5G: Apple Puts the Ball in Carriers’ and Developers’ Court

5G: Apple Puts the Ball in Carriers’ and Developers’ Court

Apple released its first lineup of 5G-enabled phones at its “Hi, Speed” event. Following the presentation, shares of AAPL traded down about 2.5%, given the announcements were in line with expectations. Despite the move, we view today’s announcements as an essential step forward for the company to capitalize on the upcoming multi-year rollout of 5G.

While we believe it will take carriers years to build a compelling 5G infrastructure, Apple is ready today with a lineup of phones that should enjoy a three-year upgrade cycle, compared to a typical one-year duration. Additionally, the company continues to advance augmented reality. We see the combination of AR and a 5G iPhone as the basis for why Apple is the best way to invest in 5G.

Despite pandemic, Apple has delivered on key products

Although there has been a pandemic headwind, Apple has still delivered on all of its key products that were scheduled at the beginning of the year. This is a remarkable accomplishment, as hardware development requires in-person lab work, and production is centered in China.

One ball in the carriers’ court

In contrast to the commentary from Verizon CEO Hans Vestberg that “5G just got real,” we believe Verizon’s advertised download speeds are only available to about 1% of the US population today and will be available to about a quarter of the population a year from now. The good news is that Apple has done its work of building an affordable 5G device, and now it’s up to the carriers to make true 5G widely available.

5G speed takeaway: Availability of rocket-fast download speeds, as talked about today, will be sporadic over the next couple of years. That said, over time, those speeds will be reliable and 5G will live up to its hype, powering a multiple year iPhone upgrade cycle.

A second ball in the AR developers’ court

Separately, the company took a step forward in its AR ambitions with the addition of a LiDAR scanner on the iPhone 12 Pro models. We’ve been waiting three years for this hardware to be added, and now the ball is in developers’ hands to make compelling AR applications for consumers. We continue to believe that, over the next five years, AR will emerge as a new window through which we interact with the world. We are continuing to track the development of Apple Glasses, which, if released, would be the next leap forward in AR.

More compelling screen sizes appeal to a broader audience

Most notable in the new iPhone lineup was the iPhone 12 mini, which hits the optimal $699 price point along with a form factor that iPhone users have been waiting for. This is the first time in seven years, since the iPhone 5S, that a smaller form factor iPhone is part of the flagship lineup. iPhone mini is priced in line with some other 5G offerings, including the new Google Pixel 5 and Samsung’s entry-level flagship phone, the S20 FE 5G, both priced at $699.

Additionally, iPhone 12 Pro models now have slightly bigger displays inside the same form factor as the iPhone 11 Pro, which means fans of larger displays will have a reason to upgrade.

Pricing for the iPhone 12 lineup remains roughly the same as the iPhone 11 lineup ($699-$1,399). We view this as a sign that iPhone demand has been essentially unchanged throughout the pandemic. Meanwhile, iPad and Mac have experienced an acceleration in demand to nearly 30% y/y growth, compared to flattish growth pre-pandemic. As evidence for the demand increase in iPad, Apple raised the price of iPad Air by 20% last month.

What does this mean for iPhone sales next year?

5G speed is only one factor in a consumer’s upgrade decision. The age of the phone is another factor, and iPhone owners have been holding on to their devices longer. We believe the number of iPhones that are three years or older has increased by 90m units over the past year, which provides a tailwind for iPhone demand in the coming year. We remain comfortable with our 15% iPhone unit growth estimates (in line with the Street) for FY21, which would be an increase from 1% in FY20.

Campaigning for pro photographers

Every year, cameras across the industry experience marginal improvements. This year, the iPhone 12 Pro Max camera will be better in low light settings and more effective at managing vibration. Noteworthy in Apple’s presentation of the new camera features was the company’s outreach to professional photographers, which traditionally use SLR cameras and maybe dabble in iPhone photography. This effort to win pro photographers includes RAW capture modes for still photography, and the addition of HDR recording for video photography. This is bad news for SLR camera manufacturers, who should expect iPhone to nibble away at their market share in the coming years.

Seamless integration across devices

Finally, Apple landed a punch in the smart speaker market. The previous $299 HomePod was stuck with sub 5% US smart speaker market share, generating about $1B in revenue (about 0.3% of total sales) per year. At $99, the new HomePod mini means Apple wants a piece of this market, and the new price should be a catalyst for the company to expand its US share to about 10% in the next couple years. Despite that market share growth, the business will still be sub 1% of total revenue.

The importance of the HomePod mini goes beyond a price point and a product line because it illustrates something unique to Apple: its ability to seamlessly integrate hardware, software, and services. This has been a longstanding strategy for the company and is an example why investors should rethink the multiple on AAPL shares. We believe this integration is unique, defensible, and justification for a higher multiple compared to its big tech companions.

Two HomePod examples of integration include the ability to use your iPhone as a display for HomePod mini, along with Intercom features which connect iPhone, iPad, CarPlay, and HomePod as a messaging system.