Is Apple feeling a little 'cold' this summer?

Since the release of the iPhone 15 series, Apple's sales have been consistently weak. From the beginning of the year to the second quarter report, Apple's performance in the US stock market lagged behind the S&P 500 index by 1630 basis points. Especially in China where sales have cooled, the decline in market share has caused market concerns.

Investors typically believe that changes in iPhone sales are due to competition with Android manufacturers. That is, the growth/decline of Apple's sales is due to the decrease/increase of Android sales.

However, according to a research report released by Bernstein Research on the 12th, this view is incorrect. In fact, iPhone sales are mainly determined by Apple's upgrade rate rather than changes in market share.

The importance of competition with Android in terms of market share is overestimated. The upgrade rate is the key.

Bernstein Research pointed out that most iPhone buyers are actually upgraders of existing Apple users, not new users switching from the Android system. CIRP data shows that 91% of Android users plan to buy another Android phone as their next phone (while 94% of iPhone users express the same view).

Therefore, iPhone sales rely mainly on the upgrading behavior of existing users. A strong product cycle will lead to higher upgrade rates.

We estimate that for every 1% change in the upgrade rate, iPhone sales will change by 3.3%, and total company revenue will change by nearly 2%.

The report points out that this is particularly evident in the Chinese market, where 'the update cycle's impact on the Chinese market is more pronounced than in other markets globally.' Chinese consumers are very sensitive to new features. Whenever Apple launches a new product, the Chinese market usually experiences significant sales growth, followed by several quarters of sales decline.

Bernstein Research further proved this point through data analysis:

In a strong cycle of iPhone, with the acceptance of new phones by Chinese consumers, Apple's revenue growth in China has always been far higher than its global revenue growth. After the strong acceptance of the new machine, there are usually several quarters of weak (and often negative) year-on-year growth.

For example, in the first and second quarters of 2019, global revenue fell by 5%, but Chinese revenue fell by 27% and 22% respectively. Similarly, in the second quarter of 2017, global revenue grew by 5%, but Chinese revenue fell by 14%.

The analysis further points out that the recent 8% decline in revenue in the Greater China region for Apple's second quarter is mainly due to a weak upgrading cycle and not local brand competition or user switching.

2025 will see Apple's strong cycle.

Bernstein Research pointed out that the potential user base for Apple has been growing steadily at a rate of 3-4% in the past five years, and has now reached nearly 1 billion. This growth seems to be more stable than sales fluctuations.

Therefore, iPhone sales growth in the 2025 fiscal year is expected, as Apple's existing user base has aged and users are more likely to upgrade to the latest iPhone, which will drive higher upgrade rates and increase sales.

Another driving factor is the upcoming AI features. Analysts believe that these new features will be very attractive and further promote user upgrades.

Since the 5G cycle, Apple's user base has grown by 15-20%. Bernstein Research believes that this growth, coupled with potential increases in average selling prices (ASPs), will enable Apple to benefit from healthy iPhone revenue growth in the next 1-2 years. The application of generative AI is expected to help Apple achieve more sustainable growth.

The strong performance of the iPhone 16 may be delayed until the 26 fiscal year, but long-term growth is still optimistic, thanks to the growth of the user base and the increase in ASP.