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TechThe Mobile Executive

Here’s Why Wall Street Isn’t Excited About a New iPhone

By
Aaron Pressman
Aaron Pressman
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By
Aaron Pressman
Aaron Pressman
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September 6, 2016, 10:04 AM ET
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With Apple’s annual fall new product unveiling scheduled for Wednesday, analysts who follow the company have been weighing in with their expectations and predictions. After numerous leaks, a consensus has formed around the likely new features in the expected iPhone 7.

KGI Securities analyst Ming-chi Kuo is perhaps the dean of the college of Apple rumors thanks to his close ties with the Asian manufacturers who actually build the iPhone and most of its components. After numerous earlier reported leaks from Kuo, he added a slew of final details on Tuesday.

For one, Apple may replace its current space gray color with two new black options: one that is “dark black” and another shinier sheen Kuo refers to as “piano black.” Also, Apple is expected to bump up the minimum storage space on the cheapest iPhone 7 to 32 GB from 16 GB in last year’s 6S model. Kuo yet again confirms that Apple will remove the industry-standard headphone jack and will include a set of headphones that connect to the phone’s proprietary Lightning connector that is also used for recharging. Apple is also expected to include a dongle enabling any standard pair of headphones to connect to the Lightning connector as well.

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With few major changes to the iPhone’s exterior, most analysts expect sales growth will be muted. Sales in the all-important holiday quarter even could come in below last year’s 75 million phones sold. But Apple’s stock price has also been muted, declining 1% over the past year. That has some analysts predicting better performance ahead as Apple will be able to beat low expectations.

“Recent run-ins with the FBI, China Government, EU and short sellers has made Apple the ‘Jason Bourne of Tech,'” wrote Brian White, an analyst at Drexel Hamilton, on Tuesday. “Similarly, just as the market calls for Apple’s undoing, the company emerges even stronger.”

The controversial headphone jack removal doesn’t appear to have worried many of the analysts.

“Our research in Asia highlights that Apple will remove the headphone jack by leveraging the Lightning connector,” White explained. “Although likely a contentious issue with iPhone users at first, we believe this will soon be forgotten and makes room for an additional speaker with enhanced sound quality.”

iPhone 7 Rumor Roundup: Release Date, Features, and More

“Waterproof will be a big selling point from AAPL—though of course Samsung is already there—further enabled by the elimination of the headphone jack and integration w/the lightning port (maybe angering some who charge the phone while listening to music, but otherwise a positive development),” Cowen & Co analyst Tim Arcuri wrote on Tuesday.

Apple is expected to add some improvements, such as a dual lens camera and more RAM, only to the larger screen iPhone 7+ model, Toni Sacconaghi, analyst at Bernstein Research, noted on Tuesday. That could be a play to entice more customers to buy that more expensive model, he said. “The upshot is that while the increased capacities of the devices may lead to lower margins (at least initially), Apple may be attempting to boost the relative attractiveness of and its revenue mix toward the larger screen 7-plus, which we believe has higher margins,” Sacconaghi wrote.

With the somewhat dull iPhone 7 upgrade so close, some analysts are looking ahead to next year when Apple (AAPL) is rumored to have a much more significant upgrade on deck, particularly with a new higher-definition OLED screen.

Shipments in 2017 “remain highly uncertain,” Abhey Lamba, analyst at Mizuho Securities, wrote last week. “Shipments will highly depend on the sell-through data and adoption/availability of OLED displays for the next generation phones. Our Japan team’s expectations for (calendar year 2017) are fairly wide (expecting 178-230mm phones) and we expect them to narrow once we get more feedback on the new phones.”

For more on the 2017 iPhone rumors, watch:

“The iPhone 7 is widely expected to introduce only incremental innovation with the iPhone 8 driving a Super Cycle (OLED, wireless charging, etc. expected),” Kulbinder Garcha, an analyst at Credit Suisse, noted last week. “While investors have accepted a weak upcoming product cycle, the innovation expected in the iPhone 8 still seems to be of concern as many of the new features expected are already in many Android phones. We note, however, that Apple has historically trailed in terms of hardware specs, but its strong ecosystem and compute platform have supported its strong loyalty rate (~93%) over the years.”

“Assuming iPhone units are flattish with iPhone 6S (as implied by current Street estimates), the portion of the base >2yrs old (where “upgrades” are highly concentrated) will hockey stick from ~33% – a number which has been very consistent now for ~6Qs – to ~43% a year from today,” Arcuri also predicted on Tuesday. “On an absolute basis, this means that units >2yrs old will grow from ~210MM units to ~275MM units – meaning the ENTIRE growth of the installed base (and then some) in the next year will come from units >2yrs old. This creates a veritable powder keg for upgrades with an innovative new phone in ’17.”

Apple is also widely expected to introduce an updated version of the Apple Watch on Wednesday. The first Apple wearable, which hasn’t been updated since it arrived in April, 2015, has experienced declining sales this year.

“We expect Apple to update Apple Watch, adding native GPS and upgraded Wi-Fi functionality,” Andy Hargreaves at Pacific Crest Securities wrote last week. “The addition of GPS is the most important, in our view, as this is critical to many fitness tracking applications, which remains among the most in-demand features in wrist-worn wearables. Despite the potential for GPS to drive growth in Apple Watch unit volume, we continue to believe Apple will have to expand its wearables lineup with lower-functioning devices at lower price points to fully capture the opportunity.”

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