On October 18 Apple (AAPL) announced earnings, which were below the consensus estimates of Wall Street’s crack research analysts. No one seemed to realize that the comparable quarter last year included the launch of the iPhone 4 (which was at the time the best iPhone launch ever), and the rumors leading up to the early October announcement of the iPhone 4S led to significant iPhone purchase deferment. It’s also important to note that these rumors included the idea of a cheaper iPhone option, which did come to pass with the now $99 iPhone 4 and free iPhone 3GS (both, of course, require a two year contract).
Demand was pushed from fiscal Q4 into the first fiscal quarter of 2012, which also happens to include the holiday season.
In order to analyze the potential for iPhone sales in the holiday quarter and fiscal 2012, let’s categorize potential iPhone purchasers.
· Units sold: 16.9mm
· Assume 10% are still in use and, of those, 5% will be upgraded
· Total demand: 0.1 mm
· Units sold: 20.3mm
· Assume 5% still in use and will be upgraded
· Total demand: 1.0 mm
· Units sold: 33.2mm
· Assume 50% still in use and will be upgraded
· Total demand: 16.6 mm
· Units sold: 27.3mm
· Assume 100% still in use and 30% will upgrade to 4S
· Total demand: 8.2 mm
· Units sold: 50.5mm
· Assume 100% still in use and 10% will upgrade to 4S
· Total demand: 5.1 mm
· TOTAL DEMAND: 30.9mm units
For context consider that the best quarter for iPhone sales was the June 2011 quarter, which had sales of 20.3mm units. The total demand from the above analysis is 30.9mm units, 50% greater than Apple’s best iPhone quarter. Further, I believe many of the assumptions used in the above analysis are conservative, particularly around the number of iPhone 4 users who will upgrade to the 4S, which I have assumed is a blended 17%. It would not surprise me for this to be more in the 40%-50% range. At a blended 40% upgrade rate (still potentially conservative), the total demand increases to 49.1 units. Another approach would be to assume that 30% of current iPhone 4 users will not upgrade. Therefore 70% will upgrade, increasing total demand to 72.1 units. If an iPhone 5 came to market one year from now for the holiday quarter those 30% represent another 23mm phones. Note that we are quickly getting to over 100mm phones, over the next 4-5 quarters and we still have many of the 50% of 3GS users, who did not upgrade to an iPhone 4. And, if an iPhone 5 comes out in 2012, there are iPhone 4S buyers (some of whom haven’t even bought the 4S yet) who will upgrade to the iPhone 5. Therefore, sales of 120mm or more over the next 5 quarters is certainly within reach.
But there’s more. Apple is now also offering lower priced iPhones. On the earnings call the company revealed that 2.8mm iPhones were sold in early October from the inventory channel. These are separate from the 4mm iPhone 4S’sold in the first 3 days of the iPhone 4S launch. Therefore, we know that in the quarter-to-date Apple has already sold almost 7mm phones, and this data is already stale. This also suggests that there is ample demand for the less expensive iPhones. Extrapolating the 2.8mm sold in the first 2 weeks of the quarter to a full quarter results in almost 16.8mm units.
Adding it all up, a 40mm iPhone quarter is very possible for Apple this holiday quarter and continued iPhone sales strength over the balance of fiscal 2012 is also likely.
Apple’s earnings “miss” due to the timing of its largest product launch ever has created a fantastic opportunity for investors to establish positions ahead of a great fiscal 2012.
Disclosure: I am long AAPL.