Deflated Expectations

IPhone Sales Cycle Is Looking a Lot Less Super

Analysts are settling in for a slightly more modest increase and hoping higher prices will pick up the slack.
Photographer: Justin Sullivan/Getty Images
APPLE INC
-1.96
At Closing, June 15th
188.84 USD

Remember the hype about the iPhone "super cycle?" Wall Street doesn't. 

There was a popular investment theory that Apple's 2018 would be something like a repeat of 2015, when the first larger-screen iPhone models flew off store shelves. Apple sold 231 million iPhones in its 2015 fiscal year, or 37 percent more than it did in the previous year. Apple hasn't topped that annual total since then.

But Apple's shares have been on a steady march up since a 2016 low, in part because of hopes for the latest iPhone lineup. The idea was that the drastically overhauled model now known as the iPhone X would spur many users to ditch older smartphones for Apple's latest one. Analysts referred to this expected growth surge as the super cycle. 

Looking Up

Apple's shares have climbed 86% since a May 2016 low, largely on hopes of a sales surge from new iPhone models

Source: Bloomberg

Apple still might have a great 2018, but the Apple prognostications have slowly morphed. Stock analysts are now settling in for a slightly more modest increase in the number of iPhones sold. And in recent days, analysts' anxiety has been almost palpable as they further tamp down expectations. Optimism about the super cycle has been scrubbed from history.

It's another reminder that Apple may not be able to defy a secular change in smartphone buying habits since 2015 and that even with so much investor money riding on the world's most valuable public company, forecasters still get a lot wrong

Just before Apple introduced new iPhone models in September, analysts on average expected Apple to sell about 247 million smartphones in its 2018 fiscal year, which ends in September. The average estimate is now about 239 million devices, a difference of about $6 billion at the estimated average iPhone sales price. In terms of growth, current estimates work out to about a 10 percent bump in iPhone devices for fiscal 2018, compared with average expectations of a 14 percent increase a few months ago.

Hope Deflation

Wall Street has scaled back estimates of an iPhone sales rebound this year after a couple of declining or slow years

Source: Bloomberg and UBS (for average analyst FY 18 estimates)

Note: Apple's fiscal year ends in September.

Yes, that's a relatively modest change relative to Apple's size. And confidence remains high that Apple's revenue and profits will grow substantially this year. On average, stock analysts expect the company's revenue to climb 19 percent in fiscal 2018, Bloomberg data show. That's actually higher than estimates from six months ago that work out to a 13 percent increase. The dialed-up revenue estimates, combined with the tempered expectations for iPhone unit growth, show that Wall Street expects something other than a smartphone sales surge to pick up the slack. 

No Worries

Apple stock watchers in recent months have increased their expectations for the company's fiscal 2018 revenue, even as they scale back estimates of iPhone sales

Source: Bloomberg

Note: Apple's fiscal year ends in September.

Wall Street's expectations now depend less on an acceleration in iPhone sales and more on an expected jolt from higher prices. Investors are also more confident in sales of other Apple products including Apple Music and the coming HomePod. Furthermore, Apple will benefit from U.S. corporate tax cuts and a chance to tap $250 billion in cash it had considered off limits. Analysts are expecting a big chunk of that money to flow to stockholders. 

Meanwhile, it's hard to find mentions of the super cycle anymore -- at least not positive ones. "We don't think F18 will be a 'supercycle' year," UBS wrote Monday. Oppenheimer, BTIG Research and Deutsche Bank also scaled back estimates of iPhone sales for coming quarters. Sanford C. Bernstein analysts last week even outlined the possibility that Apple might sell fewer iPhones this year. This is not a common view. But it's a sign of how the investment story has downshifted from a super cycle to a solid number of iPhones sold, with an outside chance of a decline. 

The share prices of Apple and its suppliers have also wobbled recently after news organizations reported that Apple slashed factory orders for the iPhone X. It's typical for Apple to pare back iPhone manufacturing after the holiday season, and it's not clear whether this year's cuts depart from the norm. The reaction is in keeping with the skittishness about Apple's coming year. That puts added pressure on Apple's quarterly earnings on Thursday. The real test will be what Apple forecasts about the quarter ending in March. Apple watchers will use the guidance to extrapolate the rest of the fiscal year. 1  

The good news for Apple optimists is that as Wall Street has slowly revised its forecasts, investors' expectations have tempered to the point where they may not panic even if Apple doesn't have a boffo year. The problem, though, is that outsiders and Apple itself aren't sure about what kind of company it will be. Apple executives insist there's plenty of smartphone growth left. But analysts are rethinking whether Apple can keep selling more and more of the devices that generate nearly two-thirds of the company's revenue. That makes the super cycle look less than super.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. There's a typical pattern of sales swings from quarter to quarter. Once Apple gives a forecast for its fiscal second quarter ending in March, stock watchers will be able to make rough guesstimates for the rest of Apple's fiscal year.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE