Wedbush: Apple will be fine, even if the 5G iPhone is delayed

Apple's Services are Teflon-like, says analyst Daniel Ives, and there are 350 million iPhone owners overdue for an upgrade.

From a note to clients that landed on my desktop Sunday afternoon:

Under our negative stress test scenario for Apple's model we now assume only the installed base consumers currently in the window of an upgrade opportunity that have not upgraded their iPhones in more than 42 months purchase a new phone over the next 18 to 24 months.

Currently we estimate that ~350 million of Apple's 925 million iPhones worldwide are in this upgrade window, as we assume going forward in a more draconian scenario that minimal new smartphone activity takes place besides this segment of Cupertino's massive installed base.

Even factoring in this more doomsday type scenario, with a services business that is Teflon-like and poised to hit roughly $60 billion in FY21 we believe the risk/reward on the stock is extremely compelling at current levels for risk tolerant investors heading into a delayed (by ~3 months) 5G super cycle thesis over the next 12 to 18 months.

Taking a step back, this is not any ordinary year for Cook and Cupertino as the company is entering, in our opinion, one of its most important iPhone upgrade product cycles ever as the drumroll for the 5G super cycle was slated to kick off in the September timeframe even though we now believe this is looking like the holiday timeframe given the current global lockdown and still damaged supply chain.

Maintains Outperform rating and $355 price target.

My take: Even Ives' doomsday scenario looks okay.


  1. Gregg Thurman said:
    I’d like to see a breakdown of Apple’s installed base that buy NEW A/ every year, B/ every two years, C/ every three years and, D/ every four years. I’m assuming that the rest buy used.

    I believe the total of those NEW buyers has an annual growth rate of about 1% with fluctuations greater than 1% are just new sales pulled forward.

    The growth rate of iPhone installed base is being driven by sales of used units. Used units are not manufactured that way, ergo there is a limited supply that falls short of demand. It is that imbalance of used units supply and demand that maintains iPhone high resale value.

    This is a phenomena that I experienced when I was a reseller of Mitel telephone systems (1987 – 2004). Each year Mitel sold essentially sold the same number of new systems while the demand for used equipment easily exceeded supply. Mitel equipment had the highest resale value (as percent of original cost) and was the easiest to resell.

    Mitel had the largest installed base of systems (under 300 extensions), the most loyal customers. Mitel system software was easy to upgrade and backward compatible for about 7 years. In order to grow Mitel established its own resale channel and starved the secondary market of supply. Sound familiar?

    To me new iPhone sales and the iPhone resell market looks virtually the same as the market for Mitel systems (new and used).

    So I’d be surprised if Apple sold more than 250 million new iPhones during FY2021 (assumes a transient 10% growth rate) that goes flat to down very slightly in FY2022 then essentially flat thereafter with minor ups a downs.

    Apple revenue growth will come from recurring streams such as Services and new product categories. MSFT is taking the same approach with its recently adopted software as a service focus (hardware creates a base into which MSFT will sell its software services). As a side thought I think Windows manufacturers (especially Dell and HP) have a short life expectancy in the enterprise with HP the first to exit the market.

    March 30, 2020
  2. Gregg Thurman said:
    Strange prints in Asian and Australian indexes. Australia/New Zealand are up strongly while the best that can be said of Japan/Asia is that they haven’t collapsed completely. European markets aren’t yet open, but US indexes are trading up about 2% two hours before pre-market opens.

    Looks like foreign monies are flowing into the US via equities not US dollar purchases (down 5 points off last week’s highs).

    March 30, 2020

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