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Bernstein's Sacconaghi Tries To Answer Why iPhone Growth Remains 'Stagnant'

March 12, 2018 8:51 am
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Apple Inc. (NASDAQ:AAPL)'s management team said during its fiscal first quarter conference call that its total installed base of Apple devices stands at 1.3 billion, which marks an uptick of 30 percent from two years ago. Yet at the same time, consensus estimates are calling for iPhone shipments in fiscal 2018 to remain flat or even decline for the third straight year.

The Analyst

Bernstein's Toni Sacconaghi, Jr. maintains a Market Perform rating on Apple's stock with an unchanged $170 price target.

The Thesis

A deep-dive into iPhone sales shows that the replacement cycle has been "relatively flat" in fiscal 2016 to 2018, Sacconaghi said in a note. This would be consistent with the company's own commentary and that growth in the installed base comes from both used and resold devices. In fact, the installed base of used iPhones is estimated to be 227 million, which represents roughly 30 percent of the total installed base, the analyst said. On the positive front, this implies:

  • Apple's ecosystem is "more accessible" from resales, which creates the potential to turn new buyers into Apple loyalists over the longer-term;
  • A larger installed base should translate into higher services revenue; and
  • iPhone resale values are "robust" and the proceeds from sales of older devices are likely to be used in upgrades to new devices.

On the other hand, there are a few negatives to robust used iPhone sales, including cannibalization risks on new phone sales and a slowdown in the market for used iPhones could "dampen" trade-in-values.

Price Action

Shares of Apple were trading higher by around 0.4 percent early Monday morning at $180.67, which is above the stock's 52-week high of $180.62.

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