Apple (NASDAQ:AAPL) remains one of my favorite large-cap picks and that’s partially due to higher average unit pricing of iPhone versus prior-year. While analysts have raised concerns on pricing trends from prior year, I believe that those concerns are a bit overblown given iPhone SE, 5S and 6/6 Plus unit contribution was more highly elevated on the back of a weak iPhone 6S offering.
Consumer favorability of iPhone has ticked higher in the past year due partially because of Samsung’s battery issues, but more due to the feature set that complimented the iPhone 7/Plus versus prior year’s flagship offering. Furthermore, I believe adoption of the high-end variants to have ticked materially higher over prior-year given usage data and installed base estimates. With the ultra-premium iPhone 7Plus or $750 ASP+ category contributing 3x more than the sub $500 (iPhone SE category) in Q2’17. Furthermore, my estimates imply the iPhone 7 Plus is on track to generate 81.57 million unit shipments (FY’17) versus prior-year (FY’16) 6 Plus shipments of 46.86 million.
Analysts ringing the alarms on historical iPhone data
Barclays analyst Mark Moskowitz continued to reiterate his cautious tone on Apple as he believes near-term ASPs could be pressured given divergences in trends between premium device sales and sub $500 iPhone sales. He also reiterates that the iPhone 8 cycle may have too much hype embedded into shares and cited concerns over iPhone 8 delivering on expectations.
Moskowitz from Barclays mentions share of devices sold under $500 have increased markedly from prior year. However, it’s worth noting that iPhone 7 Plus shipments were slightly subdued given supply imbalance coming out of Q1’17.
It’s not yet clear whether Apple has reached supply/demand balance between iPhone 7 and 7 Plus, but the installed base of Plus units is higher as a percentage versus prior year. So, I’m expecting markedly better ASPs from prior-year in the remaining fiscal quarters. Consumers are moving up the stack, but trends in moving down the tiers were partially driven by iPhone SE.
As such, prior-year ASPs were partially subdued due to the introduction of iPhone SE, which represents 22.6 million unit sell-in since inception. According to the Fiksu Usage Monitor, approximately 3.6% of the current installed base is composed of iPhone SE. When multiplying the latest Goldman Sachs installed base figures of 630 million by 3.6% we arrive at 22.6 million cumulative SE unit shipments, which would negatively affect device mix between premium and non-premium tiers.
Source: Alex Cho, Apple Financial Reports, Fiksu Data Monitor, Goldman Sachs and BofAML
Apple’s iPhone SE did cause some momentary weakness in Q1’17 ASPs ($694.57) versus $690.50 (prior year), which perhaps dragged the average down. But I don’t anticipate the low-end segment to meaningfully affect ASPs even further for the duration of the current fiscal year as SE shipments are trending at about 2.4 million units per month, or appx. 7.14 million units for Q2’17. That compares to 57.6 million iPhone units for Q2’17 (estimate), which implies that the below $500 ASP segment will compose appx. 12.39% of total unit sales. Of course, my estimate could be off, but I don’t anticipate the units to materially drag ASPs lower on a y/y comparative basis given higher unit mix-shift to 7 Plus variants versus prior-year.
The recent data on iPhone 6S and 6S Plus suggests the usage mix at 16.5% and 6.6% or 103.95 million, and 41.58 million unit sell-in since launch (September 2015). Recent trends suggest Q2’17 will experience a meaningful ASP bump, as Apple sold-in 61.74 million iPhone 7 and 39.06 million iPhone 7 Plus units since launch (based on most recent figures).
Keep in mind Apple almost sold the same number of 7 Plus units in the first 100 days versus the cumulative 465 days of iPhone 6S Plus. My estimate on 7 Plus shipments for Q2’17 implies unit sell-in of appx. 22.58 million unit, which is significant when compared to my earlier iPhone SE shipments of 7.14 million for the next quarter. The super-premium category is trending at appx. 3x the number of shipments for ASPs above $769 versus ASPs below $450.
That’s a substantial shift upwards in pricing, which suggests average unit pricing won’t be an immediate headwind to revenue/gross margins in the near term. Furthermore, I estimate a step-up in average ASPs when compared to prior year, as I’ve forecasted $673.92 ASP for Q2’17, which compares to Q2’16 figures of $642.83 (my premium research subscribers have early access to my full ASP model).
Source: BMO Capital Markets
I’m anticipating Chinese shipments to move above seasonal trends in the next quarter as industry supply chain checks exiting the prior quarter suggested Apple’s inventory in various Chinese retail locations was markedly lower when compared to prior year. I anticipate that added sell-in of iPhone 7 Plus plus high levels of demand in Asia will materially alter mainland Chinese comps once earnings are reported. This will be driven by mix-shift to iPhone 7 Plus, which was supply constrained in China over the December quarter.
Hence, I’m optimistic on iPhone shipment/pricing trends though I believe historical data does tend to skew a little unfavorably given the contribution of SE, which contributed to a momentary weakness in unit mix, on top of less than favorable adoption of iPhone 6S versus 6, as iPhone 6/6 Plus represented 23% of prior-year unit sales, whereas SE represented 5% of the total mix and iPhone 5S was 4.6% of total unit mix, which amounted to roughly 33% of all iPhone sales falling below the $650 price tier, but primarily as a result of softness in the flagship 6S/6S Plus series.
I’m expecting pricing to improve markedly, but primarily because of less prior-year unit contribution, i.e. 6S/6S Plus representing less of the mix and decelerating unit contribution from iPhone SE in the following quarters.
Near-term pricing trends seem overall supportive to the Apple investor base. I anticipate that trends in pricing will improve even further upon the introduction of iPhone 8, though the assessment is somewhat subjective given little awareness of Apple’s next major refresh and lack of reliable consumer survey data.
Given differences in unit mix it’s fair to assume that Apple’s upcoming earnings reports will be fueled by pricing and unit shipments. We’ll gain further clarity as we progress through the year, but embedded in my estimates is something fairly conservative.
I continue to reiterate my high conviction buy recommendation on Apple.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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