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.
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.
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.