Now that the iPhone SE unveiling is behind us, analysts are looking even more to the iPhone 7 as the next source of growth for Apple. The iPhone 6s cycle has been seen as a weak one that will probably cause a year over year unit decline this year, but most of Wall Street expects a return to growth next year on the back of the iPhone 7 release, which UBS analysts say will trigger “a return to a normal upgrade cycle.”
Looking for 10% growth in 2017, thanks to iPhone 7
Analyst Steven Milunovich, who has a Buy rating and $120 per share price target on Apple stock, said he expects the iPhone maker to overcome the challenges currently facing it. He thinks it’s possible that Apple will see iPhone unit growth of 10% in fiscal 2017 on the back of the iPhone 7 release. He estimates that approximately 30% of the installed base purchases a new iPhone “in an average year.”
He said in his March 28 report that he overestimated demand in fiscal 2016 because the upgrade cycle is lengthening, but a return to the 30% upgrade rate in fiscal 2017 from the expected 27% upgrade rate in the current fiscal year should result in double-digit growth just in upgrades alone.
He added that even if the number of new customers declines in fiscal 2017, he expects unit growth to rise by nearly 10% with the iPhone 7 release. Further, he doesn’t think the iPhone has peaked and notes that 200 million iPhone users still haven’t upgraded to a model with a large screen.
Apple’s strong ecosystem
He doesn’t think the company will be disrupted like other smartphone makers have been because he believes the Apple brand and differentiation of its products and ecosystem will protect it. He added that “good enough” alternative products do usually disrupt hardware that carries high margins, as Apple’s hardware does. He also believes the iPhone maker successfully pursues profits “indirectly.”
“Apple could be described as an annuity business model delivered as hits,” he explained. “But perhaps the best way to understand the company is as a platform in which software and services subsidize hardware sales.”
He thinks Apple’s platform creates “network effects” that set it apart from past “handset shooting stars.” Milunovich added that although Apple lost the PC battle to Microsoft, in mobile, it has found a better balance between the openness of its platform and protecting some of its own proprietary technology to differentiate the iOS ecosystem.
Upside from the iPhone 7 cycle
The UBS analyst noted that the markets are currently valuing Apple as a “traditional legacy vendor,” which he believes means that investors are “underestimating its optionality.”
The iPhone maker’s current valuation is less than 10 times, excluding cash, and with not much long-term growth being implied in the valuation. According to Milunovich, this values Apple at about the same level as “legacy pipeline computer companies.”
He noted that the company does battle the law of large numbers in that it needs to grow its already huge installed base at 800 million, its platform also has a solid economy, which he thinks could result in revenue growth in the single digits, high margins, and price to earnings ratio expansion over a lengthy period of time.
