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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.

Apple now trades roughly 24-25 times two-year forward price-to-earnings. That’s high versus historic levels but towards the middle of the range it has traded in since 2020.

iPhone still key - but Apple is diversifying

You can gauge the importance of the iPhone to Apple when you examine how it has made its money over the years.

In the years following its launch the iPhone rose in importance until it accounted for around 80% of Apple’s gross profits by 2015. Since then, its role had diminished somewhat thanks mainly to the expansion of Apple’s ‘services’ business, which includes App Store sales and digital offerings including iCloud and Apple Music.

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Source: Fidelity International

Using the same data, it’s possible to see how profits from different areas of the business have come through. In particular, you can see how earnings from iPhone have been highly cyclical, rising and falling with each new iPhone launch. Compare that to the steady rise of services where user subscription models have provided more steady revenue.

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Source: Fidelity International

Good iPhone or bad iPhone? Can the 15 avoid an ‘off’ year

Although the importance of iPhone sales has been diluted, they are clearly still crucial to the company. If a new iPhone launch goes badly, it will harm earnings and likely knock the share price.

There have been previous examples of new iPhone launches falling flat. In both 2013 and 2016 - when the iPhone 6S and iPhone XS came to market - sales failed to meet expectations and resulted in lower earnings-per-share in those years, as shown in the chart below.

There can be various reasons for a new iPhone failing to hit the mark. If improvements in the technology underwhelm users, they may choose to delay an upgrade until a better model comes along. Beyond that, economic conditions can also hurt sales if demand is lower.

In recent years, earnings-per-share have proven more resilient. Apple has expanded the range of iPhones on offer to include higher-value Pro and Pro Max versions and has endeavoured to push buyers towards these models. Can the launch of the iPhone 15 keep up that trend?

Pre-sale orders for the new handsets are now available and - although it’s early days - the signs are positive.  Wait times for the Pro models have risen to between 30 and 50 days, indicating strong demand for higher value handsets. Lead times for the non-Pro models are lower, but similar, to last year.

Overall, it suggests that the iPhone 15 is on track to meet expectations. Apple needs it to because, although it is becoming less reliant on its flagship product, sales of handsets are still the primary influence on the company’s performance.

Source:

1 Uswitch, UK mobile phone statistics,1.2.23

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.

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