Doug Kass, president of Seabreeze Partners and well-known columnist for The Street's Real Money Pro, recently said that he's going to be "more aggressive shorting Apple (NASDAQ:AAPL)." In particular, he thinks that Apple's "last significant product upgrade cycle" -- the iPhone 6/6 Plus cycle -- is "nearing completion and that neither the watch nor Apple Pay will move the corporate needle."
I think it's worth pondering whether Kass will prove to be right or if future iPhone launches will continue the momentum set by the iPhone 6/iPhone 6 Plus.
I totally get Kass' point
To be clear, although I'm pretty positive on Apple's future and would describe myself as a fan of Apple products, I can see where he's coming from. The move from smaller screen iPhones to the larger screen iPhone 6/6 Plus is a move that can only be done once.
Going forward, Apple is going to have to dazzle customers with meaningful improvements that will get them to plunk down substantial amounts of cash on new iPhones.
In markets where carrier subsidies are popular, I don't think it'll be a problem at all to convince customers to buy newer iPhones. After all, paying $200 to $400 upfront for a device that is very likely a core part of your life and then reselling it for approximately the subsidized cost when it's time for a new phone is a pretty compelling value proposition.
The risk is in regions where such carrier subsidies aren't as common. Users may choose to hang on to devices longer, particularly if future iPhones don't offer enough obvious and compelling features to justify plunking down a lot of money for a phone (although the fact that Apple's iPhones keep their value well can take the sting out of an upgrade).
That's the bad news; here's the good news
While the above certainly seems like a risk to keep an eye on over the long-term, I think – at the very least in the near-to-medium term -- Apple's iPhone business will continue to have legs.
For example, two quarters after the iPhone 6/6 Plus hit the market, iPhone 6/6 Plus penetration within the iPhone installed base is just 20%, according to Apple CEO Tim Cook.
Note that this number increased from "barely in the teens" (let's call it 14%) last quarter to "about 20%" this quarter. Also keep in mind that iPhone 6/6 Plus sales will likely cool off over the next two quarters as customers await next generation iPhones. This seems to suggest that the rate of growth of that metric will decline over the next two quarters.
By the end of the iPhone 6/6 Plus cycle, I would expect that about 30% of the iPhone installed base will have moved to iPhone 6/6 Plus. That's a whopping 70% of the installed base that could be ready to upgrade.
Apple needs to deliver compelling new products
I think that Apple understands that it needs to deliver more significant jumps generation-on-generation with iPhone to get customers to upgrade. If it does, then not only could Apple get iPhone users who didn't upgrade to the iPhone 6/6 Plus, but it could continue to lure in Android/Windows Phone users.
Heck, if the features are compelling enough (not just "whiz-bang" checkbox features, but features that have mass appeal) it could even get iPhone 6/6 Plus users to upgrade.
We'll have to see, though
Make no mistake: the growth that Apple is seeing from the iPhone 6/6 Plus cycle is absolutely nuts. Seeing 55% year-over-year revenue growth in Apple's iPhone business in the most recent quarter was nothing short of jaw dropping.
Keep in mind, though, this is a bit of a double edged sword as Apple now has an extremely high revenue base from which it needs to deliver year-over-year growth on next year; growth from here isn't going to be easy.
I think that if Apple executes well with its next iPhones, it can grow iPhone sales from these levels, albeit at a much slower pace than we're seeing with the current product cycle. Apple trades so cheaply, though, that it doesn't need to deliver crazy high growth to deliver solid returns to its shareholders.