Apple – Super cycle blues.

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Early data indicates that there is no super cycle

  • While it is too early to say for sure, the initial data suggests that the super cycle that the market is looking for to underpin the valuation of the shares is not occurring.
  • Mixpanel is an analytics company that tracks user interactions for the providers of apps and services on the web as well as mobile devices.
  • With 20,000 customers and 7tn data points collected every year, I think it is fair to say that Mixpanel is quite capable of collecting a data sample that is a good representation of reality.
  • The latest data from Mixpanel tracks the appearance of iPhone 8/8+/X devices in the data that it collects, giving an idea of how quickly the user base is switching to the new models.
  • In the two months since release (iPhone X one month only), the three devices have racked up the following share of the user base:
    • iPhone 8: 2.79%
    • iPhone 8+: 3.68%
    • iPhone X: 4.91%
    • This gives total penetration of the new generation of iPhones in the first two months of availability of 11.3% of the user base.
  • In comparison, the iPhone 7 and 7+ penetrated 23.5% of the user base within the first two months of availability.
  • This strongly suggests that the latest generation of devices is not generating the kind of super cycle that the market is looking.
  • I do not think that supply is an issue as I can order an iPhone X 64GB today and pick it up from the Apple Store in New York City or Palo Alto tomorrow. The iPhone X 256GB wait is four days.
  • To be as consistent as possible, it is necessary to adjust the data to reflect the fact that the iPhone X has only been available for a month.
  • If I take the penetration achieved in the first month by each model in the new generation, I end up with a total user base penetration of 8.8% after one month of availability.
  • By contrast after one month the iPhone 7/7+ had achieved 11.5% penetration of the iOS user base.
  • This is a strong indication that uptake by users of the new generation of devices is actually slower than it was for the iPhone 7.
  • It is important to remember that this is going to be offset by price as the data clearly shows that the iPhone X is much more popular than the iPhone 8, despite being 30% more expensive.
  • Hence, softness in unit shipment numbers could easily be compensated by the higher price being paid for the iPhone X.
  • However, I think that expectations for Apple for FY2018 are including both a strong replacement cycle and higher prices which is why I fear disappointment in the short term.
  • The caveats to this analysis are:
    • First, data: I have assumed that Mixpanel is a statistically significant representation of reality.
    • While the data quantity suggests that this should be the case, I have no hard data to prove it.
    • Second, availability: I have tested availability in NYC and California as they are places with the highest demand, but this may not be a true representation of supply.
    • Third, user base: The user base of iOS devices is larger this year than it was last year.
    • Consequently, it will require more devices to be sold in order to achieve that same level of penetration as the iPhone 7.
    • However, I do not think that differences in the size of the user base is enough to account for this discrepancy.
  • When I weigh up the findings of this analysis and take into account the caveats, I conclude the following:
    • First: uptake of the new generation of iPhone is slower than last year and there is no sign of the much hoped for super cycle.
    • I think this is mainly driven by the very high price of the most desirable product which will lead to many users waiting until the full screen penetrates to the lower priced segments.
    • Second: the higher price of the iPhone X will offset the impact on Apple’s revenues of a slower uptake compared to the iPhone 7, but it will not enable the company to soundly beat market expectations.
  • Consequently, I think that while demand for the iPhone X is clearly quite high, it is not high enough to allow Apple to beat the already very high financial expectations that have been set for it.
  • Hence, I can see disappointment coming through in Apple’s next few sets of earnings releases and think that the time has come to take some money off the table.
  • Tencent, Baidu and Microsoft are worthy candidates for consideration.