Morgan Stanley sees multiple growth drivers in the upcoming cycle for Apple. Analyst Katy Huberty, a noted Apple Bull who put a price target on Apple at $166/share back in May, chimed in on Apple prior to the iPhone event next week.
Three Main Core Drivers for iPhone Growth
Katy Huberty and her team see three main core drivers for iPhone growth, unique to this product cycle:
First, penetration of the 6 series in the installed base is still rather low—combined with discounted iPhone 6/6+ prices when the new models debut, this should propel accelerating upgrades.
Apple is less than 1⁄3 through the upgrade cycle. Only 27% of the 82% of US consumers who planned to upgrade to the larger screen iPhone have done so to-date, and our 3% FY16 iPhone unit growth assumes continued upgrades with slowing new user additions.
Secondly, wireless carriers are still transitioning to installment plans and offering new leasing opportunities, which will help iPhone sales because they lower upfront fees.
Installment / leasing plans allow Apple to be more price competitive against other smartphones like Samsung Galaxy, despite higher retail value. As of June 2015, the Big 4 carriers in the US have largely removed the option to sign up for a traditional subsidy plan that required upfront payments from consumers. Additionally, we see carriers like Sprint and AT&T moving to leasing plans whereby iPhone's higher residual value can reduce the monthly fee to levels similar to (or even below) smartphones with lower retail prices. Our AlphaWise tracker indicates that Apple iPhones on average retain 8% more of the original value compared to Samsung Galaxy devices. As a result, Sprint recently launched a leasing program for the iPhone 6 with a monthly cost below Samsung Galaxy S6. With nearly half of Big 4 postpaid subscribers now off the traditional subsidy model and take rates for installment/leasing plans trending higher, we expect a tailwind to iPhone unit growth from the permanent shift in wireless plans.
And Thirdly, Huberty writes that despite recent worries about the Chinese economy, iPhone demand in that country is still strong, helped by the growing middle class who use a smartphone as the primary conduit to the internet.
More specifically, China will be in the first tranche of regions launching the iPhone 6S/6S+, supporting unit growth. Huberty and team believe smartphone users in China are trading up to higher-end devices as evidenced by the mix shift towards $300+ handsets. According to IDC, China smartphone ASPs even ex-Apple are growing, an indication that the appetite for high-end devices is increasing. This trend is further supported by the transition to faster LTE networks.
And finally, Huberty and team see an opportunity for Apple to continue converting previously mid-market smartphone purchasers and second-hand iPhone users to new iPhones given the increased demand for a better user experience.
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