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Consensus iPhone 6/6+ Numbers Might Prove Conservative; Cowen Boosts Apple (AAPL) PT to $110

September 19, 2014 6:34 AM EDT
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Cowen and Company is out with commentary on Apple (Nasdaq: AAPL) as the new iPhone 6/6+ are released on Friday. The firm rates Apple at Outperform and raises its price target from $106 up to $110.

Analyst Timothy Arcuri notes a recent survey of 4,500 adults in the U.S. and China on iPhone 6/6+ demand and drivers. Here are some conclusions:

Composition of iPhone Base, Core Specs Favorable for 6/6+

Our survey data largely confirms Apple’s recent commentary regarding composition of iPhone installed base (i.e. ~200MM iPhone 5/5C/5S users). Specifically, the survey shows that ~58% of the iPhone installed base owns a model with a core set of specifications two or more years old, and ~39% of the iPhone installed base owns a model with a core set of specifications three or more years. Relative to the most important features cited as influencing upgrade intentions from survey respondents, battery life and screen size are core to the 6/6+ story, while better processor speed should resonate in China (possibly helping QCOM).

iPhone 6/6+ Units Could Be Biased to the Upside

We currently model ~120MM iPhone 6/6+ units in the first 12mos (and are already ~10% above Street EPS over this period), but believe our survey results strongly suggest our estimates are still conservative. Specifically, a surprisingly large ~34% of all Android users expressed unaided intent to purchase an iPhone 6/6+, while unaided intent to purchase an iPhone 6/6+ was expressed by ~61% of total iPhone users and a very high ~67% of iPhone 5, 5C or 5S users. When applied to our iPhone installed base estimates, this intent implies ~130-140MM units is a reasonable expectation for the iPhone 6/6+ product cycle in the first 12mos (we believe China and the U.S. are a reasonable proxy for the global market). The large number of Android purchase intention (especially in China) potentially adds a significant number of incremental units on top of the ~130-140MM number.

Generic Interest in Wearables Is Positive for Apple Watch

Relative to wearables, our survey indicates ~21% of total respondents already own some type of wearable device (largely smartwatches and/or fitness bands), though this result is heavily skewed toward China, where ~33% of respondents already own a wearable device (about 2/3 of these are smartwatches). While Apple Watch is still ~4-6mos away, our survey also indicates ~25% of iPhone users already own one or more type of wearable device.

More key points from the survey:

1) ~58% of surveyed iPhone users are using a model with core specifications that are two or more years ago; assuming our combined China and U.S. survey results are a viable proxy for the world (and the global iPhone installed base is currently ~340-350MM units) this suggests an installed base of ~200MM units that are iPhone 5 or newer models (supporting numbers recently provided by AAPL).

2) ~61% of the all surveyed iPhone users, and a surprisingly large ~34% of all surveyed Android users expressed an unaided intention to purchase an iPhone 6/6+, with a greater overall propensity to upgrade in China than in the U.S. Relative to the iPhone installed base that is iPhone 5 or newer, ~67% of respondents indicated an unaided intention to purchase iPhone 6/6+. Applied to our installed base estimates, this implies ~130-140MM units is a reasonable expectation for the iPhone 6/6+ product cycle in the first 12mos - based merely on the intentions of the iPhone installed base alone (using China + U.S. as a proxy for the entire world). The Android installed base is more fragmented, but given ~1/3 of surveyed Android users expressed their unaided intention to upgrade to iPhone 6, this potentially adds a significant number of incremental units on top of the ~130-140MM number. Overall, we are modeling ~120MM iPhone 6/6+ units in the first 12mos (and we are ~10% above Street EPS over this period); thus, this survey strongly suggests our estimates are still conservative.

3) The survey suggests iPhone 6/6+ purchase intention consistently declines with the increasing age of the iPhone installed base. As a result, we believe the survey calls into question conventional wisdom that the older portions of the iPhone installed base are those most ripe for upgrades with the 6/6+ product cycle. This result implies the ~150MM iPhone units in the installed base are older than iPhone 5 should be considered less fertile ground for iPhone 6/6+ upgrade demand.

4) Battery life and screen size are among the most important features cited as influencing upgrade intentions across all survey respondents, while processor speed was particularly important to Chinese respondents. The overwhelmingly large importance of battery life suggests that iPhone 6/6+ demand could skew more to the iPhone 6 Plus model than our current estimates of a roughly 2:1 iPhone 6:6+ split, likely lifting ASPs. Additionally, the dissatisfaction w/processor speeds cited by Chinese respondents can be read as positive for QCOM and even Mediatek (both of whose processors offer big performance improvements over those often contained in many low-end Chinese smartphones).

5) As it relates to cover glass technology, our survey suggests just ~9% of the iPhone installed base has a cracked screen – implying a global number of 30-35MM. While this is not an insignificant number, when combined with weighted survey responses relative to feature importance – where a stronger device cover glass rated well below other features - this implies that despite its exclusion, sapphire would not have been a big needle mover in this launch anyway. Nevertheless, we note iPhone 6/6+ initial purchase intention is very high among this group (~61%).

6) Relative to wearables, our survey indicates ~21% of total respondents already own some type of wearable device (largely smartwatches and/or fitness bands), though this result is heavily skewed toward China, where ~34% of respondents already own a wearable device (about 2/3 of these are smartwatches). Even though Apple Watch is still ~4-6mos away, we note our survey indicates ~25% of iPhone users already own one or more type of wearable device, while China respondents demonstrated a much greater interest in an Apple wearable device.



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