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Things continue to get murkier for Apple’s (AAPL) iPhone transition to 5G Modems, with more and more expectations shifting to a 2021 launch for an iPhone model with 5G capabilities. This will lag Samsung (SSNLF) by two-years, and it puts somewhat of a damper on expectations for iPhone upgrades, as it diminishes the perceived value in comparison to smartphone peers. It doesn’t necessarily mean consumers won’t upgrade to new iPhone’s, but it gives them less of a reason to do so.
Apple’s stock has continued to rally despite declining expectations tied to the hardware business, and with more emphasis on software and services revenue.
Given Apple’s growing installed base of users, and opportunities to continue monetizing that base of users with a plethora of new and pre-existing apps, services, and app store sales it’s not a matter of whether or not Apple can continue to monetize the pre-existing base, but whether they can continue to generate excitement in the foreseeable two-years absent of 5G capabilities. Apple’s business model does remain attractive, and it’s difficult to imagine consumer preferences changing just because Apple doesn’t transition beyond LTE as quickly as other high-end variant phones.
However, rather than the risk of smartphone market share loss, what’s more probable is a loss of interest tied to smartphone upgrades in the upcoming cycles without a new killer-feature tied to next generation iPhone’s. Furthermore, Apple may have exhausted a lot of in-house efforts to improve the iPhone from prior-generations with the launch of iPhone X and X S. The perceived value of these phones gets diminished by the increase in pricing, and the absence of the home button. Some would prefer to have the home button, and others would not. It’s certainly a feature of the iPhone I don’t want to let go of, which is why I’m not in any hurry to upgrade my iPhone to any of the iPhone X variants. Some would call the new design change innovation, but others who are more stubborn may hold onto iPhone 6, 7 and 8 generations longer. The performance of prior-generation iPhone’s remains serviceable in most instances even when tied to gaming and tend to have similar response times to loading apps, hence the need to upgrade has become more questionable.
Source: UBS
The iPhone installed base has reached 900 million iPhone’s, and the growth of that installed base has slowed to single-digit percentage points, so if we forecast the addition of new smartphone users tied to the Apple ecosystem, units shipments from new customers would probably add 50 million to 90 million in annual shipments based on the single-digit growth rates. For Apple to reach consensus estimates, it would need to sell $140B worth of iPhone’s at an ASP of $700 or 200 million units this fiscal year. The bulk of sales happen in Q1’19 where Apple reports holiday results, the rest of the year tends to slow down based on consumer buying and spending habits. With sales comps weak in Q1’19, the rest of the year will likely exemplify the same weakness in comps, hence the introduction of some other feature not tied to a major design overhaul would be welcomed at this point. However, the prospects of creating some new technology in such a short window is also unlikely. 5G would be welcomed at this point, but the on-going complications with the Qualcomm (QCOM) lawsuit has made Apple dependent on Intel.