Revenue. Apple saw robust iPhone revenue growth in 1Q18 due to the dramatic jump in iPhone ASP. Going forward, an ASP reverting back to the mean, combined with modest iPhone unit sales growth, will make it difficult for Apple to maintain robust iPhone revenue growth.

Margins. Apple doesn't disclose iPhone margins. However, given the company's stable overall gross margin, there is no reason to believe iPhone margins have deteriorated significantly in recent years. While Services revenue growth has certainly contributed to Apple's stable overall gross margin, much of that positive impact has likely been offset by weaker wearable and iPad margins.

One reason iPhone margins won't likely change much in the near term is Apple's broader iPhone strategy of using higher-priced, high-margin SKUs to offset margin pressure from lower-priced SKUs.

Implications

There are two major implications from the iPhone business entering a Goldilocks era:

Time. A relatively stable iPhone business buys Apple management much needed time to come up with the next big thing(s). It's been a little more than three years since Apple unveiled Apple Watch, the company's most recent major new product category. New products like Apple Pencil, AirPods, and HomePod are accessories meant to work with Apple's major product categories. It's not realistic to expect Apple to launch new major product categories every three or four years. Instead, pressure for Apple to unveil a new product category will likely begin to grow in 2019 or 2020, five to six years after the Apple Watch was unveiled. Money. The iPhone is kicking off approximately $60 billion of gross profit per year. Assuming iPhone fundamentals remain relatively unchanged from current levels, Apple stands to earn close to $200 billion of gross profit from iPhone over the next three years. This is enough cash to support Apple's organic growth, R&D, M&A, and still leave funds to handle the capital return program.

Risks and Wildcards

In the mid-2000s, there was a school of thought that viewed the U.S as having a Goldilocks economy. Instead of strong growth, which would lead to inflation, or weak growth, which would lead to a recession, the economy was following a path somewhere in the middle. As it turned out, an asset bubble was forming in housing during this period. The bubble burst in 2007. A massive recession ensued, made much worse by toxic financial instruments based on an inflated asset.

Is there a variable that may do the same to the iPhone business? What may be developing or building in the background that has the potential to appear suddenly and quickly unravel the iPhone business overnight?

A few of the more popular items positioned as iPhone risks include:

Voice. The expansion of rudimentary digital voice assistants into new platforms where data is increasingly transferred via voice and value moves away from apps and touch screens.

The expansion of rudimentary digital voice assistants into new platforms where data is increasingly transferred via voice and value moves away from apps and touch screens. Post Device Era . All-powerful cloud services eventually reduce the value found with hardware.

. All-powerful cloud services eventually reduce the value found with hardware. China. The iPhone business can experience a sizable contraction overnight due to new policies enacted in China targeting Apple.

The iPhone business can experience a sizable contraction overnight due to new policies enacted in China targeting Apple. Lack of Innovation. Mediocre features that are on par with competitors can lead to longer upgrade cycles, lower margins, and fewer sales.

Mediocre features that are on par with competitors can lead to longer upgrade cycles, lower margins, and fewer sales. New Product(s). A new kind of product reduces the value found with iPhone.

Out of those five items, China regulatory issues represent the only item capable of impacting a decent portion of iPhone sales overnight. China is responsible for approximately 30% of iPhone sales. The other risks don't pose as much of a near-term concern for the iPhone business.

The largest wildcard that will jeopardize the iPhone business over the long run is a new kind of screen that is able to grab our time and attention away from iPhone. (I don't think voice by itself will be the answer.) This screen won't replace the iPhone, just as the iPhone didn't replace a laptop or desktop. Instead, this screen will initially appeal to those who felt overserved by iPhone. Eventually, this screen will begin to handle an increasing number of new tasks and workflows, some of which were never given to iPhone. Apple Watch and a pair of augmented reality (AR) glasses are best positioned to be those screens.

The initial versions of AR glasses for the mass market will probably be more like head-up displays positioned as smartphone accessories. This leads me to think that it will be difficult for new products to unravel the iPhone business overnight. The iPhone is simply too multi-functional and multi-purpose. The artificial sense of safety found with such a statement does not escape me. The moment when it seems like there is nothing that can impact a business or product is usually the time when safety needs to be thrown out the window.

Big Picture

The iPhone's Goldilocks era is all about stable fundamentals for the next two to three years. During this period, Apple will continue to experiment with higher-priced and more capable SKUs at the high end while making iPhone more accessible with lower pricing at the low-end.

As for what comes after the Goldilocks era, a good argument can be made that iPhone's future is one of a powerful AR navigator. In this environment, Apple Watch and Apple Glasses handle much of the low-hanging fruit in terms of mobile tasks and workflows while iPhone is a more powerful computer targeting increasingly niche applications. This would lead to less robust iPhone unit sales but improved ASP and margin trends.

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