What's Next In Apple's (AAPL) Product Cycle?


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Following Apple's (AAPL) stock split, its impressive second-quarter, where the company shipped over 47 million iPhones and a developer conference that whet the appetites for investors, the big question remains -- what's next for Apple?

A lot more than you think.

Credit Suisse analyst Kulbinder Garcha, who rates shares neutral with an $86 price target, notes that there could be as much as 13% upside for the stock, especially if Apple is able to raise prices on the next iPhone, and the iWatch is as big a hit as everyone thinks it will be.

"The upcoming product releases will likely contain updates to iPad and iPhone and the introduction of a wearable (iWatch)," Garcha wrote in the note. "For the iPhone, we expect two devices; one 4.7-inch and one 5.5-inch, both with faster processors and improved cameras. We also expect a new product category (likely an iWatch). Of these, the iPhone is the most important to fundamentals and the iWatch the most important to judging the sustainability of Apple's innovation."

Initially, new product cycles at Apple hurt gross margins, a closely watched level for a company that charges premium prices for its products. With a new iPhone product cycle coming later this year, Garcha believes that gross margins could be lowered by as much as 400 basis points, even if Apple hikes prices on the new phones.

"We believe the two larger screen devices will likely be 30% and 50-60% larger in surface area, once we account for screen cost, manufacturing, and processor hikes," Garcha wrote in the note. In the fiscal second-quarter, Apple's gross margin was 39.3%, the highest it's been in some time, as the company works on cutting costs and improving efficiencies. Apple does not break down gross margins for each separate product.

In the fiscal second quarter, Apple shipped 47.3 million iPhones, as the company generated quarterly revenue of $45.6 billion, earning $11.62 a share.

Photo by ShutterstockPhoto by Shutterstock
The most important thing for Apple in the near term will be the mix, or how many of each phone will be sold. Garcha notes that the 4.7-inch version could really hurt gross margins, so if more people buy this phone (Garcha assumes 65% of people will buy this version), that could potentially affect Apple's earnings in a major way.

A major unknown right now is the replacement cycle for iPhones. Right now, they are at around 23 months, but if that bumps up to around 21 months, due in part to consumers wanting large screen iPhones, that could not only cause Apple's 230 million iPhone user base to upgrade faster, but also steal some Android users as well, given the fact that many Android phones, including most of Samsung's phones, are more than 4 inches.

As carriers increasingly try to move away from subsidies (programs such as Verizon Edge, AT&T Next), the customer is being asked to foot the bill, which may provide some cautious buying habits from consumers, and US carrier obligations (how many units they must purchase) are set to come to an end. The new agreements are not in place yet, but could prove an issue for Apple, if it's not able to get what it wants from the likes of Sprint (S), Verizon (VZ), AT&T (T) and others.

Despite those headwinds, Apple has a lot going for it, as consumer demand for Apple products continues to remain high, and the company is incredibly confident about its pipeline. In a recent Re/Code interview, Eddy Cue said Apple's portfolio is "the best in 25 years," but did not go into detail. With the media and industry analysts advocating Apple's product lineup for 2014, this could put Apple in an even better negotiating stance with carriers than it has in the past.

"Apple retains pricing power with carriers, by not supporting the iPhone launch equally," Garcha wrote in the note. "As a result carriers will suffer from subscriber churn. This means Apple will attract the same if not more support over this launch."

Aside from the excitement surrounding the new iPhones and the new iPads, comes Apple's move into wearable technology. After Apple's Worldwide Developer Conference (WWDC) earlier this month, the excitement exploded, as Apple released not only its Health app as part of iOS 8, but HealthKit, a platform that allows doctors and hospitals to monitor your data (with your permission). Garcha believes the iWatch will be launched in the fourth quarter of this year, and could generate as much as 70 cents a share in earnings power to Apple, assuming it costs $300.

At WWDC, Apple also announced Continuity, something that allows users to start a document on one device and pick it up on another, and Garcha believes the iWatch could be a part of this as well. "Apple’s advantage is its ability to integrate core features from messaging, data synchronization, and video calling through its iPhone, iPad and PC product portfolio," Garcha wrote in the note. This not only helps existing Apple customers, but is a big draw for people who want their devices to talk to each other, and work in sync with each other.

The second half of 2014 is shaping up to be a massive few months for Apple, as the company releases a slew of new products, software, services and potentially more. We already know about the watch, the phone(s), and the tablets, but given Apple's penchant for surprises (its latest being a new developer language), maybe, just maybe, we'll get "one more thing" as well.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Technology , Business , Travel and Lifestyle
Referenced Stocks: AAPL , S , VZ , T

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Chris Ciaccia

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