What Will 2016 Look Like For Apple’s iPhone?

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2015 turned out to be a great year for Apple (NASDAQ:AAPL), driven by the full-year availability of its large-screen iPhones, robust sales in Greater China and the launch of the Apple Watch. We estimate that the company’s calendar year 2015 revenues grew by 20% year-over-year to $239 billion, with EPS growing by a solid 32% year-over-year. However, Apple’s stock performance remained a mixed bag. While the stock rose by over 20% through the first half of the year, the gains were erased during the second half with the stock ending the year down 7% amid some concerns about the growth prospects of the iPhone. Apple’s fortunes are tied to the iPhone in a big way, with the product contributing 60% of total revenues and over 75% of profits by our estimates. In this note, we spell out some key factors that are likely to drive the performance of the iPhone going into 2016.

We have a $144 price estimate for Apple, which translates to a market cap of about $840 billion. Our estimate is about 35% ahead of the current market price.

See Our Complete Analysis For Apple Here

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iPhone Sold Well In 2015, Investors Are Jittery About Its Outlook 

Apple’s iPhone business performed well in 2015, benefiting from the full year availability of the large screen form factor devices and the launch of the iPhone 6S. We estimate that Apple shipped a total of around 237 million iPhones in 2015, implying a 23% jump over 2015. Average selling prices have also been trending higher (estimated at $660, up 6% year-over-year), as Apple held on to its storage mix strategy (16GB/64GB), pushing customers towards higher-capacity iPhone models, while benefiting from the availability of the more expensive Plus models. However, despite the strong run, investors seem apprehensive about the device’s future growth potential, amid slowing growth in the global smartphone markets, economic headwinds in China – currently the biggest iPhone market – and some negative cues from some iPhone component suppliers. While these concerns aren’t unfounded, we remain largely bullish on the device’s prospects going into 2016.

Why We Remain Bullish On The iPhone

Although the smartphone market is saturating (single-digit growth projected for 2016), the iPhone, being a high-end device, could actually end up benefiting from this trend. First-time smartphone buyers from a few years ago are likely to upgrade to more capable and premium devices such as the iPhone. For instance, the iPhone saw an Android switcher rate of 30% during Q4 FY’15 – the highest ever figure since Apple began measuring the metric – and we see the number growing in 2016 as well. Moreover, smartphones are increasingly becoming the primary connected devices for many users. Accordingly, customers are likely to be more willing to pay a premium for the design and user experience that an iPhone offers.

Apple has been honing its iPhone strategy to focus on improving margins and increasing the switching costs around the device. For instance, the new iPhone Upgrade program that Apple launched last year is expected to boost margins around the iPhone by bundling the Apple Care+ service plan, while shortening the upgrade cycle. We estimate that the program alone can boost EPS by as much as 4% in 2017. Apple has also been focusing on keeping customers hooked onto the iPhone with compelling service launches such as Apple Pay, while promoting the Apple Watch, which we believe could eventually reinforce the iPhone ecosystem and increase switching costs for customers.

Moreover, the upcoming iPhone 7, which is likely to sport an industrial design overhaul, should drive volumes growth for Apple. Overall, we expect iPhone sales to expand by about 4% in 2016 at over 246 million units, with the number growing to about 280 million units by 2022. That said, we believe that prices could see some pressure in 2016, falling to about $640 amid currency headwinds in emerging markets, as well as the possible availability of a new 4-inch handset with more affordable pricing.

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