updated 10:53 pm EDT, Thu April 17, 2014
Expected new products and updates, larger screen sizes will boost AAPL
Historically, investment and Wall Street analysts have had a poor track record predicting Apple's fortunes ahead of time. However, as Apple's guidance has gotten more accurate, and as supplier leaks and blatant manipulation of the market grow, predictions are getting more accurate. As it traditionally does, Fortune magazine has rounded up the predictions of various investment houses and independent analysts, which show slow growth in iPhones this quarter, but expectations of boosts ahead.
The iPhone is nearly the only Apple product analysts really care about. Despite the iPad and iTunes also being a major successes and hugely profitable businesses, Apple's stock price fluctuations are nearly always tied directly to how well or poorly the iPhone is seen to be selling, and little else. Ahead of Apple's planned conference call to reveal its fiscal Q2 numbers on April 23, the consensus is that iPhone sales will be up only two percent year-over-year, with an average prediction of 38.2 million units.
Analysts believe that iPhone adoption in China, even with the help of all three of China's biggest carriers (the upcoming report will be the first full quarter of iPhone availability on China Mobile, the largest by far), will be lower than original expected. Barring any surprising numbers from China or other emerging markets, the consensus is that the iPhone has reached "saturation point" in North America and Europe, despite evidence that it continues to grow share in the US and other markets, albeit incrementally.
US carriers have also begun making it more expensive to upgrade phones well ahead of the usual two-year limit, but what effect that will have on Apple is unclear. Owners of the iPhone, who are generally more well-to-do than Android owners, may take advantage of earlier upgrade offers despite the slight cost increase in order to always have the latest iPhone. Some carriers are offering a low up-front cost with monthly phone payments and increased freedom to upgrade, which may allow more customers to take the step up to an iPhone from their present device, particularly with generous trade-in offers that have been going on lately.
At least one analyst, Keith Bachman of BMO Capital Markets, believes that as many as 20 percent of smartphone buyers will move to the "frequent upgrade" programs this year, and that the change could provide Apple with more frequent upgrading, to the tune of an extra five million units this year or up to $3.7 billion in revenue. Some 15 percent of AT&T customers have already signed up for the early-upgrade program, which carries no up-front financial penalties but does increase the total cost of ownership over time.
Ironically, these more flexible but also more expensive overall programs might greatly increase the number of refurbished iPhones available, which Apple could use to combat lower-cost Android models in developing countries -- an area analysts say Apple must do better in to sustain growth. There are indications that Apple's strategy of making more iPhone 4 and 4S units available in markets such as Brazil and India is paying off, and for budget-minded consumers in North America the new 8GB iPhone 5c model, along with trade-in discounts on the latest iPhones, may have helped sales toward the end of the second quarter.
Looking past the second quarter, however, analysts seem more upbeat on AAPL generally. In addition to some new and updated products expected in the near future (such as a revamped Apple TV) and news on future OS versions expected at the company's Worldwide Developer's Conference, investors are looking to the fall when Apple usually refreshes its iPad and iPhone lineups. This year, Apple's long-delayed entry into larger screen sizes for the iPhone is expected, reinforced by rumors and leaks of mostly-dubious quality but underpinned by an acknowledgement from the company that consumers want to see larger displays.
Analyst Ming-Chi Kuo believes that Apple will shift at least one of its next iPhone models to a 4.7-inch screen size with a specific 1334x750 display with a pixel density of 326ppi. His reasoning is that this would allow the iPhone 6 (or whatever future model is to receive the screen boost) to grow more vertically than horizontally, keeping the ability to use the iPhone one-handed intact while making the device only slightly wider.
The resolution would also allow the display to grow to accommodate one extra row of icons exactly, something that would be minimally disruptive to developers (un-adapted apps would simply run centered on the larger screen, with a black border similar to the way iPhone 4S-era apps run iPhone 5 and later devices). Once again, analysts expect iPhone, iPad and other Apple products to dominate the holiday buying season, as the company continues to face minimal competition at its price and quality levels.
Analyst Katy Huberty with Morgan Stanley believes Apple's stock price will rise across the year on these expected developments and possibly some surprises, noting that stock rises in AAPL often follow periods of increases R&D spending. She also observed that the impact of larger-screen iPhones and new product categories are not presently factored into AAPL price expectations.
Huberty is maintaining a year-end target price of $639 with an "over weight" rating, while Bachman is maintaining an "outperform" rating of $565. All 32 of Fortune's analyst estimates for iPhone sales in Q2 can be seen in the gallery below.