Apple Investors Question Whether IPhone Growth Has Peaked

Are IPhone Sales Growing Too Fast?

Welcome to the great iPhone debate of 2015: Have sales of the larger-screened phones peaked?

A day after Apple Inc. posted a 33 percent jump in quarterly earnings, shares rose and fell on Tuesday as investors questioned whether Chief Executive Officer Tim Cook can keep iPhone sales roaring and continue to turn in revenue growth in excess of 20 percent a quarter.

On one side is billionaire investor Carl Icahn and some analysts who argue that Apple stock is poised to go higher, driven by a longer sales cycle for the bigger iPhones as well as a just-released smartwatch and other products on the horizon. Others say growth may decelerate later this year as demand for the phones trails off.

“Things are going exceptionally well, but investors are always two steps ahead of where their current business is,” Gene Munster, an analyst at Piper Jaffray, said in an interview. “If investors would take these results and feel like there was some potential acceleration in the future, then they would feel great about owning it.”

Apple shares fell 1.6 percent to $130.56 at the close in New York, after rising as much as 1.4 percent and falling as much as 2.3 percent earlier on Tuesday.

Record Profit

Optimism about Apple’s future has helped drive the company’s shares to record levels this year. As a follow-up to all-time-high profit and iPhone sales in the quarter that ended in December, Apple posted earnings for the March period that ranked as its second-highest. Apple in those two quarters sold a combined 135.6 million iPhones, compared with 169.2 million for all of fiscal 2014.

“Potential upside from iPhone seems to be waning and we see more risk to consensus F2016 estimates than upside opportunity,” Andy Hargreaves, an analyst at Pacific Crest Securities, wrote in a note to investors. Analysts’ consensus estimates for next year anticipate “iPhone, iPad and Apple Watch unit sales that are at the high end of or above what we believe is likely, which suggests our expectations are meaningfully low or new categories are needed to make up the difference.”

Indeed, Apple will face tough year-over-year comparisons in the next fiscal year, when there won’t be the same pent-up demand for Apple’s first large-screen iPhones, according to a report by Bloomberg Intelligence.

“This highlights the risk that iPhone sales growth will resume its decline, particularly as comparisons grow more difficult” starting in the final three months of this year, Bloomberg Intelligence analyst John Butler wrote.

‘Upgrade Headroom’

Apple, for its part, says the momentum will continue. The iPhone 6 and 6 Plus, which debuted in September, helped boost Apple’s phone unit sales for the recent quarter by 40 percent globally and more than 70 percent in China, where the new larger screens are especially popular. Apple estimates that only 20 percent of its active installed base of iPhone users has upgraded to the new device.

“That suggests there’s plenty of upgrade headroom,” Cook told analysts Monday on a conference call. “We want to keep inviting over as many switchers as we can.”

The company forecast revenue will rise 23 percent to 28 percent in the current period from a year earlier. That outlook suggests iPhone sales may rise 31 percent this quarter to 46 million, Piper Jaffray’s Munster wrote in a note to investors Monday.

“We believe the iPhone unit strength is another sign of the iPhone 6 cycle’s fundamental difference from prior upgrades given the size increase of the screen,” he wrote. “If you look at the high-end phone market, the iPhone share gains are more pronounced.”

More to Come?

Munster’s not alone in thinking there’s more potential for the iPhone.

“Don’t get altitude sickness yet, we are going higher,” Amit Daryanani, an analyst at RBC Capital Markets, wrote in a note to investors. Morgan Stanley’s Katy Huberty also wrote that there’s more to come.

“IPhone upgrade cycle still in early innings,” she wrote. She estimated that more than half of iPhone users will need to upgrade during the expected iPhone 6s cycle.

Icahn has argued that Apple is undervalued and should be trading at $203 a share, which would give the company a market capitalization of more than $1 trillion. Its current value is about $752 billion. His optimism for Apple is driven in part by his predictions for the iPhone and new products, including the Apple Watch. He took to Twitter on Tuesday with a message that he still thinks Apple is “undervalued and misunderstood,” and said he’ll release a report on the company within two weeks.

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