Apple is sitting on 'a powder keg of dramatically ageing' iPhones

Apple reports its September quarter earnings tomorrow and analysts are expecting CEO Tim Cook to report another decline in iPhone sales. But analysts are already looking forward to next year. Cowen’s Timothy Arcuri and his team believe iPhone sales are set to explode when Apple introduces the successor to iPhone 7, which they believe will be called “iPhone 10”:

“iPhone 7 is proving an effective ‘bridge’ to the iPhone 10 super-cycle in ’17, where a powder keg of a dramatically ageing installed base lurks just under the surface such that C17 Street revs/EPS are 10%+ too low. Raise target to $135, which even still seems too low.”

Arcuri’s theory is that over the next few quarters, 43% of iPhone users will be using a device older than two years, and will be ready for an upgrade.

BMO Capital Markets has a chart illustrating the upcoming iPhone “super-cycle”:

Cowen’s theory suggests that weakness in sales for iPhone 7 will actually end up helping next year’s new iPhone, which is expected to feature dramatically improved features and functions. Users are holding onto their older phones because they really want “iPhone 10,” not iPhone 7.

In the meantime, a review of a dozen or so recent analyst notes shows Wall Street is expecting another decline in iPhone sales during the quarter ending in September, despite the implosion of Samsung’s Galaxy Note 7 flagship.

UBS Asia Telecom analyst Jinjin Wang believes slowing demand for iPhones in China is one factor behind the weakness. She recently told her colleague Steven Milunovich that the improving strength and quality of Chinese brands plus their lower price has hurt demand for iPhone 7 in Apple’s second largest market:

“… domestic brands are catching up as Apple’s innovation has lagged — consumers are now not embarrassed to own Oppo, Vivo, or Huawei handsets. Apple this year is number five or six among the top 20 sellers.”

“Domestic brands like Huawei, Oppo, and Vivo have been big winners against foreign brands like Apple and Samsung. The top ten handset brands in China today include only two foreign brand names, Samsung and Apple, with all others on the list domestic brands.”

“… Typically a Chinese consumer buys Apple to ‘pretend to be something,’ because it’s a very high-end brand. Starting last year and continuing this year, it’s been the opposite. Consumers are looking at domestic brands like Huawei, Vivo, and Oppo as also being very high quality brands. They can buy similar functionality as iPhone at only 2-3k RMB, half of Apple. It’s more value for the money.”


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