Apple's Hidden iPhone Catalyst Gets Discovered, But There's Another You Should Know About
The crowd is waking up to Apple's strike back against Android, but there are other angles to the story investors are missing.
So the "Mass Media Brain Trust" is finally seeing how many Samsung/Android users are jumping to onto large screen Apple (AAPL) iPhones.
There are many more examples of these types of articles. But I still don't see anyone that has done my math -- the 500-750 million large-screen Androids out there in the wild that will be upgraded in the next 1-2 years. But some are now coming around to part of this effect and my "Hidden Catalyst" [subscription required] is being discovered a million phone sales at a time.
However, my assertion is that this is NOT a typical 2-3 quarter upgrade cycle. It is a 5-7 quarter upgrade cycle. It will take a good while before many others realize this.
But there is another hidden catalyst -- self-cannibalization! There have been quite a few stories and reports about weak iPad sales the last couple quarters. I have always thought the iPad Mini was going to be cannibalized as soon as the company launched a large-screen phone.
This will certainly occur. And this is a strong positive for AAPL as iPhones carry higher margins than the iPhone Mini. The hidden catalyst is that there is so much enthusiasm for the larger of the two phones that it might just cannibalize even larger-screen iPad's.
Now we will probably see negative/scare stories written about this but they will be way off the mark for wwo simple reasons:
1. Apple users upgrade phones far far more quickly than they do iPads. At worst, the phone is upgraded every 2-3 years. At best, it will be upgraded once per year. This is also being spurred by the frequent upgrade plans and/or "off contract but still on a contract" hybrid plans. So with smartphones, you have a logical 1-2 year upgrade cycle that may be getting shorter. On the other hand, iPads have a very similar upgrade cycle to traditional Macs in the 2.5 to 5-year range, with the average being 3-4 year.
2. Again, margins. The iPhone 6 Plus carries at least 550 bps higher margins than a typical iPad. In fact, it might be closer to 750-850 bps higher margins but I'll need to see the next two quarters to verify that assertion. That's HUGE.
There is also strong and ample research (for years running) that iPhone sales spur Mac sales whereas iPads are often a substitution purchase for an Apple laptop.This effect isn't a huge needle mover but it certainly exists.
Bottom line, while my "hidden Android catalyst" is rapidly being discovered, there is still a long runway left on that one.
Moreover, there are some other major positives to these new large screen phones, especially the larger Plus model. And faster upgrade cycle and higher margins will increase earnings and cash flow.
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