Waiting for the new iPhone

Bolko Hohaus -

Apple generates more than a quarter of its revenues in China these days, double as much as two years ago.

Therefore this will in our view be a critical market to watch for the further success of the company. Bulls stress that there will be more financing options available for Chinese customers, making the sticker shock of the iPhone more bearable. If this is enough in a macro slowdown needs to be seen but so far Apple’s CEO has stressed that the Chinese business is doing very well.

But there are two more positives that we see:
A bit more than only one fourth of current iPhone users have upgraded to the current generation of 6 and 6 plus, leaving still significant replacement demand in front of us.
And secondly, while the big screen of last year’s new iPhone was the key driver for the current cycle, Apple will this time incorporate a new feature in the upcoming 6S. It is called forced touch and allows to differentiate between touching the screen softly or forcefully. Imagine applications which use this feature in an effective way and you get one more reason you want to own an iPhone.

Longer term, we believe Apple needs to be more innovative to keep the majority of the handsets industry profits in its pockets. It profits from the failure of its main rivals to come up with really differentiated products. Samsung for example had promised us bendable phones by now, we are still waiting for this to happen. Many Android phones look to us like an iPhone clone.

However, Apple’s profit depends mostly on only one product and its variants, the iPhone. The watch has not really sold to be classified as a major revenue stream for them and also Apple Music got very critical reviews after the launch. At the same time, iPad unit sales have been declining for more than a year already. Hence, we do not see the company as fool proof and eventually the tipping point may come. This is why the shares trade at 12x earnings, well below the market, despite plenty of cash on its balance sheet.

Bolko Hohaus – Head of the Technology Fund Investment team – Lombard Odier IM