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  1. Home
  2. / Investing
  3. / Technology

Apple Will Sell More iPhones Than Expected, Analysts Say

The company's expanding services sector should also take some pressure off, as iPhone sales recover momentum.
By TONY OWUSU
Aug 03, 2016 | 11:41 AM EDT
Stocks quotes in this article: APPL

It's amazing what one quarter of outperformance can do for the outlook of a company like Apple  (APPL) . Skies are bluer, grass is greener, and more iPhones will be sold in fiscal 2017 and 2018, according to analysts at UBS. 

Analysts at the firm raised their fiscal 2017 iPhone sales estimates 5% -- to 222 million units from 205 million units sold -- while also raising their 2018 expectations 18% -- to 264 million units from previous expectations of 240 million unit. 

"Our model shows that an iPhone unit decline in F17 probably requires less than 40% of the F15 base to upgrade in two years," said analyst Steven Milunovich. "This would be a significant lengthening of the upgrade cycle, since we estimate that 50% to 60% of each prior class upgrades in two years. Even estimating that only 41% of the F15 base upgrades in F17 yields upgrade unit growth of 17% next year. The worse F17 is, the better F18 iPhone sales will be, assuming retention rates remain high."

Milunovich's raised expectations are contrary to current market talk, as iPhone growth prospects have been heavily scrutinized amid flagging sales and lowered guidance from an array of suppliers. 

"Within the all-important iPhone sales figures, strength in terms of units sold (40.4 million) was driven largely by outsized demand for the company's cheaper iPhone 6 SE, which weighed on the average selling price (ASP) per unit of $594 -- from $642 in March," wrote Action Alerts PLUS charitable trust co-managers Jim Cramer and Jack Mohr in a recent note. Apple is a key holding of AAP.

But the company was helped by its ever-expanding services segment. While iPhone sales account for about 65% of Apple's quarterly revenue, the company's services segment has seen steady increases in three consecutive quarters, growing from 8.61% of Apple's revenue a year ago to 11.85% in the just-concluded period. The services segment includes Apple Pay, Apple Music, iTunes and the App Store. 

"Services is where we think the growth is for Apple," AAP senior analyst Scott Berman said in an interview Wednesday. "Everyone thinks of Apple as an iPhone business, but those gadgets are facets of its business. The iPhone is just another phone with a web browser without the services that Apple offers with the device."

Apple Pay, for example, is still in the early innings, Berman said. The company still hasn't monetized it, and it is yet another area for potential growth for the company. 

"The sentiment surrounding Apple has shifted from unbridled optimism to cautious optimism," said Berman. "We follow industry checks, but we don't take them as gospel. Despite the iPhone's struggles, Apple is still the most recognizable brand."

That distinction will be important as the company continues to expand overseas, Berman added. 

Sentiment surrounding the company has been steadily shifting, since its surprise earnings beat and strong current-quarter guidance last week. Apple reported net income of $7.8 billion, or $1.42 a share, and although that was a 27% decline vs. the year-ago period, it topped analysts' expectations of $1.39 a share. Revenue for the period fell to $42.3 billion from $49.6 billion, but also topped analyst expectations.

For the current quarter, Apple forecasts revenue between $45.5 billion and $45.7 billion vs. Wall Street's consensus expectations of $45.5 billion.

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Employees of TheStreet are restricted from trading individual securities.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AAPL.

TAGS: Investing | U.S. Equity | Technology | Telecom Services | Stocks

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