Preorders Suggest Apple's iPhone 7 May Exceed The Street's Low Expectations

Analysts at Morgan Stanley say pre-order data suggests Apple Inc. AAPL's iPhone 7 may exceed low expectations as only 25 percent of existing iPhone users need to upgrade to beat consensus estimates.

Apple has more than 600 million iPhone users. The analysts estimate 219 million iPhone unit sales for 2017. They assume 30 percent of 2017 estimated iPhone units (66 million) are sold to new users. So, only 25 percent of the current installed base needs to refresh for Apple to sell the remaining 153 million iPhones.

"We think that is quite reasonable, as it implies a four-year iPhone life, and our global consumer survey in June revealed that about half of iPhone users still have 4" versions (5, 5s, 5c, SE). While some will upgrade to the SE, many will pick a larger iPhone in our view," lead analyst Katy Huberty wrote in a note.

Morgan Stanley has an Overweight rating and $123 target on Apple, which closed Wednesday at $111.77.

Related Link: iPhone 7 Will Be A 'Super Hit', iPhone 7 Plus Could Outsell It

In addition, Huberty pointed out that the pre-orders for iPhone 7 and 7 Plus at T-Mobile US Inc TMUS and Sprint Corp S were up four times versus last year's launch.

Aggressive promotions by all four carriers might entice users to upgrade to iPhone 7 despite the two-year lock in. Verizon Communications Inc. VZ, AT&T Inc. T, Sprint and T-Mobile all announced new promotions for the iPhone. Customers can get a free 32GB iPhone7 worth $650 by exchanging an eligible device in good working condition and signing a 24-month contract.

Huberty noted that these promotions are more aggressive than last year's deals for the iPhone 6s, which largely only subsidized part of the handset value with an eligible trade in at certain carriers.

"Most reviews today have a positive tone, noting the better cameras, longer battery life, water resistance, and some even said the lack of a 3.5mm headphone jack is not a major issue," Huberty continued.

Meanwhile, the battery issues and recall of Samsung Galaxy Note 7 should also boost demand, particularly iPhone 7 Plus, and a tailwind for Apple' margins.

Further, the brokerage maintained total iPhone build estimates of 44 million in September quarter and 72 million in December quarter. iPhone 7 and7 Plus builds of 83 million in C2H16 are also unchanged and roughly flat with 6s and 6s Plus a year ago.