The newest iPhone craze has officially begun. On Friday morning, Apple (AAPL 0.31%) and its retail partners began taking pre-orders for the latest batch of iPhones in the U.S., Japan, and several other countries.
Apple's bigger iPhones have finally arrived! Source: Apple.
It's virtually certain that the launch of the 4.7" iPhone 6 -- and its larger sibling, the 5.5" iPhone 6 Plus -- will make this another year of record iPhone sales. However, the iPhone 6 and 6 Plus may have an even bigger impact than that. The addition of big-screen phones could return the iPhone to its former position as a huge growth engine for Apple.
iPhone sales growth has slowed
Apple can't complain about the pace of iPhone sales during the past two years. That said, iPhone sales growth has rapidly decelerated since 2012 because of market saturation and increasing competition. Just take a look at the following table:
|
Fiscal Year |
iPhone Unit Growth |
iPhone Revenue Growth |
|---|---|---|
|
2010 |
93% |
93% |
|
2011 |
81% |
87% |
|
2012 |
73% |
71% |
|
2013 |
20% |
16% |
|
2014 (est.) |
10%-13% |
8%-11% |
Source: Apple SEC filings and quarterly earnings reports.
Between 2010 and 2012, iPhone revenue growth slowed modestly: from 93% to 71%. On the other hand, the iPhone revenue growth rate has plunged from 71% to around 10% in the last two years.
Thus, while Apple has continued to post record iPhone sales each year, the growth rate went from the high double-digits to the low double-digits almost overnight. This slowdown explains the Apple stock crash of late 2012 and early 2013.
Apple 5-Year Price Chart, data by YCharts.
With Apple stock recently rallying past its 2012 highs, some pessimists think another big crash is inevitable. However, there's a big difference between now and 2012. Whereas iPhone growth slowed dramatically in late 2012, the iPhone 6 is likely to drive a return to faster growth. Here's why.
A broader selection
The most basic reason why Apple should sell more iPhones in the coming year is that it has a significantly broader product portfolio. Up until now, iPhones have only had 3.5" or 4" screen sizes. But the market has moved toward bigger phones -- as evidenced by the steadily increasing size of Samsung's Galaxy S line of phones -- and that's where the iPhone 6 lineup comes into play.
The 4.7" iPhone 6 and the 5.5" iPhone 6 Plus move Apple solidly into the market for big-screen phones and "phablets." Apple's new product lineup also keeps the iPhone 5s and iPhone 5c, both of which have 4" displays, as lower-priced offerings.
Apple's new iPhone lineup. Source: Apple.
With a range of screen sizes and prices (as low as $0 with a two-year contract for an 8GB iPhone 5c, and as high as $499 with a two-year contract for a 128GB iPhone 6 Plus), Apple can appeal to more smartphone buyers. This should help it gain market share, particularly in the high end of the market.
The iPhone China has been waiting for
One region where Apple is likely to excel in 2015 is China. Apple's partnership with China Mobile has already started to pay dividends, as Apple's market share in China reached 6.5% last quarter, up from 4.9% the previous year. The arrival of the iPhone 6 and iPhone 6 Plus should drive further gains.
Earlier this year, sales of phablets -- phones with screen sizes larger than 5" -- surpassed 40% of the Chinese market. Phones similar in size to the iPhone 6 (4.7") make up another big chunk of the market. As a premium brand, Apple's lack of big-screen phones has definitely hampered it in China up until now -- but no longer.
The pricey iPhone 6 Plus could become a status symbol in China. Source: Apple.
The popularity of large-screen phones should drive a strong wave of upgrade demand from the roughly 50 million iPhone users in China. The iPhone 6 and iPhone 6 Plus are likely to become status symbols in China. Given the wealth of Apple's current customer base there, smartphone subsidy cutbacks probably won't have as big an impact on Apple as on other vendors.
Some pundits have noted that China is not part of the first launch wave this year. However, a delay of a few weeks -- or even a few months -- will have a negligible impact on how many iPhones Apple can sell in China during the coming year. After all, it will take months for Apple to catch up with global demand for the iPhone 6 and iPhone 6 Plus.
Americans ready to upgrade
Lastly, the iPhone 6 and iPhone 6 Plus should do well in the U.S., because Americans are ready to upgrade their iPhones. More than 73 million Americans owned iPhones as of July, according to comScore.
About 70% of U.S. iPhone users have the iPhone 5 or an even earlier model. There is thus a huge base of iPhone users who are already upgrade eligible, and others becoming eligible during the year. A large proportion of these people are planning to upgrade soon.
Even among owners of the latest model -- the iPhone 5s -- 24% are planning to upgrade by the end of 2014. Adding in the likelihood of market share gains, it seems clear that Apple will have a big year in the U.S.
Just what Apple investors need
The introduction of the iPhone 6 and iPhone 6 Plus will almost certainly drive an acceleration in iPhone growth, which would be a big turnaround from the past two years of moderating gains.
It's hard to quantify exactly how many iPhones Apple may sell in its upcoming fiscal year, but the tally could easily exceed 200 million. (One analyst claims that a sales figure as high as 235 million is plausible.) Strong upgrade demand and market share gains in the U.S. and China alone could account for more than 100 million iPhone sales.
Selling 200 million iPhones worldwide would imply unit growth of around 20%, and even faster revenue growth due to the higher price of the iPhone 6 Plus. A return to growth may dispel the pessimism that has kept Apple stock languishing at a lower earnings multiple than the rest of the market. This could drive big gains for Apple investors in the coming year.
