How Can Apple Keep Growing If Its Current Growth Depends on iPhone Price Hikes?

May 1, 2018, 11:19 PM UTC

Wall Street hasn’t been able to figure out whether Apple CEO Tim Cook’s gambit to sell higher priced iPhones is working. And it looks like it’s going to take more than six months to figure it out.

On Tuesday, Apple reported results for the quarter ending March 31 and received an immediate positive reception from investors. Revenue jumped 16% to $61.1 billion, just as analysts had forecast, and iPhone sales reached 52.2 million, also about what Wall Street expected. For the current quarter, which ends June 30, Apple said it expected revenue of $51.5 billion to $53.5 billion, compared to Wall Street’s forecast of $51.5 billion.

Additionally, the company tried to curry favor with investors by pledging to buy back another $100 billion of its own stock and raise its dividend by 16%. That kind of spending often pleases investors.

But the almost 4% jump in Apple’s stock price in after-hours trading only got the shares back to around $175, the same level where they were back in November and have bounced around for the intervening months. And the Wall Street forecasts that Apple met were a result of weeks of analysts reducing their projections based on fears the higher priced iPhones might scare off some customers, particularly in emerging markets.

As recently as a week ago, the average analyst revenue forecast was $51.9 billion. And Citigroup analyst Jim Suva predicted the $100 billion share buyback level almost a month ago, meaning Apple’s announcement on Tuesday was likely already anticipated by investors.

The real bottom line is that while Apple is clearly doing well for now, the sources of future growth may still be murky.

CEO Tim Cook took every opportunity on a call with analysts to pump up the iPhone’s prospects, particularly the iPhone X. The iPhone X has been Apple’s top selling device every week since it came out last fall and was the best selling phone model in China, Cook noted multiple times on the call, as he sought to combat the negative narrative some analysts were pushing.

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“The iPhone X is a beloved product,” he said. “I think that it’s one of those things where a team wins the Super Bowl and maybe you want them to win by a few more points, but it’s a Super Bowl winner. I could not be prouder of the product.”

The debate over how well the higher priced iPhones would sell started back in September. In addition to the new $1,000 model, Apple also priced its upgraded iPhone 8 at $699, $50 or 8%, more than the prior year’s model and the 8 Plus at $799, a $30 or 4% price hike over last year’s larger screen device. Since the new models went on sale, Apple has sold 129.5 million, just a 0.4% gain from the same six months a year earlier. But with the higher prices, revenue climbed 14% to $99.6 billion.

The real question is how long Apple can keep revenue growing at this pace. To grow a year from now, next year’s models would have to be even more expensive or the number sold would have to start increasing again in what many consider to be an already globally saturated smartphone market.

Cook battled furiously against that narrative, pointing out that about 500 million simple feature phones were sold last year. “Many of those were sold into emerging markets,” he said. “We still believe that over time every phone sold will be a smartphone. It seems to us with so many feature phones being sold, that’s still a big opportunity.”

To be sure, Apple is also growing in other areas, such as sales of services like Apple Music and wearables like AirPods and the Apple Watch. But those businesses remain a fraction of the iPhone’s size and probably can’t match its profit margins, either.

For now, Wall Street will have to keep debating.

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