Despite all the talk about Services and other devices, Apple (NASDAQ: AAPL) stock is still all about the iPhone. Apple needs iPhone sales to be at least stable while it works to develop other sources of long-term revenue growth. Unfortunately for the owners of AAPL stock, one recent survey suggests Apple’s massive trove of global iPhone users may be getting less loyal to AAPL.
iPhone Loyalty Dropping
A recent survey by BankMyCell found that only 73% of iPhone users who are upgrading their devices in 2019 plan to get another iPhone. While that is still relatively high, it’s the lowest iPhone loyalty rate since 2011. In fact, loyalty to the device has apparently dropped 18 percentage points since 2018.
The same study found that 26.2% of iPhone X users switched to a phone made by another company when they upgraded their devices. Only 7.7% of Samsung (OTC: SSNLF) Galaxy 9 users switched to iPhones during that same stretch. In the month of June alone, BankMyCell found that 18% of iPhone users who upgraded their devices had switched to Samsung.
In the most recent reported quarter, 53.5% of Apple’s total revenue came directly from iPhone sales. Sure, Apple’s news, video, watches and its other projects will slowly diversify the company’s revenue. But make no mistake about it: Apple stock price will continue to be mostly based on iPhone for the foreseeable future.
Apple has a critical iPhone upgrade cycle ahead in 2020, when it is expected to launch its first family of 5G network phones. Every product cycle is important for Apple, but establishing its dominance in the 5G era will be particularly critical. If the BankMyCell numbers represent a trend and not an outlier, now is a terrible time for Apple to be losing the loyalty of its customers.
Critical Upgrade Cycle Ahead
Apple’s efforts to acquire the Intel (NASDAQ: INTC) 5G modem business for $1 billion is evidence of just how seriously Apple is taking 5G upgrades. However, Wedbush analyst Daniel Ives says the owners of AAPL stock shouldn’t simply write off the next 12 to 18 months before 5G arrives. Ives says there are roughly 330 million iPhones due to be upgraded worldwide at some point in the next 12 to 18 months. If Apple retains just 73% of those users rather than 90%, the company’s bottom line may be meaningfully lowered, hurting AAPL stock.
“The installed base of Apple remains the golden jewel and key to the valuation and our bullish thesis, as with 900 million active iPhones worldwide and roughly 1/3 of those poised to be in the window of an upgrade over the next 12 to 18 months, Cupertino now has a key opportunity to catalyze these consumers into their next iPhone with a trifecta of new smartphones set to be unveiled in the early September timeframe,” Ives says.
He is optimistic about the upcoming upgrade cycle, despite his concerns about the U.S.-China trade war.
“So far the bark is worse than the bite on the China iPhone front, although there clearly is a discernible nationalistic move among some in China to buy from domestic suppliers,” Ives says.
AAPL Stock Is Still Compelling
The good news for the owners of AAPL stock is that the stock is the most defensive play of all the U.S. tech giants. Apple stock trades at a forward PE of just 16.6, a slight discount to the S&P 500’s average PE ratio of 17.5. During the last reported quarter, Apple said it returned $27.5 billion to its shareholders. Apple said it would spend another $75 billion on buybacks in the following quarter.
The $1 billion Intel deal wouldn’t even put a dent in Apple’s massive $225 billion cash pile. Apple has one of the healthiest balance sheets in the world. The company has nearly unlimited financial flexibility.
Even if Apple loses more iPhone users than expected over the next few quarters, it’s difficult to make an argument that Apple stock price is overvalued. However, it may become equally difficult to argue that it’s undervalued.
Apple reported a 5% decline in total revenue last quarter. Those who are bullish on AAPL stock argue that plateauing iPhone sales are fine as long as Services picks up the slack. If Apple can better monetize its existing customers, it can grow its high-margin Services revenue without iPhone unit sales growth.
But that bull case is contingent on Apple retaining its existing customers. If iPhone users start jumping ship, not even an increase in average revenue per user can offset the losses.
For now, I’d recommend AAPL stock investors take the latest iPhone upgrade data with a grain of salt. The company is still doing just fine and has a major product launch cycle coming in September. But in the longer term, if declines in iPhone loyalty become a trend, it could be a major cause for concern for the owners of Apple stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
