Merrill Lynch: Used iPhones drive Apple’s growth

From “How is the iPhone installed base growing double digits with no unit growth?,” a note sent to clients Tuesday by analyst Wamsi Mohan:

We view the installed base (IB) as a key indicator of the eventual potential of the Apple ecosystem. In our opinion the following points are the most important to consider in evaluating the long term potential for Apple:

(1) Size of the global iPhone IB of about 1 billion units by the end of 2018 (about 750mn primary and 270mn in the used iPhone IB),

(2) Installed base CAGR [compound annual growth rate] over the past 2 years is 15%, primarily driven by strong double-digit growth in the used iPhone IB (2-year CAGR of 61% y/y, albeit off of a small base), while the new iPhone installed base has grown at a mid-single digit CAGR (6% y/y),

(3) Future growth in IB will largely come from the used phone market which can be a detractor to primary phone sales,

(4) A larger installed base can eventually drive higher consumption of services and sales of incremental devices (halo effect),

(5) The elongation of replacement cycles is additive to IB growth but the onus of unit growth will fall on Android switchers and first-time smartphone buyers (primary only), and

(6) Secondary market growth presents a large services opportunity but currently even primary market services attach is relatively low.

We maintain Neutral on risk/reward balance driven by weaker emerging markets and near-term slower Services growth, balanced by large net cash which affords optionality.

Maintains Neutral rating and $220 price target.

My take: The focus on installed base, rather than quarterly unit sales, is useful. That future growth will largely come from used phones, rather than new phones, is a surprise.


  1. Horace Dediu said:
    No, it’s not a surprise.

    November 22, 2018
    • Mark Visnic said:
      Agreed. It’s not a surprise at all. What is a surprise is that no one is writing about how the installed base grew at a double digit percentage rate from 2016 when iPhone unit volume was stalling. Apple’s business model and growth is all about the installed base. The IB is the invisible “next big thing.”

      The IB growth doesn’t fit the “device/hardware doomed company with unsupportable margins” narrative. Concepts like retention rate, ecosystem , halo effect and

      November 24, 2018
      • Mark Visnic said:
        Concepts like retention rate, ecosystem, halo effect, $90 Billion FCF run rates, and anti-dilutive share ownership seem to escape the sell-side and finacial media. Mohan writes of the IB yet doesn’t appear to comprehend the significance or of Apple’s business model or competitive strategy.

        November 24, 2018
  2. John Bossons said:
    Happens every time a market matures. New sales liberate still-useful phones/cars/whatever. Liberated phones get bought in the used phone/car/.. market. Think of it as an indirect way of reducing prices for those buyers that enlarge the installed base.

    November 22, 2018
  3. Rick Raphael said:
    I spoke yesterday with my China production manager (a 27 yr old female) asking about iPhones in Shanghai. She told me her friend bought the Xs Max (this is a middle income group). She also volunteered, “the most popular iPhone in China is the 4S”. A Hong Kong factory owner I know also bought an Xs, for his daughter. Another friend told me that most people he knows have the 8.
    I don’t know anyone in the US who has bought the X version yet.

    November 22, 2018
  4. Robert Paul Leitao said:
    This report underpins and accentuates Apple’s product strategy. As the economic life of iPhone handsets expand and each new iPhone is likely to continue in service for a second owner, Services revenue takes center state.

    The global market for pre-owned iPhones, through both formal and informal channels, is massive and robust. This is why even if iPhone unit sales remain static in any given quarter or fiscal year the global base of device users will continue to grow.

    Any analyst that is using iPhone units sales exclusively or primarily to model Apple’s growth or growth potential is relying on an outdated metric in their analysis. It’s among the reasons Apple’s management is choosing to no longer disclose unit sales in favor of more forward-looking performance metrics.

    November 22, 2018

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