Apple's (AAPL) iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max are selling better than most estimates. The production forecasts for the third calendar quarter are revised upward to 47 million, up from the 44 million forecast in the prior month. The 3 million increase in the September quarter builds was due to the iPhone XR receiving a price reduction of $150. Analysts from Deutsche Bank have suggested that the popularity of the lower-cost iPhone 11 might lower the average selling prices (ASPs) between 4% and 6% for 2020. Theoretically, the revenue impact of the lower ASP may be offset by higher volume, and the net result is uncertain. There is a possibility that the 5G support for next year's iPhone may drive down the high-end iPhone demand this year. The users may be opting for a low-priced iPhone 11. The lower $699 iPhone 11 compared to the $749 iPhone XR is the main reason pushing down ASP.
Investors' "fascination" of iPhone ASP starts with the premise that a higher ASP contributes directly to Apple's revenue, as most of the iPhone sales (U.S.) are not price elastic. Historically and in the near future, revenue growth rate remains to be the most important factor to determine the stock price movement (Figure 1). As a result, Apple's growing inability to raise ASP becomes a major obstacle for it to increase revenue growth at the historical level, as indicated by the declining growth rate since 2011. The growth history also reflects that the traditional iPhone replacement cycle became longer and the revenue growth cycle less pronounced (Figure 1A).
The declining revenue growth cycle, along with a sharply increasing ASP in the recent period, explains why Apple has consistently been losing its global market share to less than 12%, following Samsung (OTC:SSNLF) and Huawei (Table 1). Again, the market share changes over time in Figure 2A confirm the long replacement cycle in Figure 1A. It may be inevitable that Apple is losing market share, but the good news is that losing market share is not the end of the rope. Thanks to the investors' insensitivity to a declining market share, Apple's stock price is not terribly related to the changes in market share, especially in the recent period (Figure 2). It appears that the increasing revenue, which is more important to investors, more than offsets the loss in market share.
Average Selling Price
ASP is always tricky to deal with. On one hand, investors always like high ASPs to increase revenue and profit, assuming the unit sold is not price sensitive. For the better part of Apple's history, when most iPhones have been sold in the U.S., a higher ASP has benefited the company's revenue and earnings, as shown by the strong correlation between ASP and the stock price. Therefore, a high ASP has in general led to a high stock price (Figure 3).
Lately, Apple is seeing the negative demand impact of a high ASP. As smartphone demand has been saturated in the U.S., Apple has moved into the next-gen growth area such as China and the rest of the world where iPhone demand is very much price elastic. In comparison, for the rest of the world, iPhone still has the highest ASP, often 2-3 times of the competitors' products (Table 3), which has been the main reason for Apple to lose market share. In addition, China has been hit by the trade war and the trade-war-induced domestic recession which significantly reduced Apple's sales. This is also why the recent surge in ASP from the high-priced iPhone 10 has led to the drop in revenue and in stock price (Figure 3A and Figure 3).
Ultimately, Apple's top-line growth is critically linked to the iPhone upgrade cycles. As a result, the stock is more related to revenue growth and less to market share or ASP. This is really a good news to Apple's shareholders since the company is losing market share and cannot raise its ASP. The surprise in iPhone 11 serves as a short-term catalyst for Apple's stock to reach a new high while the market waits for the likely introduction of a 5G iPhone in September 2020. However, whether the high valuation is sustainable or not will depend on the sustainability of the revenue growth. In the long run, Apple simply delays the inevitable of an aging iPhone replacement cycle in order to wait for the Service segment to pick up the slack from iPhone and Watch and AirPods to gain traction. In both cases, the revenue pickup will not be meaningful until 2-3 years from now.
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