Pacific Crest analyst Andy Hargreaves has been waiting for this moment for more than a year. In early September 2014 -- before Apple (NASDAQ:AAPL) had even launched the iPhone 6 and iPhone 6 Plus -- Hargreaves told investors that they should consider selling some of their Apple stock.
He reasoned that while the new iPhones would be a hit, they would create tough comparisons, causing iPhone sales to decline year over year for the first time ever in fiscal 2016.
Now that the tough comparisons are in place -- Apple is on pace to sell 230 million or more iPhones in fiscal 2015 -- Hargreaves is sticking to his guns. On Thursday, he offered a litany of reasons iPhone sales are poised to fall. However, on closer inspection, Apple's iPhone prospects for the next 12 months don't look so bad.
Reasons to fear?
Apple's iPhone unit sales have never declined in a fiscal year. Indeed, unit sales growth has never even fallen into single-digit territory for a full fiscal year. However, based on the tough comparisons created by the popular iPhone 6 and iPhone 6 Plus, Pacific Crest has warned that iPhone unit sales could decline by up to 8% in the upcoming 2016 fiscal year.
In the firm's most recent missive, Hargreaves and his team point to factors such as low buzz, weak search volume for the iPhone 6s, and the continued availability of many iPhone 6s models for delivery on launch day as evidence that demand for Apple's new flagship phone is weak.
This pessimistic analysis comes despite Apple's statement last Monday that it expects to beat last year's record opening weekend sales volume of 10 million units. Yet the Pacific Crest group claims that this statistic merely shows that Apple has more supply available, not that there's a real increase in demand.
3 reasons not to worry
There are several reasons Pacific Crest is probably taking too gloomy a view of iPhone sales. First, while most versions of the iPhone 6s are still available for delivery on Sept. 25 in the U.S., the 6s Plus is on a multi-week backlog across the world. And in China, Apple's most important growth market, even the smaller iPhone 6s has had a backlog since the day pre-orders began.
The apparently strong demand in China is yet another indication that slowing economic growth there isn't affecting Apple much. Rising iPhone demand in the massive Chinese market could more than offset somewhat weaker demand in other countries.
Second, it makes sense that there is lower search volume for the iPhone 6s than for last year's models. While the new iPhones offer several useful improvements, they can't match the magnitude of moving from a relatively small 4-inch screen to a 4.7-inch or 5.5-inch display.
However, just because there's less buzz doesn't mean the phones won't sell. As of the end of June, only 27% of iPhone users had upgraded to the iPhone 6 or iPhone 6 Plus. That leaves a lot of people with older hardware. Over the next year, many people will become eligible for upgrades, their old phones will break, or they will simply decide they need better hardware.
Furthermore, Apple and its carrier partners are providing more and more ways to make it affordable to buy a new iPhone. The bottom line is that the normal upgrade cycle (and a normal rate of new-to-iPhone customers) can drive a lot of sales even without a lot of hype.
Third, if consumers don't see the iPhone 6s and 6s Plus as being such a big upgrade from last year's models, they may just opt to buy the reduced-price iPhone 6 or iPhone 6 Plus. Higher demand for the older models (which aren't supply constrained) could actually help Apple beat its sales record from the holiday quarter last year, when the iPhone 6 and especially the iPhone 6 Plus were in short supply all quarter.
While the iPhone 6 and iPhone 6 Plus are priced $100 below the comparable new models, they are also cheaper to produce both because of new features included in the iPhone 6s and 6s Plus and the fact that production costs always decline over time. Thus, an "unfavorable" mix shift toward the year-old models wouldn't hurt Apple's profitability very much.
Wait and see
It always takes a few months to get a firm handle on just how popular the newest iPhones are. Between fans who try to upgrade as soon as possible, droves of holiday shoppers, and Apple's efforts to build channel inventory, Apple can typically sell as many iPhones as it can produce for the first few months.
Thus, it's always possible that despite Apple's solid initial sales report and the factors I've noted, Hargreaves and his team are right about weak iPhone demand. Their bearish forecast doesn't seem like the most likely scenario, though. And with Apple stock trading for less than 12 times forward earnings, there's plenty of margin for error even if Apple can't match last year's record iPhone sales total.