For all of the talk about Apple Watches and Apple TV+, the quiet star of the hype around Apple's first-quarter earnings was a product that isn't even on sale yet.
Shares rose Wednesday morning in trading after the largest U.S.-based wireless-phone maker reported December's first-quarter earnings that handily beat expectations, led by revived growth in sales of Apple's biggest product, the iPhone. But analysts also praised the performance of the company's wearables unit, which makes the Apple Watch, Beats headphones and Air Pods, which collectively saw sales jump 37%, and its services business, which grew 17%. Even the recently challenged China market saw overall Apple sales climb 3.1%.
But arguably the biggest driver of Apple's 40% stock gain since Sept. 30 is the growing hype for its upcoming 5G phone line, which is expected to launch this fall.
"5G is one of those undeniable transformative trends," Daniel Ives, Wedbush Securities' managing director of equity research, said in an interview Wednesday, days after raising his Apple price target to $400 on a combination of 5G expectations and gains in Apple's services business. "The first and biggest beneficiary will be Apple. With a 95% retention rate (when customers upgrade phones), it's like hitting the Lotto."
And it comes at a time when Apple has recently struggled with unit growth in its biggest product line. Apple's peak year for iPhone sales was 2015, when the iPhone 6 hit stores, with 231 million units worldwide. Even with the 5G phones expected to hit in fiscal 2020, Ives says units will be about 195 million, before rising to 215 million to 220 million in fiscal 2021, which begins in late September.
The prospects for 5G are hot. Combined with the services and wearables businesses, 5G could push Apple's $1.3 trillion market cap toward $2 trillion within a few years, Ives said. Even if that's optimistic, the new phones are going to be what everyone is talking about when Apple reports its Christmas 2020 quarter this time next year.
Apple isn't yet ready to talk in detail about 5G projections, CEO Tim Cook said on the company's conference call with analysts Tuesday. A call Wednesday morning to Apple's media relations line wasn't immediately returned.
"Sorry. We don't comment on future products," Cook said. "I will try to sidestep a bit. With respect to 5G, I think it's — we're in the early innings of its deployment on a global basis. We obviously couldn't be prouder of our lineup and are very excited about our pipeline as well and wouldn't trade our position for anybody's."
Consumers have held on to their iPhones for longer and longer recently — a trend Ives and others think 5G may help Apple reverse. Three years ago the average iPhone was used for 26 months to 28 months before replacement, Ives said, and now that is up to 37 months to 38 months.
"5G will shorten or stablize replacement cycles," CFRA Research analyst Angelo Zino said Wednesday. "Which is needed, after a three-year decline in smartphone unit sales, in an industry that had never had a decline.''
The question, really, is how fast it can happen.
Three big questions loom over the pace of 5G adoption. One is how rapidly infrastructure to provide the service, with its higher speeds and greater visual clarity, will be put in place, especially in the U.S. A second is how rapidly an ecosystem of applications, or apps, that use the greater capabilities can be brought to market, especially in areas like augmented reality, which offers more avenues in gaming and medical imaging, among other areas. And a third is what the souped-up phones will cost.
Investors are more likely to see 5G develop into a major technology over three to five years than to witness a "supercycle" or iPhone upgrades beginning next fall, Zino says. He predicted that 5G will enable Apple to post low- to mid-single-digit percentage growth in iPhone unit sales beginning in fiscal 2021.
"5G is a big deal, but some analysts may be making a bigger deal of it than they should," he said.
Apple hasn't said how much the 5G iPhones will cost, and Ives put the number at about $1,500, versus $700 to $1,100 for the current generation of iPhone 11s. Zino thinks the increases may be smaller than that, because analyses of component costs suggest initial 5G phones will cost $75 to $200 more to make than iPhone 11s. It's possible that Apple will deliver models at different price points, with the less expensive models omitting technology that needs faster networks that haven't been built in all parts of the world yet, he said.
When the wireless industry upgraded to 4G technology around 2016–2017, unit sales of new phones switched to 4G more rapidly than networks could be built to bring the faster speeds to outlying areas, Zino said. But the slower buildout could temper early sales, especially in countries like India, where networks are built out more slowly, he said.
Zino's view is shared by Goldman Sachs analyst Rod Hall, who wrote before the earnings reveal that Wall Street's consensus view of 2020 iPhone sales "looks optimistic."
"Part, if not most, of Apple's recent positive stock movement relates to high expectations for iPhone 12/5G shipments at the end of this year," Hall wrote. "Our iPhone revenue estimate of $32.5 billion in [the September 2020 quarter] is 6% below consensus, and our $52.8 billion estimate for the first quarter of fiscal 2021 (to December 2020) is 7% below consensus. We do expect Apple to enjoy a typical redesign bump in unit demand in late 2020, but we note that consensus is forecasting a return to near late 2016 peak unit volume, when iPhone penetration in China was still growing, whereas China and other major markets are more fully penetrated today."
Zino also noted that 5G has taken off quickly in Asia already, with 3.5 million South Korean subscribers signing up in the first six months the upgraded service as offered. Asia will represent about three-fourths of total 5G global connections in 2020 and 60% of total connections by 2023, he said, thanks largely to efforts by China's government to promote the technology. South Korea-based Samsung has said its third-quarter 2019 cellphone unit sales rose by 6 million, to 78 million, from a year earlier.