Apple Is Poised for Explosive iPhone Growth -- Despite the Slowing Upgrade Rate

By Markets Fool.com

Earlier this week, Consumer Intelligence Research Partners released a report showing that U.S. iPhone users have been holding on to their phones longer. At first, this new data point would seem to support Apple bears' contention that iPhone sales have peaked.

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A growing number of investors think the iPhone's best days are over. Image source: Apple.

However, one notable aspect of the CIRP report is that while the iPhone upgrade rate is slowing, it's not slowing quickly. Given how rapidly the iPhone user base has grown in the past couple of years, this suggests that iPhone sales growth could be on the verge of accelerating again, at least for a little while.

Upgrade rates are slowing...

Over the past few years, CIRP has collected data on how frequently U.S. iPhone users replaced their devices. Three years ago, nearly two-thirds of the iPhones being upgraded in the U.S. were two years old or less. As of last quarter, the comparable figure was only 51%.

In other words, more people are hanging on to their phones for two to three years or more. In total, CIRP estimates that over the past three years, the average age of iPhones being replaced in the U.S. has increased by about three months.

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Explaining the study results, CIRP co-founder Josh Lowitz stated, "The rate of change in iPhone features has slowed. In addition, phone financing plans now encourage iPhone owners to hold on to their current phone. ... This motivator appears to outweigh the impact of any early upgrade options that carriers offer with the new financing plans..."

Yet upgrade rates aren't crashing

The slowdown in iPhone upgrades might seem to support the bearish tone struck by many Apple analysts. A growing number of analysts expect iPhone sales to shrink again in the upcoming 2017 fiscal year, following a roughly 10% decline in fiscal 2016. Even the more bullish analysts are just hoping for iPhone sales to return to the fiscal 2015 level next year.

However, this pessimism may be an overreaction to the slowing upgrade rate. After all, a three-month increase in the upgrade cycle over a three-year period is a slow trend, not a radical shift.

The total impact of this three-month slowdown in the upgrade cycle would likely be a 10%-15% reduction in annual iPhone sales, holding all else equal. Obviously, CIRP's data only covers the U.S. market, but the trends are probably directionally similar in other countries around the world.

The iPhone user base is exploding

Contrast the gradual slowdown in iPhone upgrade rates to the rapid growth of the global iPhone user base. In April, Apple CEO Tim Cook stated that the iPhone installed base had grown by 80% in the past two years. Much of that growth came during fiscal 2015, following the launch of the hugely successful iPhone 6 and iPhone 6 Plus.

The iPhone is still growing in popularity. Image source: The Motley Fool.

All else equal, an 80% larger user base would mean an 80% increase in iPhone replacements. A slower replacement rate would reduce that figure somewhat. The increased availability of used iPhones in good condition will also allow some consumers (especially in emerging markets) to upgrade their iPhones from time to time without ever buying a brand-new device.

Still, given just how much the iPhone user base has grown since 2014, it's quite likely that the number of iPhones upgraded during fiscal 2017 will exceed the previous high hit last year. And assuming that Apple makes some big improvements for the 10th anniversary iPhone coming in 2017, the number of upgrades should jump again in fiscal 2018.

Plenty of growth for now

While upgrades now drive the majority of Apple's iPhone sales, the iPhone platform is still drawing in lots of new users. The number of people switching to the iPhone from Android is at a record high. There is plenty of room for smartphone ownership to rise in emerging markets, too. Both of those trends support the continued growth of Apple's iPhone installed base.

As a result, iPhone sales will likely rise by double digits in fiscal 2017 as iPhone user base growth more than offsets a slower upgrade cycle. If the iPhone 8 (or whatever comes after the iPhone 7) lives up to the hype, Apple will be in line for another year of double-digit growth in fiscal 2018.

At some point, growth of the iPhone user base will moderate. When that happens, further slowing of the upgrade cycle could lead to "peak iPhone." Luckily for Apple investors, that point is still probably several years in the future.

The article Apple Is Poised for Explosive iPhone Growth -- Despite the Slowing Upgrade Rate originally appeared on Fool.com.

Adam Levine-Weinberg is long January 2017 $85 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool is long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.