- Apple’s U.S. iPhone install base exceeds 100 million units.
- More than 70% of existing iPhone owners have not upgraded to iPhone 6/iPhone 6S.
- Apple to take up more than 61% of smartwatch market share in 2015.
Questions are being asked about whether the party is over for Apple Inc. (NASDAQ:O:AAPL) in the smartphone business. There appear to be fears that developed markets that Apple targets for iPhone sales are reaching smartphone saturation, thus limiting new smartphone sales opportunities. It has also been said that rivals are catching up with Apple in premium smartphone segment in markets such as China, thus diluting its pricing power and eroding its premium margins.
If indeed the concerns raised about Apple are true, they qualify as near-term noise that have little or no impact on the company’s long-term prospects.
But still, it is always important to note that Apple is not all about iPhones, although iPhones account for the majority of its sales and profits. The company is aggressively diversifying its revenue streams into new hardware markets such as smartwatch (Apple Watch) and services (Apple Music, Apple Pay etc.).
iPhone still going strong
However, even if Apple was all about iPhones, the saturation in developed markets and fierce competition in developing are unlikely to deny Apple growth in the smartphone market overnight.
iPhone upgrade opportunity:
If selling iPhones to first-time buyers is going to be difficult because of competition and market saturation issues, Apple has a huge and usually sticky install base that it can target with new iPhone models. It is estimated that only about 30% of existing iPhone owners have upgraded their handsets to iPhone 6 and iPhone 6S.
According to Consumer Intelligence Research Partners (CIRP), there are more than 100 million iPhones in active use in the U.S. alone. That means that Apple’s iPhone install base in the U.S. has surpassed 100 million units and there are millions more globally.
As such, with about 70% of the iPhone global install yet to upgrade, there is huge internal sales opportunity for Apple to target with iPhone 6S and iPhone 7, which is coming out next year.
Android switchers:
Apple continues to win over Android defectors. In the last quarter alone, Android converts account for nearly 30% of iPhone sales. Surveys have also shown that many more existing Android owners are planning to shift to iOS platform in their next handset upgrade.
As such, besides selling to its existing iPhone install base, Apple can also sales millions more units of iPhones to Android defectors, thus making up from the various pressures (real or perceived) in the global smartphone market.
Beyond iPhone there lie amazing catalysts
iPhones sales account for about two-third of Apple Inc. (NASDAQ:AAPL)’s total revenue. That explains why developments in the iPhone market make cause heads to turn. However, beyond the all-important iPhone, Apple has other amazing growth catalysts.
Apple Watch disruption:
Apple ventured into the wearable tech market just recently (April 2015) with the Apple Watch, which is available in three flavors and cost anywhere between $350 and $17,000.
Despite being a latecomer in the smartwatch market, Apple is already disrupting the market with the Apple Watch, just projecting the product as a huge new growth opportunity for Apple. According to researcher IDC, Apple is set to finish CY2015 with 61.3% of the global smartwatch market under its control. That means that the company is on track to ship at least 13 million units of Apple Watch before the end of the year.
IDC expects Apple to continue dominating the smartwatch market, with its share of the market projected to remain above 51% until 2019.
The chart below shows estimated smartwatch market share for major players:
Although currently small in respect to total revenue contribution, Apple Watch is shaping up to be a huge growth opportunity for Apple in the coming years. It is already estimated that smartwatches will sell faster in 2016 than dedicated fitness wearables. That signals a huge sales opportunity for Apple Watch.
Apple Pay as a double-edge sword:
Apple Pay is Apple Inc. (NASDAQ:AAPL)’s other attractive growth catalyst. The mobile payments service is only available on modern iPhones, which means that it serves as another reason for why existing iPhone owners have to upgrade their handsets to enjoy all the benefits available to them.
Directly, Apple Pay is promising to be an incredible revenue source. Apple takes a cut from Apple Pay supported transactions. With more stores and banks coming to support Apple Pay, revenues from the service are expected to continue improving. Apple is also taking Apple internationally, thus expanding its addressable market and revenue potential.
There have also been speculations that Apple is working on a P2P Payments service that could be offered as part of an enriched Apple Pay or a standalone peer payments solution.
Besides being a way to get people to upgrade their handsets and also tap direct revenue, Apple Pay also enhances the stickiness of Apple’s ecosystem.
In addition to Apple Watch and Apple Pay, Apple’s other growth catalysts are Apple Music and a rumored Apple digital television streaming service believed to be along the lines of Netflix, Inc. (NASDAQ:O:NFLX) or Sling TV.
Apple’s capital return program
Apple Inc. (NASDAQ:AAPL) has plans to return more cash to shareholders. The company intends to return $200 billion to shareholders in the form of dividends and buybacks by the end of March 2017. About $143 billion of the total capital return amount has been distributed to shareholders. In the last quarter alone, Apple repurchased shares worth $14 billion.
The existing $200 billion capital return program was boosted from $130 billion that was previously in place.
Apple’s generous capital return program to some degree also reveals the management’s confidence in continued growth and profitability in the company.
Pressure points
Reliance on iPhones
The fact that Apple Inc. (NASDAQ:AAPL) relies on iPhones for the vast majority of its revenues and profits has become a cause for concern in the shrinking new smartphone market.
Margins squeeze
Although Apple’s strategy allows it to generate premium margins across its various product portfolio, shift in sales appear to threaten its bottom line. It has been noted that the low-margin iPad mini is selling faster than its peers, which could cause some gross margin squeeze for Apple in the tablet market.
Additionally, it is speculated that producing iPhone 6S probably costs Apple more than previous models. As such, the company is likely not enjoying top of the range margins in the product given that it sells at the same price as the predecessor.
Bottom line
Smartphone penetration reaching peak levels in developed markets and intense competition in developing markets are valid concerns about Apple Inc. (NASDAQ:AAPL)’s future. However, looking at them alone to predict the future of Apple doesn’t present you with the whole picture, because Apple is more than iPhones. Upside remains from people switching from Android and Apple has significant ammunition to return capital.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.