will release an additional iPhone model intended for a large audience.

Fear no cannibal
No one ever said a lower-cost iPhone wouldn't come at an expense. A low-cost iPhone would likely put continued pressure on Apple's gross margin and cannibalize the entire iPhone line. Last quarter, the iPad Mini cannibalized the iPad, which ironically ate into Mac sales. However, Apple has always maintained a philosophy to never fear cannibalization because if it did, Apple believes someone else will come along and cannibalize its products. Apple approaches cannibalization as an opportunity, because when someone buys their first Apple product, there's a good chance they'll come back for more. In other words, creating a long-term halo effect is far more valuable than the short-term fear of cannibalization.

Hold the line
As long as Apple sustains its market share, unit growth will continue to increase, allowing Apple more opportunities to create new halos for its products. Longer term, Apple's business model hinges on creating new customers and keeping them for life. If it can continue being successful in this area, I have little doubt that Apple shares will have no choice but to rise again.