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How Apple's iPhone Shipments This Year Could Surprise Analysts

Expectations are pretty pessimistic for Apple's iPhone, perhaps overly so.

Despite Apple  (AAPL) - Get Report recently unveiling a refresh of the budget iPhone SE, there’s some pessimism on Wall Street about the number of iPhones the tech giant will ship this year, with estimates having been steadily declining since the end of February. 

Some negative headlines haven’t helped, such as the Financial Times' recent report that Foxconn, a division of Taiwan’s Hon Hai Precision Industry and the firm charged with assembling the vast majority of iPhones, has stopped hiring at its plants in China that make the phone and has cut back on part-time workers’ hours.

Apple seems confident: it has told suppliers to plan for a 4% increase in production of the device through the next 12 months, potentially to make sure it has no shortages during its all-important holiday season.

And there could in fact be room for upside. Even in a lockdown situation, people still need to upgrade the device that has largely become many people’s only computer, the mobile phone.

But the bar is set low for Apple. iPhone sales dropped 14%, year over year, to $142.4 billion in the September-ending fiscal 2019. Analysts estimate that iPhone unit sales dropped by the same percentage, to 188 million units. (Apple at the end of 2018 stopped disclosing unit shipments of iPhone on a quarterly basis, but Wall Street still makes forecasts.)

For fiscal 2020, analysts project an increase of 3.3% in units shipped, to 194 million, with a fairly wide range, from 175 million to 212 million, according to FactSet.

iPhone dollar sales may be roughly flat with last year, $142.09 billion, given that analysts expect average selling prices to drop by 2% to $740.

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What could produce upside? Simply the need to upgrade one's primary computing device now that it has become even more the center of existence, including now socializing. It’s unlikely most people who have become accustomed to relying on a phone will suddenly become laptop users.

Assuming the phone remains the primary digital device, it has to be upgraded at some point. One of two things are likely to happen. Either people will resign themselves to living in some form of quarantine for a while longer, perhaps until a vaccine is invented, or some positive turn in COVID-19 data points will help open up society and people will be back on the streets.

Assuming September is still the time frame for a new “flagship” iPhone debut, that time is still some months off. A lot could change in that time to open up society. That might put people back in a buying modem with newfound mobility translating into the need for a  new phone.

But assuming the worst-case scenario -- that people have to hunker down for a lot longer -- the imperative to keep up in a world where socializing is more digital than ever means people have to increase the speed of their devices to keep up with all the digital activities that now dominate their lives. A new “digital divide” is taking shape in quarantine between those who have adequate computing resources, and those who don't.

Consider the Zoom  (ZM) - Get Report application, which has become the way to experience cocktail hours and birthdays and so much more. Anyone who’s been on these calls has observed that half the people on the call are using a smartphone instead of a laptop. And the experience of those people on a smartphone appears to be quite dreadful, with aging iPhones freezing in mid-video.

Of course, in unprecedented times, Apple could take extraordinary steps. With cash and equivalents of $207 billion, according to its most recent 10-Q, and with public opinion currently against share repurchases, Apple could enhance its existing financing program for purchases with more generous terms that would allow more customers to effectively buy on credit. Don’t rule out such largesse as a clever tactic by Cook & Co. to goose sales if they feel it would cheer their customer base.

Some pessimism is reasonable about iPhone, in the face of a potential global recession, if not an outright depression. But it’s also possible the iPhone, as the lifeline in good times and bad, can surprise as people realize it’s almost as essential as toilet paper.

Apple is a holding in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL? Learn more now.