Insights

1 Surprising Catalyst for Apple Stock

With the original iPhone announced over 15 years ago, you might think that the segment wouldn’t still be a growth driver for Apple (NASDAQ: AAPL). And some investors might be surprised to find out that after all these years, the company is still driving strong switch rates from other devices to the iPhone.

Indeed, the tech company recently said its most recently ended quarter garnered a record number of people switching to iPhone from other phones than in any fiscal third quarter to date. 

Here’s a closer look at iPhone’s momentum — and why strong switching trends bode well for the company.

Strength in iPhone

It’s always been management’s belief that if it achieves high customer satisfaction, it would translate to a loyal customer base. While this is obviously easier said than done, Apple’s largely been able to consistently do exactly this. In its earnings calls, Apple often cites impressive customer satisfaction for its devices. 

For example, in its fiscal third-quarter earnings call, Apple CFO Luca Maestri cited a recent 451 Research survey of U.S. consumers that indicated an impressive 98% satisfaction rate for iPhone. This high satisfaction, combined with Apple’s continued innovation in the segment, led to double-digit year-over-year growth in the number of customers who are switching from other phones to iPhone. This growth rate is particularly strong when viewed in the context of the quarter’s 3% year-over-year growth in iPhone revenue.

Growing its installed base

Investors shouldn’t underestimate the positive impact of iPhone switchers on Apple’s business. For anyone who thinks it may not matter where the new iPhone buyer is coming from, they should reconsider. If an iPhone buyer is an existing iPhone owner, the company’s installed base of active devices does not increase. But if the buyer comes from a different phone, the company adds another user to monetize across its App Store and other services. An iPhone buyer who is switching from another device, therefore, is arguably much more valuable than a repeat buyer.

This is why, in Apple’s fiscal third-quarter earnings call, Maestri drew attention to the company’s installed base performance. “iPhone active installed base reached a new all-time high across all geographies as a result of this level of sales performance combined with unmatched customer loyalty,” the CFO explained.

Apple’s emphasis on growing its installed base is working across all of Apple’s product categories and geographies, with the company achieving all-time high installed bases across every one of these segments in fiscal Q3. Further, Apple said it saw “increased customer engagement” with its services during the quarter, showing that the value of each user in its installed base continues to increase.

A good example of this is the growth in paid subscriptions — including both third-party and native subscriptions — on its platform. Paid subscriptions across its user base were 860 million by the end of fiscal Q3, up by more than 160 million over the year-ago period. Further, Maestri said its “transacting accounts, paid accounts, and accounts with paid subscriptions all grew double digits year over year.”

All of this is to say that high switch rates for iPhone add significant fuel to an already powerful engine for the company: Apple’s growing installed base of active devices. With the tech company increasingly finding ways to engage and transact with these customers, each user is becoming more valuable — and the installed base likely still has plenty of room to grow, considering that every geography and product category hit a record level of active devices during the quarter.

Daniel Sparks has positions in Apple. His clients may own shares of the company. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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