MorningWord 10/11/16: Phone Tag

by Dan October 11, 2016 10:14 am • FREE ACCESS

A couple weeks ago, despite not expecting too many differences from my iPhone 6s, I bought the iPhone 7. I had not intended to upgrade (my wife accidentally destroyed her iPhone 6+ that week). I’ve had every iPhone, with a couple tries of Android phones in between (but always returned). The Apple ecosystem permeates the Nathan’s technological world. One Android phone could cause a glitch in The Matrix. After a couple weeks with the 7 I feel fairly similar than I did last Oct 11th after a few weeks with my 6s, very nice incremental upgrade, but not worth $750 to do so yearly. That seemed to be the consensus of most reviewers.

AAPL’s stock is up 15%, gaining nearly $100 billion in market cap since the low on Sept 9th that immediately followed the iPhone’s 7 introduction. Recently it has held its gains, and built slightly on them:

AAPL 30 day chart from Bloomberg
AAPL 30 day chart from Bloomberg

iPhone accounts for about 70% of Apple’s total sales. Next year will be the 10th anniversary of the device. Given this year’s delay of their normal two year device form factor change (typically second year internal upgrade, 3rd year total redesign), 2017 is almost guaranteed to bring a massive design change (oled curved screen, wireless charging, VR functionality). At that point almost all iOS device owners will consider an upgrade.

T-Mobile and Sprint have suggested that initial sales have been very strong (aided by their heavy promotions). Investors have clearly bought into this. The current quarter catches the holidays, and it will be aided greatly by Samsung’s trouble with their high-end flagship Galaxy 7 note. Samsung has thrown in the towel and canceled production.

Wall Street consensus for AAPL’s fiscal Q4 (to be reported on Oct 25th) is for eps to decline 16% year over year on a 9% sales decline. With the stock’s recent strength, hitting consensus and at least matching guidance will be very important for the stock to be able to hold gains. Q1 consensus is for a 3% eps decline and 1% revenue decline, both could prove to be conservative, if upgrades were in fact better than expected (we have not heard much from AT&T or Verizon) and if Samsung Galaxy recall and cancellation re-accelerates the trend of Android switchers.  But after fiscal Q1, it could be a disaster, as the 2017 tech landscape will be dominated by the iPhone rumor mill mill in anticipation of their 10th anniversary device that will be re-imagined after 3 years of external meh with tons of pomp and circumstance.

Apple has a huge opportunity to expand its reach with the Galaxy situation. It might be somewhat neutralized by Google’s launch (this month) of their high-end Pixel phone. But I think it is a safe assumption that Apple is benefiting from Samsung’s troubles right now.

The most important take-away in terms of market share is that iOS is still a niche player with a tad less than 15% global smartphone marketshare globally. Android had 86% in Q2.  But Apple is playing a different game than most of their Android competitors. Shareholders are investing in the profitability of their smartphones vs competitors as much as market share. AAPL’s average selling prices have averaged $675 over the last 6 years, with gross margins well above the company average of about 40% during that time period. On the flipside, Samsung ASPs over the last 6 years has been about $300, with margins closer to 40%. The Galaxy woes will force Samsung to compete on price even more aggressively to maintain market-share and win back trust. That could put pressure on AAPL’s margins in 2017, especially if most iOS users seem inclined to wait for the next iteration.

In the meantime, with little expected by way of bad news (aside from broad market moves) the stock looks hellbent on getting back to its 52 week highs just below $125:

From Bloomberg
From Bloomberg