Please ensure Javascript is enabled for purposes of website accessibility

This Statistic Shows Why Apple Inc.’s iPhone 6 Will Be Huge

By Sam Mattera - Aug 9, 2014 at 3:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple's next iPhone could smash existing sales records.

Apple (AAPL 2.45%) is likely unveil the next iPhone on Sept. 9, according to a variety of major media outlets. The handset, which could be defined by its larger screen, is expected to set sales records when it debuts later this year: According to The Wall Street Journal, Apple is prepared to move as many as 70 million-80 million new iPhones by the end of December.

If so, it will be a huge year for Apple's handset, especially given the recent difficulty rival Samsung (NASDAQOTH: SSNLF) has experienced. Nevertheless, such figures are made possible by a key statistic.

Apple's customer loyalty is unmatched

According to Morgan Stanley Research, Apple is unmatched when it comes to customer loyalty, retaining 90% of iPhone owners as recently as March. Samsung's customers are also fairly loyal, but to a much lesser extent -- Samsung's customer retention is around 77%.

Morgan Stanley's research is consistent with other findings. In February, WDS released the results of a survey it had conducted on smartphone buying habits. Although its results were not as bullish as Morgan Stanley's, WDS found that 76% of Apple's customers purchased a new iPhone when it came time to upgrade -- only 58% of Samsung's customers bought another Galaxy.

There are many factors that may explain this loyalty -- the quality of Apple's products, for example, or the stickiness of its ecosystem. Most notably, unlike Samsung, Apple has exclusive rights to its mobile operating system -- customers that want a phone powered by iOS have no choice but to purchase another iPhone; Galaxy users that want to stick with Android are free to choose a variety of competing handsets from rival manufacturers.

A larger iPhone could spark a wave of upgrades

Given its high degree of customer loyalty, it's logical to expect Apple's next iPhone to capture the bulk of existing iPhone users, particularly if they're attracted to its larger screen.

In another piece of research, Morgan Stanley noted in May that -- at least in the U.S. -- older-generation iPhones make up much of Apple's current install base. In fact, the iPhone 4 and iPhone 4s account for nearly half of the iPhones currently in use.

Many of these iPhone 4 and iPhone 4s owners could be prime customers for Apple's next handset, especially if they purchased their iPhones around their respective debuts (in 2010 or 2011). However, many of these handsets were undoubtedly purchased more recently, as even now Apple continues to offer the iPhone 4s.

A better measure may be to consider Apple's iPhone sales in the fourth quarter of 2012, as those consumers would be coming up on the end of their two-year contract agreements. During that quarter (which was Apple's first quarter on a fiscal year basis), Apple sold nearly 48 million iPhones.

Should 90% of those customers purchase another iPhone later this year, that would result in sales of over 43 million. On top of that, sales in that quarter did not include the more than 5 million iPhones Apple sold during the iPhone 5's first weekend on sale in September 2012.

At the same time, rumors of a larger iPhone 6 have been swirling for months, and many of Apple's customers (who may have otherwise already upgraded) could have delayed their purchase in the hope of snagging a larger iPhone. With a larger screen variant, Apple could also be poised to poach some of Samsung's best customers.

The last factor, and perhaps the most significant one, has been the growth of no-contract plans. According to Apple's CEO Tim Cook, more than 75% of the iPhones Apple sold last quarter were to customers on an unsubsidized plan. Although these customers receive a discount for holding on to their existing phones for a longer period of time, they can also upgrade more quickly -- at least every year, if not more often.

In the past, it would have been appropriate to assume that Apple's prior-year customers would not upgrade to the latest model -- today, that's far from true. In the fourth quarter of 2013, Apple sold 51 million iPhones; the majority of those buyers will probably not upgrade, but millions could.

The iPhone 6 in context

Although smartphones are approaching saturation, Apple's iPhone 6 is still likely to be the best-selling iPhone yet. Given the intense loyalty of Apple's customers, it's fair to assume that many of them will upgrade.

If Apple sells 65 million iPhones in the fourth quarter (factoring out iPhones that will be sold at the end of September), it would represent an annual increase of more than 27%. That may be too aggressive, but it certainly seems possible.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (2.45%) $3.39
Morgan Stanley Stock Quote
Morgan Stanley
MS
$77.82 (5.21%) $3.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.