How important is the iPhone 15 to Apple’s success?

IF you’re reading this article on a mobile, the chances are it’s an Apple iPhone.

According to industry figures compiled by Uswitch, the iPhone accounted for 50% of UK handset sales last year. It’s closest rival, Samsung, followed behind on just 30%.¹

The dominance of the iPhone over the years has propelled Apple from being a home computing also-ran in the mid-noughties to the sometime biggest company in the world today - by market share among publicly listed companies, at least.

That means the iPhone matters to a lot of people. Not only users but investors as well because, as the largest company in the world’s largest stock market, an awful lot of people have money tied up in Apple.

The launch of a new iPhone is, therefore, a big deal and Apple is under pressure for its new arrival - the iPhone 15, launched this week - to prove a success. How important is the iPhone 15 to its fortunes?

Electricals retailer or consumer staple - what is Apple now?

Apple has a famous history in computing and most still see the company primarily as an electricals retailer, albeit a fashionable one. But categorising Apple in investment terms is a little more complicated.

Since the launch of the first iPhone in 2007, Apple’s fortunes have been highly correlated with sales of handsets. Earnings have tended to be cyclical, both in terms of the cycle of new iPhone releases - now running at about one a year - but also the economic cycle, with slowdowns in growth meaning fewer sales of iPhones.

But the pattern has been shifting and many investors now see Apple differently. The company’s strong brand has created incredible loyalty among users, many of whom would not willingly consider shifting manufacturer. The general trend of our lives being more online, and specifically conducted via our phones, mean iPhones have moved from being expensive nice-to-haves to absolute essentials that we spend on come rain or shine.

In this way, latter-day Apple is seen by investors as being more like a consumer staple and it carries a higher valuation as a result.

The pandemic and a ‘rerating’

This shift in status was cemented during Covid-19, when Apple’s share price surged as the market realised just how indispensable iPhones were to their users even during a global pandemic. The inflation and cost-of-living crisis of the past 18 months has provided another set of tough economic conditions, but again Apple seems well-placed to ride it out.

“Particularly after Covid, the centrality of your smartphone as something you cannot live without has been reinforced. It is effectively a consumer staple,” says Jonathan Tseng, a US hardware and Semi-conductors analyst at Fidelity.

He adds, “Apple skews towards higher end consumers. Market share ranges from 50% in the US to maybe 10% in China but it will be the highest income cohort. So relatively speaking it is less impacted by the cost-of-living crisis, although in the past - when for example China’s economy has slowed - it has felt some pain.

“Consider how excess savings built up over the pandemic have trended. These have been reverting towards normal levels, but again the decline has been steepest amongst lower income cohorts.”

That change of status is evident if you look at Apple’s valuation. The chart below shows Apple’s value based on its forecasted earnings over the next two years, versus its share price. The ‘re-rating’ that coincided with Covid is clear.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates.  Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.