For the first time in company history, Apple recently posted a year-over-year drop in iPhone sales. During the March 2016 quarter, Apple sold 51.1 million iPhones compared to 61.2 million iPhones sold during the same quarter a year-ago. And seeing as how the iPhone is Apple’s primary revenue driver, Apple’s earnings also took a hit, with the company posting EPS of $1.90, down from $2.33 during the year-ago quarter.
Not surprisingly, shares of Apple opened up 8% lower when trading began earlier this morning. And while shares have since climbed back up from a low of $95.98 to about $98, the stock is still down more than 6% as fears of ‘peak iPhone’ continue to grow.
While there’s no denying that iPhone sales this past quarter took a hit, I think people overlooking the fact that there’s no way iPhone sales could have even come close to what Apple achieved during its second fiscal quarter of 2015. In other words, the ‘doom and gloom’ scenarios that many are now associating with Apple are a bit premature. The sky isn’t falling nor is the iPhone about to embark on a multi-year decline a’la the iPad, a likelihood an analyst alluded to on Apple’s earnings conference call.
If we take a step back and look at why iPhone sales checked in lower this year than last, I think it becomes clear that the iPhone is still doing remarkably well.
For starters, we have to examine why iPhone sales during the year-ago quarter were so high. Remember, the 61.2 million iPhones Apple sold during Q2 2015 were 40% higher than what they sold in Q2 2014. The reasons behind the impressive increase are three-fold.
One, last year marked the release of the iPhone 6 and 6 Plus. For the first time in company history, Apple was selling two new iPhone models with distinct form factors. What’s more, Apple’s iPhone 6 lineup marked Apple’s first foray into the realm of larger-sized smartphones. That being the case, the iPhone 6 release prompted a unique and unprecedented upgrade cycle that Apple couldn’t replicate with the iPhone 6s.
To this point, Tim Cook explained:
First, from an upgrade perspective, during the first half of this year the upgrade rate for the iPhone 6s cycle has been slightly higher than what we experienced in the iPhone 5s cycle two years ago, but it is lower than the accelerated upgrade rate we saw with iPhone 6, which as you know was a big contributor to our phenomenal revenue growth a year ago.
Two, iPhone sales during Q2 2015 were artificially higher due to supply constraints during the holiday quarter. Consequently, many individuals who were eager to pick up a new iPhone 6 or 6 Plus last year had to wait until early 2015 before being able to purchase an iPhone. This year, Apple got a handle on supply and there was no delayed iPhone supply to provide a boost to quarterly sales.
Three, it’s not entirely fair to compare iPhone sales figures from one generation to the next. Remember, S-cycle refreshes have historically performed worse than numbered upgrades. Again, the upgrade rate to the iPhone 6s was higher than what Apple saw with the 5s, yet lower than what they experienced with the iPhone 6. This shouldn’t come as much of a surprise. Looking ahead, it stands to reason that the iPhone 7 will go on to shatter all previous iPhone sales records. Now if iPhone 7 sales turn out to be disappointing, well, then it’s more than fair to declare that we’ve reached peak iPhone. But until then, such proclamations are far too premature.
Touching on the same points, Brian Nichols over at Seeking Alpha astutely points out:
Yes, Apple’s earnings look bad, with a 12.8% decline in revenue, but investors must remember the comps and how big of a success the iPhone 6 was. The iPhone 6 and 6 Plus launch included two phones versus just one the year before. The product launched to a more developed 4G network in China, and it marked the beginning of annual upgrades on installment plans here in the U.S. In other words, even iPhone 5s owners were able to upgrade and buy a 6 or 6 Plus, rather than waiting two years.
Furthermore, this is an “s” year for the iPhone, which means mostly software changes. Historically, it is the big hardware changes, with software, and iPhone 5, 6, 6 Plus that really perform well for Apple, not the updates it does between launches.
Put simply, let’s see what the iPhone 7 brings to the table and how that device sells before categorizing Apple as a company on the downward trend.