UBS: The iPhone X upgrade 'supercycle' is a myth

Hollis Johnson
  • The iPhone X was expected to drive a wave of customers to upgrade their phones, but it looks like that might not happen.
  • Apple seems to have hit a ceiling for its US market penetration.
  • The company will now have to focus on milking more money from its current iPhone owners and growing its international market share.
  • Watch Apple’s stock price move in real time here.

Before its release, analysts speculated that the iPhone X would drive a “supercycle” of phone upgrades. For about three years, Apple stuck with the same design for its new phones and many consumers opted to stick with their old models.

The iPhone X was announced in September and offered, for the first time since the iPhone 6, a new design. The bezel-less screen and face-unlocking features were expected to drive a wave of upgrades, but that hasn’t happened, according to Steven Milunovich, an analyst at UBS.

“[The fiscal year 2018] likely is not a ‘supercycle’ but a solid year,” Milunovich said in a note to clients on Monday. While iPhone sales are growing, it’s not at the “supercycle” rate that many analysts called for.

There are several reasons for the missing supercycle. Milunovich points out that the United States has roughly 320 million people, and only 48% of those people currently own an iPhone to upgrade from. That means only about 75 million people are willing to upgrade their iPhones each year, assuming a 2-year upgrade cycle. Milunovich suggests that Apple has hit its ceiling in the US market, and would have to expand its market share in order to sell more phones.

Many analysts were worried about the high cost and low supply of the phone too. The iPhone X is the most expensive phone Apple has ever released, and only a few million were available for purchase at the time the phone launched, though production issues seem to be much better now. The higher price could have steered customers away from the iPhone X. The the other options Apple announced in September maintain the same design as their predecessors.

Milking more money out of its customers is Apple’s next best move, after selling more devices and expanding its market share, Milunovich said.

“The stock narrative should shift from iPhone cycles to iPhone annuity-how does Apple monetise the installed base through additional products and services?” Milunovich said. Apple is already working on this, increasing its services business to 16.2% of its total revenue, or $US8.5 billion, in the most recent quarter. The higher price of the new iPhones also means that Apple makes more money from each phone it sells, on average.

International markets are another potential target for Apple. Even though the US may be a saturated market, Apple has a lot of growth opportunity available in China and other areas of the world, Milunovich said.

He rated the company a buy, with a price target of $US190, about 8.6% higher than the company’s current price around $US174.

Apple is up 80.07% this year.

Read more about iPhone X production.

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