Apple’s (AAPL) iPhone 6s and 6s Plus launch weekend sales were not supposed to top 13 million — representing 30% growth over last year — not according to Wall Street analysts.
Oops.
But here on InvestorPlace, you were told to expect strong performance because of two simple reasons, advantages that AAPL had in 2015 that it did not have in 2014. Unfortunately for Apple stock, it may only have another year of double-digit iPhone sales growth before a big reversal occurs.
China and U.S. Drive AAPL Growth
China’s 4G network expansion and U.S. wireless leasing programs are driving iPhone growth right now. Last weekend, the iPhone 6s and 6s Plus launched in China — an advantage the iPhone 6 did not have. Combined, these things drove 30% iPhone sales growth during the 6s and 6s Plus launch weekend.
In 2014, most wireless carriers were still selling phones with two-year contracts. It wasn’t until this year that leasing and same-year upgrades became a staple in the wireless industry.
Looking ahead, though, leasing iPhones on 12-month upgrade cycles for $1 to $10 per month is not a sustainable business model. This is hardware with base retail prices of $649 and $749, respectively … thereby leaving a large balance that carriers must pay after each upgrade cycle.
Investors have yet to identify leasing as a problem. However, Verizon (VZ) is telling investors what to expect from all these $1 and $5 leasing programs, saying that “surprise balloon payments” are likely. The reason is simple supply and demand. All of these carriers are offering similar deals, for customers to upgrade annually and trade in their old devices.
The problem is that no carrier has identified a divestment plan for all that excess inventory. With the supply of inventory being so high, it is hard to imagine that demand will be present, not when customers can pay $1 or $5 per month and lease the newest iPhone. If you can do that, why pay $300 or $400 for a used, unlocked older version of the iPhone?
As a result, leasing prices will eventually rise, if not done away with all together. My belief is that carriers will notice the unsustainability of leasing sooner rather than later, and iPhone users will be slower to upgrade next year. That would be bad for Apple stock long-term.
In regards to China, the 4G network is being built rapidly, but with China Mobile now having nearly 230 million 4G customers, investors must realize that buildouts will soon slow significantly. That will give AAPL a tough year-over-year challenge in the years ahead. Not to mention, China’s growth is slowing, and that alone poses a threat to Apple stock.
AAPL’s Wildcard?
With that said, sales for the iPhone 6s and 6s Plus are sure to be explosive, breaking all sorts of records and driving Apple stock higher. The problem is what happens when leasing prices start to rise and China’s 4G network expansion slows. Beyond 2016, maybe 2017, Apple stock will have a hard time finding growth, as will Apple stock.
The one wildcard is India, a country with the population that’s nearly the same size as China and is expected to become the next great growth driver for mobile technology. Looking ahead, India’s GDP growth is expected to exceed that of China, as the number of middle class consumers continues to rise.
Therefore, AAPL would be wise to hone in on India. Thankfully, AAPL realizes the need, and is working to build its presence by reportedly planning to open 500 stores in 12 Indian cities as part of its Authorized Mobility Resellers (AMR) program.
So, yes, AAPL will give itself a chance to succeed in India, but can India counter U.S. declines if leasing fails in the way it should?
Final Thoughts
All things considered, Apple is sure to pick up some share in India, but there’s no telling exactly how much. What we know now is that China is growing and that U.S. wireless carriers have provided no real answer to the question regarding old iPhone inventory — nor how such inventory can be divested at even a small loss.
Ultimately, balloon payments are likely to occur, and when that happens, consumers will be slower to upgrade their iPhones.
Given how important the U.S. is to Apple’s iPhone sales, it’ll be hard for the company to keep growing if the U.S. goes into a slump. So, with 27.6% revenue growth expected this fiscal year and a good chance that sales will jump double digits again next year behind strong iPhone growth, AAPL is in the midst of an impressive growth era … but one that could end abruptly when and if the U.S. leasing model proves unsustainable.
If so, the Apple stock price is sure to suffer.
As of this writing, Brian Nichols was long AAPL.
