Apple is expected to unveil the iPhone 7 on September 7, and while most analysts aren’t expecting much in the way of upgrades, some believe it will be just barely good enough to convince fans to buy new phones. The company has indeed confirmed rumors about the September 7 date, so until then, speculations about the next iPhone model and how many units Apple will sell will continue.
A “good enough” iPhone 7?
In their August 29 Hardware and CommTech Weekly report Goldman Sachs analyst Simona Jankowski and team said they expect the iPhone 7 to be a “solid product cycle” with “strong upgrades” coming from the installed base. They believe the exceptionally weak iPhone 6s cycle will work in Apple’s favor because they believe it created pent-up demand. As a result, they predict that the iPhone will return to year over year growth in the December quarter.
They note that this year, the company is widely expected to break the habit of a two-year major refresh cycle for the iPhone. Instead, the iPhone 7 is expected to have only minor improvements from last year’s iPhone 6s, but they believe that whatever Apple puts out will be just “good enough” to drive volume growth year over year, based on the growth in the installed base. Here’s a summary of what the Goldman team expects the iPhone 7 to feature in terms of improvements:
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Debate about return to growth continues
Wall Street continues to debate whether the iPhone 7 will bring a return to unit growth and if so, why it will. Jankowski and team said their view is driven not by how major the improvements will be on this year’s model but rather the size of the installed base. They’re expecting Apple to sell 231 million iPhone units in fiscal 2017, which puts them ahead of consensus at 221 million units. Note that even consensus points to unit growth in fiscal 2017, however, although the growth rate is half that of what Goldman is estimating (5% for consensus compared to 10% for Goldman’s estimate).
The Goldman team estimates that the installed base for the iPhone has grown by nearly 80% since the iPhone 6 launch two years ago. Jankowski and team note that the iPhone 6s cycle was weak because upgrade cycles in general are extending and many iPhone users just skipped last year in replacing their phones. As a result, they see not only pent-up demand but also easy year over year comparisons for the iPhone 7.
They add that 44% of those who participated in their survey in April said they planned to buy a new iPhone in the fall.
A year into Apple’s iPhone Upgrade program
They also note that with the iPhone 7 launch we have the one-year anniversary of Apple’s iPhone Upgrade program. This means that those who bought an iPhone 6s last year on that program might upgrade again with the iPhone 7 simply because they will be eligible to trade in their device for the new model.
Jankowski and team sees this as an incremental tailwind for demand. Essentially, it means that instead of waiting a full two years to upgrade, those who bought an iPhone last year might do so again this year — on top of those who didn’t buy one last year and are now itching for a new phone.
EU verdict offers buying opportunity for Apple stock
The Goldman team also noted that Apple stock usually outperforms in the lead-up to iPhone launches, which means the clock is now ticking.
Apple stock slipped a little on Tuesday, falling by about 1% to as low as $105.50 per share following a negative tax-related decision from the European Union. Unsurprisingly, Apple bull Brian White of Drexel Hamilton said this creates a buying opportunity for investors. Bloomberg reported this morning that the European Commission ordered Apple to pay $14.5 billion, plus interest, to Ireland for “selective tax treatment” between 2003 and 2014.
However, Ireland is attempting to come to Apple’s rescue as it plans to appeal the decision in a case that could drag on for years. White noted that the amount is essentially pocket change for the company as it ended the third fiscal quarter with $231.5 billion in cash, 93% of which is overseas, and $84.9 billion in debt.