Analysts say iPhone sales could shrink by 17 percent if Apple doesn’t make a drastic change to its business

  • Apple faces exactly the same problem with the iPhone as it did with the iPad — people are hanging onto older models for longer.
  • That’s a problem for Apple’s profits and stock price as long as the company primarily relies on selling hardware.
  • A leading Apple analyst thinks the company could make its stock more valuable by becoming a subscription company like Netflix or Spotify.
  • Apple is already doing this in a small way through the iPhone Upgrade Programme, which lets you buy the newest iPhones SIM-free through monthly installments.

The fact that more people are hanging onto older iPhones for longer is good news for customers’ wallets, but bad news for Apple’s future stock price.

“Investors worry that the smartphone market is becoming increasingly saturated, especially at the high end, where Apple competes, and that over time, the market for iPhones will largely become a replacement market. Moreover, over time, we believe that successive generations of iPhones will likely become less differentiated (i.e. new iPhones will become “good enough” to forestall further upgrades), resulting in the elongation of replacement cycles. Such a development could materially pressure iPhone revenues; to a lesser degree, Apple has already faced these challenges in its iPad business, where annual revenues declined 37% from 2014 to 2017. We note that if the average iPhone replacement cycle were to eventually lengthen from 2.5 years (roughly where we are today) to 3 years, annual iPhone annual unit sales would ultimately fall by 17%.

“We have long believed that Apple’s transactional business model is a big reason why the stock trades where it does, and that the company should look to migrate to a subscription model going forward. As consumers become increasingly accustomed to paying monthly subscriptions, especially for key “tech utilities” (e.g. Netflix, Spotify, Microsoft Office 365), we could imagine Apple implementing a subscription plan of its own. In such a plan, customers could lease iPhones, iPads, Macs, and services such as iCloud and Apple Music for one “low” monthly fee, and have their hardware upgraded after a certain number of years. By moving to a subscription model, Apple would be able to lock in recurring revenue streams and freeze the length of replacement cycles, likely leading to a material re-rating of its stock’s multiple.”

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