08:35 am
September 26, 2017

Is Apple Stock a Buy Ahead of iPhone 8?

Is Apple Stock a Buy Ahead of iPhone 8?

Rumored to sport some major new features, the next iPhone could spark a major upgrade cycle.

Apple’s (NASDAQ:AAPL) upcoming iPhone 8 is looking as if it could represent a total overhaul to the current iPhone design. Recent rumors suggest that the upcoming flagship version of the iPhone could have an edge-to-edge OLED 5.8-inch display, integration of Touch ID into the display, the elimination the home button, 3D facial-recognition capabilities, wireless charging, and a cost upwards of $1,000. A major overhaul like this could easily solicit a monster upgrade cycle, akin to huge growth in iPhone sales sparked by the iPhone 6 and 6 Plus launch several years ago.

With such a significant update possibly around the corner, is now a good time to buy Apple stock? Or should investors stay on the sidelines until speculation is replaced by facts?

I’d argue that Apple stock is a buy ahead of the iPhone 8 launch. But it’s not necessarily because the iPhone 8 might represent the first significant redesign to the iPhone in three years. It’s because Apple’s underlying iPhone business already has some concrete trends working in its favor, whether the next iPhone gets a radical revamp or not.

Even with an outdated form factor, the iPhone is growing
Apple’s 2016 flagship iPhone launch broke from the company’s usual practice of redesigning the smartphone’s form factor every other year. The iPhone 7 and 7 Plus sported the same general design as 2015’s iPhone 6s and 6s Plus and even 2014’s iPhone 6 and 6 Plus. Nevertheless, iPhone sales hit a record high in the company’s most recent quarter. In Apple’s first fiscal quarter of 2017, iPhone revenue and units were up 5% year over year.

This bodes well for the strength of Apple’s iPhone business. If Apple can continue growing iPhone units and revenue in its important holiday quarter with a three-year-old form factor, Apple’s iPhone business may be better off than investors realize.

Apple’s pricing power is as strong as ever
A testament to Apple’s clout with its customer base, customers are paying more for iPhone than ever before. Apple has continually offered higher-priced options for customers by rolling out Plus versions of its flagship device with the iPhone 6 and 6 Plus, offering higher storage tiers, and simply by increasing the price of its iPhones. And customers don’t seem to mind. In Apple’s most recent quarter, the iPhone’s average selling price hit an all-time high of $695, up from $691 in the year-ago quarter, and up significantly from $637 three years ago.

This incredible pricing power vouches for the premium price Apple customers remain willing to pay for an iPhone.

iPhone owners are extremely satisfied
Apple has always put customer satisfaction at the top of its priorities. And it continues to pay off for the company. Citing the latest data from 451 Research, Apple CFO Luca Maestri noted in the company’s most recent earnings call that iPhone owners had a 97% overall satisfaction rate in the U.S., with 99% satisfaction for owners of the iPhone 7 Plus.

With satisfaction like this, it’s unlikely that iPhone buyers will be switching to another brand.

More consumers are upgrading and switching to iPhone than ever
Customers appear as willing as ever to buy an iPhone. Apple’s absolute number of iPhone upgraders and the number of buyers switching from another smartphone were both at an all-time high in the company’s most recent quarter, CEO Tim Cook said in Apple’s first-quarter earnings call.

Put all of this against the back drop of Apple’s conservative price-to-earnings ratio of just 16.4 and a healthy iPhone segment alone looks like a reason to bet on Apple stock. A major redesign to the iPhone, with potential to spark a monster upgrade cycle, could just be icing on the cake.

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Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.

 

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