How Will Replacement Cycles Affect Apple?

Bernstein’s A.M. (Toni) Sacconaghi, Jr. believes Apple Inc. AAPL is “seeing both cyclical and secular headwinds from a strong iPhone 6 pull-forward coupled with a maturing high-end smartphone market.”

Sacconaghi maintains an Outperform rating on the company, with a price target of $135.

The FY15 ‘Boom’

Based on comments by the company, the analyst believes that the FY15 “boom” was partly driven by a higher upgrade rate, with Apple’s installed base ending the year at 500–600 million units.

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“iPhone's replacement cycle is structurally lengthening primarily due to the growing installed base of used phones, as well as a market shift to more international users (who tend to upgrade less frequently),” Sacconaghi pointed out.

During FY15, 68 percent of the sales were due to upgrades, which increased from 25 percent in FY12.

On the other hand, 50 percent of the sales in FY15 to first-time iPhone buyers are estimated to have been to platform switchers, with the other 50 percent to customers who were buying their first smartphone.

iPhone Installed Base Will Grow

“Our analysis indicates that the iPhone's installed base should grow healthily in FY 17, leading to iPhone unit growth in FY 17, if replacement rates do not decline materially,” Sacconaghi stated.

The analyst estimates robust 18 percent growth in iPhone’s installed base in FY17, which in turn would drive healthy unit growth, based on an estimated 27 percent upgrade rate in FY16.

“Our installed base analysis indicates that Apple is attracting notably fewer first time smartphone buyers, which suggests that the high-end market is increasingly saturated,” Sacconaghi noted.

Therefore, the lower priced iPhone SE would become very important for the company, which would help Apple “with an opportunity to tap into a new consumer cohort who had been previously served by purchasing a used iPhone.”