In the past, analysts considered Apple's (AAPL) - Get Report biggest strength to be its ecosystem. But in recent years, this bullish argument has lost some of its momentum, with rival, cross-platform services gaining strength.
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I think this is why Cook began Apple's big presentation on Tuesday talking about the company's own apps and services, leaving its crown jewel, the iPhone, for last.
In January of 2019 on Apple's first quarter conference call, management noted that there were over 900 million active iPhones and the company's total active install base had risen above the 1.4 billion unit threshold, up from 1.3 billion the year before.
It's this active installed base that Apple hopes to continue to leverage and monetize to generate growth in an era where iPhone unit sale growth is slowing. The fact is, there are no other large untapped markets for Apple to penetrate. Smartphone sales growth has been slowing for awhile now and it has become clear that the refresh cycle is elongating as innovation slows in this maturing industry. Even so, there are still hundreds of millions of iPhones ready for an upgrade and Apple's recent pricing announcements seem to point to continued strong profitability on both the hardware and software fronts.
The 2020 iPhone refresh is expected to be huge due to being Apple's first-ever 5G models. Yet, designers aren't sitting on their laurels until then. During the recent event, Apple announced the specs for the new iPhone 11, 11 Pro and 11 Pro Max, which will be priced at $699, $999 and $1099, respectively.
Apple also announced a slew of technological upgrades to the iPhone 11 Pro/Pro Max, including a more durable screen, offering 15% better energy efficiency, and upgraded processors that extend battery life 4 hours for the Pro version and 5 hours for the Pro Max models. Apple also introduced a new ultra wide camera with 3 optical lenses with deep learning software integrated to enhance images (the base-line 11 model has a duel lens camera, not the tri-lens technology on the Pro models).
The iPhone 11's price is $50 cheaper than its successor, the iPhone XR. Forex was a noted concern during the company's most recent quarter. The dollar remains strong and this could have played a role in the lower base-line pricing so that Apple can continue to compete in emerging markets. The 11 Pro and Pro Max models' pricing is in-line with previous premium versions.
The lower baseline price, steady premium pricing, hardware upgrades, and continued growth of service capabilities across the Apple ecosystem should allow the company's iPhone segment to stabilize growth until the major 5G rollout. Overall, this pricing strategy will likely result in slightly lower average-sales-price (ASP), though I don't suspect it will have a significant impact on the company's margins moving forward.
On the other hand, Apple's services segment posted record revenues last quarter, with 18% year-over-year growth. And as the company focuses on high margin services growth (services gross margin came in at 64.1% in the most recent quarter, as opposed to overall gross margin, which was 37.6%), I believe it can afford to lose a bit of margin of the hardware side of things while still growing overall gross margin figures.
If this is the case, the stock's rally should continue as analysts become more and more willing to focus on the growing services segment that appears to be the long-term growth driver for Apple.
Nicholas Ward is long AAPL and DIS.