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Beware, Apple Inc. (AAPL) Longs: The iPhone 8 Supercycle Isn’t a Given

Many Apple Inc. (NASDAQ:AAPL) investors and analysts remain optimistic that the launch of the iPhone 8 sometime in September or October will spur another huge iPhone supercycle similar to that by iPhone 6. Those high expectations have helped AAPL stock rack up impressive gains of 38% year-to-date.

Beware, Apple Inc. (AAPL) Longs: The iPhone 8 Supercycle Isn't a Given
Beware, Apple Inc. (AAPL) Longs: The iPhone 8 Supercycle Isn't a Given

Source: Yanki01 via Flickr (Modified)

The iPhone 6 launch in the summer of 2014 was an unprecedented success primarily because it met the pent-up demand for a larger screen. That massive upgrade cycle helped Apple sell 10 million handsets over launch weekend, and has remained the gold standard for iPhone upgrades ever since.

Many Wall Street pundits believe that a new OLED display, among other shiny new features, will be enough to persuade many people to ditch their old iPhones for the newest Apple iteration.

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Investors long AAPL stock should temper their enthusiasm with a bit of caution.

Too Many Old iPhones Still in Use

Slowing iPhone sales — including by the iPhone 7, which so far has done well but failed to impress — has made it quite clear that people are not upgrading their devices fast enough. But just how bad the situation has become was anybody’s guess … until recently.

According to a report by Newzoo, nearly two-thirds of all iPhones sold by Apple since 2007 are still in use. The research firm says that 728 million iPhones were still in use as of April, representing about 63% of all iPhones sold since Apple launched the first iPhone a decade ago. About 31% of all in-use iPhone handsets, or 228 million, are in China; 16% (120 million) are in the U.S.

As you might have guessed, iPhone 6 remains the most popular model with 21% market share, while the latest iPhone 7 has only 11% of the market. When you take out iPhone 6 and iPhone 7 devices in circulation, you are left with a staggering 68% of older iPhone models that still are in circulation!

In other words, more than two-thirds of all iPhones in circulation are more than four years old.

That pours cold water on the two-year upgrade cycle that many analysts like to throw around. The bottom line is that iPhones don’t break easily, and many people are happy to hold on to a device that has served them well for half a decade or more — at least outside the U.S.

You can spin that data any way you want. It paints a nice picture of the quality of Apple’s workmanship. On the other hand, it’s quite damning on a purely business level because … well, smartphones that perform reliably for five or more years are bad for business.

They’re certainly not great for anyone holding AAPL stock.

China Isn’t Helping

China is the biggest culprit here. China is the second-largest iPhone market, with 51.6 million iPhone units expected to be sold in the Middle Kingdom in 2017 vs. 69.3 million in the U.S. Yet, China is hoarding nearly twice as many long-in-the-tooth iPhones as the U.S.

China was largely responsible for the iPhone 6 upgrade supercycle. The addition of China Mobile Ltd. (ADR) (NYSE:CHL) as a carrier in the country in 2015 played a big part in driving sales there. Apple’s China business has enjoyed a meteoric rise over the past half decade.

But after peaking at $61 billion in 2015 (the first full year of the iPhone 6 supercycle) it declined to just $46 billion in 2016 and shows no signs of moderating. A recent report by research firm Canalys shows that Apple lost ground in China during the most recent quarter, again, after slipping from second to fifth among top Chinese smartphone vendors.

That data gels well with the Newzoo numbers.

iPhone sales in China are nearing saturation as people continue holding on to older devices. The fact that the iPhone 8 might sell for as much as $1,200 a pop does not augur well for a price-sensitive market — not just in China but also in other low-income countries.

Unless the Chinese come to the party, you can forget about an iPhone 8  supercycle altogether.

Bottom Line for AAPL Stock

There’s little doubt that the OLED display and a couple of other fancy features are going to drive lots of interest in the iPhone 8. It is, however, going to be mightily tough for iPhone 8 euphoria to challenge the crazy iPhone 6 wave whose stars just seemed to align perfectly.

Simply put: Don’t bet the farm on Apple’s next iPhone.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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