With iPhone sales slowing, Apple (AAPL) — once the world’s highest valued company by a wide margin — has come back to earth.
It isn’t necessarily that customers don’t want new iPhones — most do — but that the upgrade cycle has become longer, meaning a customer may buy a new phone after two-and-a-half years instead of two. One way Apple is trying to shorten the cycle is by offering a generous buy-back program, where a customer trades in their old phone for a new one, at a lower price.
Merrill Lynch analyst Wamsi Mohan believes this could help shorten the cycle, as he maintains a Buy rating on Apple stock, while lifting the price target to $220 (from $210), which implies nearly 10% upside from current levels. (To watch Mohan’s track record, click here)
There was a time where a new iPhone every two years was pretty normal, especially with carriers locking customers in to two-year contracts. But Mohan says, “multiple factors have increased the time between iPhone upgrades over the past several years, including lack of carrier subsidies, introduction of higher priced iPhones, and phones without step function changes in features/functionality.” The analyst believes “consumers are not realizing the residual value of the iPhones they own (highest residual value across brands),” and that Apple “will drive an initiative to increase trade-ins,” which will push customers to upgrade.
Based on the analyst’s survey of about 18k people in China, India, Great Britain and the U.S., models range from the “latest models (XS, XS Max and XR) to models older than iPhone 4.” The most popular models are the 6, 6S and 7, which the analyst says is “exactly the models that Apple is targeting for trade-ins.”
Playing off this, the analyst estimates “24% or 216mn units of the 900mn iPhone installed base are older than the iPhone 6. And 50% of those are candidates for upgrade,” which assumes about 100 million units. He also estimates 80% of “the remaining 684mn newer iPhones (iPhone 6s and later)” are also ripe for upgrade, which would provide an additional ~500 million customers. So while many have been concerned over slowly sales, perhaps Apple is gearing up for a major headwind coming from customers ready to upgrade.
All in all, Apple had a rocky 2018 but is quickly showing signs of old this year, with shares up nearly 30%. TipRanks analysis of 35 analysts shows a consensus Moderate Buy rating, with 18 analysts recommending Buy, 16 on the sidelines and one selling. However, the 12-month average price target of $194.90 reflects a 3% downside from its current price. (See AAPL’s price targets and analyst ratings on TipRanks)
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