Why Apple's Supercycle Has Only Begun

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

The wild Apple Inc. (AAPL) iPhone chase is now over, and the most significant fears of total disaster should finally be allayed. Although the iPhone X on the surface was not the runaway supercycle success that everyone had expected, it was far from the disaster many had feared or reports had indicated. (See also: Why Apple iPhone X Worries May Be Overblown.)

The Wall Street community got some key variables wrong, which should have made them realize two things: The supercycle lives and Apple has incredible pricing power. Apple has long thrived on supercycles, which are periods of surging unit sales as consumers upgrade to their next-generation products.

The number of iPhones sold in the first quarter of 2018 declined by only one percent from last year, to 77.316 million. But the average selling price increased by over $100 per phone, or 14.6 percent, to $796. 

Stale Unit Growth

Going back to the first quarter of 2015, when the first iPhone supercycle was born, the iPhone had total unit sales of nearly 74.5 million on revenue of $51.2 billion. It also posted an average selling price of $687.30 per phone. 

By the time the first quarter of 2017 came around, total iPhone unit sales had plateaued, having grown by only 5 percent. Meanwhile, the average selling price had only increased by $7 per phone. 

Stale Revenue Growth

The stale unit growth led to iPhone revenue stagnating as well, with revenue of $51.2 billion, $51.6 billion, and $54.4 billion in the first quarters of 2015, 2016, and 2017, respectively.

In the latest first quarter of 2018, Apple's revenue jumped to almost $61.6 billion, and it was able to do this without sacrificing iPhone unit sales. So even though the number of units sold doesn't appear like a supercycle, the jump in revenue and average selling price is nothing to dismiss.

How The Analysts Got It Wrong

Not only did Wall Street get the slashing of units projections completely wrong, but they also got the average selling price wrong by nearly $60 per unit, with most of the street looking for an average selling price of $737, according to reports. 

Analysts also projected that almost 80 million iPhones would be sold in the first quarter of 2018, which would have come to total revenue of $58.96 billion at the projected average selling price. So despite the appearance of the miss on the iPhone units, it was because the street got the average selling price wrong. 

The next time reports surface about 20 million iPhone units being slashed, think twice and ask yourself: Do you really think Apple is going to miss estimates by nearly $16 billion? 

One would be wise to think again.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

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