UBS Doesn't Like Apple's Upgrade Cycle, Sees Declining New Customer Base

UBS’ Steven Milunovich believes Apple Inc. (NASDAQ: AAPL) shares are likely to remain range bound in the near term, “with low multiples acting as downside support and lack of demand catalysts an upper ceiling.”

Mulunovich maintains a Buy rating on the company, while lowering the price target from $120 to $115.

Disappointing Upgrade Cycle

The analyst mentioned that the iPhone 6 upgrades have been disappointing, with the upgrade cycle lengthening due to changing carrier plans and lower feature differentiation.

“Our installed base analysis reflects that the iPhone 6 was unusually well received,” Milunovich said, stating that 37 percent of the installed base entering FY15 is likely to have purchased a new iPhone.

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The impact of this is being felt in FY16, with a significantly lower upgrade rate of 25 percent expected.

“Our base case for F17 is total iPhone unit growth of 4 percent to 217 million based on a 23 percent upgrade rate and a decline in new customers,” the analyst pointed out.

Milunovich noted that predicted iPhone sales was difficult, although Apple had mentioned that there has been an 80 percent increase in the installed based over the last two years.

Declining New Additions

Milunovich expects new user additions to moderate going forward, while pointing out that half the sales in China has been to new users.

“Given the sudden weakness in China and immaturity of India, we assume declines in sales to new users the next few years,” the analyst, however, cautioned.