This Is The Biggest Threat To Apple's iPhone

BTIG’s Apple analyst, Walter Piecyk, cut his revenue and EPS estimates on the company last week due to concerns that the iPhone replacement cycle is lengthening. UBS ’ analyst, Steve Milunovich, brought up the same concern in a March 14 report but note that he kept his March quarter iPhone estimate the same at 52 million on March 22. I believe that an elongation of the iPhone replacement cycle is the biggest threat to the iPhone’s financial returns. (Note that I own Apple shares).

Lower upgrade rates decrease iPhone sales by 10 million units in 2016 and 2017

Piecyk has a detailed analysis by US carrier ( AT&T , Sprint, T-Mobile and Verizon) and by pre and post-paid plans of upgrade rates and number of devices sold. The general results are that the upgrade rates of the post-paid smartphone install base declines from the low 30%’s to the mid-20%’s in 2016 and 2017. This means the units sold growth rate drops from a positive 5% to a negative 5% in 2016. The pre-paid upgrade rates also decreases but by a smaller amount and since post-paid is over 70% of units sold the changes to its upgrade rate has the biggest impact.

Piecyk’s new fiscal 2016 EPS estimate is $8.87 (down from $9.42 and the Street’s $9.06) and his fiscal 2017 EPS is $9.57 (down from $10.10 and the Street’s $10.00). Part of the decline is due to lower Watch projections and its decreased pricing. Overall he kept his Buy rating and has a $130 price target based on a 13.5x PE multiple on his fiscal 2017 EPS estimate.

Lower upgrade forecast to the iPhone 6 family

Milunovich had been expecting that 70% of the iPhone install base would upgrade to a 6 or 6s model by the end of the year. He believes that this is too high of a projection based on a larger install base than he had previously thought (530 million is now a 600 million estimate due to more used iPhones being active) and a lower, maybe much lower, upgrade rate for used iPhones.

In a UBS Evidence Lab survey last fall the upgrade cycle had averaged 2.2 years and had lengthened by a small amount while a ChangeWave survey had them lengthening from 2.8 to 3.0 years. AT&T offering a 30 month payment plan is also having an impact (which I discussed with a Costco salesperson last week. A small data point but in-line with what others are finding).

As the true cost of buying a new smartphone is becoming more apparent it does not surprise me that when someone has their iPhone paid off (or in reality pretty much any other high-end smartphone) that they think twice before they get back on the payment treadmill. I don’t see myself upgrading my iPhone 6 Plus until Apple brings out enough new technology for me to buy it.

This could also put iPhone 7 estimates at risk. As Milunovich points out in his note having it be waterproof, a faster processor, dual cameras and improved ear buds may not be enough. What I will say is that from the virtual reality exhibits I saw at the Super Bowl Experience in San Francisco if Apple can crack that nut then I would be very interested in that iPhone. However I don’t think anyone is expecting Apple to have VR technology in the iPhone 7 later this year.