Apple Inc. (AAPL) And The Growing Used Smartphone Market

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Apple Inc. (NASDAQ:AAPL)’s iPhones have become the backbone of the rapidly growing market for used smartphones. So what does this mean for Apple? Is it good news or bad news? Bernstein Research analysts say the used smartphone industry is likely a minimally negative point for Apple.

Apple Inc. (AAPL) And The Growing Used Smartphone Market

Apple earns $20 per used iPhone

Toni Sacconaghi, Jr., Jonathan Cofsky and Eric C. Garfunkel issued a report to investors with their analysis of where the used smartphone market currently stands. They held a conference call with executives at eRecyclingCorps and Brightstar, two companies in the smartphone trade-in business. The analysts said their conversations with those two companies suggest that Apple Inc. (NASDAQ:AAPL) is indeed getting some profit from used iPhones. But it isn’t much.

They said their estimates suggest that the company brings in about $20 or a little more per used iPhone traded in at an Apple Store. They note that the volume of trade-ins at Apple Stores in the U.S. suggest that that amount is probably immaterial to the company’s overall financial results, at least in the near to medium term.

Estimates for Apple trade-ins

The analysts estimate that Apple Stores in the U.S. sell about 10 percent of the world’s iPhones. They’re estimating that there will be approximately 30 million used iPhones sold around the globe in the current calendar year. Assuming the company captured a disproportionate share of trade-ins at U.S. retail stores—perhaps even one out of every three—and made $20 per device, the upside to 2014 earnings per share would be about 25 cents.

That means the result of selling about 10 million used iPhones would weigh as much on Apple Inc. (NASDAQ:AAPL)’s results as selling about 1 million to 1.5 million new iPhones.

Details on the used smartphone market

According to the Bernstein analysts, trade-in programs for used smartphones are becoming increasingly popular, not just at carriers but also retailers and consumer websites. They said most used phones are collected in the U.S. and then sold into emerging markets, especially China. They note that the iPhone makes up the largest portion of used smartphone trade-ins and sales.

Estimating the used market

They believe that although the smartphone trade-in market is “still in its infancy,” it is “poised to explode.” They estimate that about 12 percent of upgraded smartphones in 2012 were traded in, compared to 4 percent three years ago. They believe this will increase to about 20 percent by 2018. The analysts also said that due to strong demand, the used market right now is supply constrained.

The Bernstein analysts estimate that the used market will grow from about 50 million units this year to more than 250 million units in 2018. By 2018, they also estimate that used phones will cannibalize about 8 percent of new smartphone sales.

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So what does this mean for Apple?

In their estimates, the used market will be about a 100 basis point headwind to new smartphone units, a 200 basis point headwind to revenue and a more than 200 basis point headwind to smartphone industry operating profits. This means the used smartphone market is a negative for Apple Inc. (NASDAQ:AAPL)—unless trade-ins result in a shorter replacement cycle.

They estimate that for gross profit to be neutral after trade-ins, the replacement cycle must shorten by about two to three months. In other words, they estimate that about 20 percent of iPhone users must upgrade every single year.

Bernstein analysts continue to rate Apple Inc. (NASDAQ:AAPL) as Outperform with a $600 per share price target.

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