Bank Of America: Apple Installed Base Holds 'Large Room' For Upside

Following the release of new Apple Inc. AAPL products, Bank of America Merrill Lynch tackled the apparent discrepancy between growth in the iPhone installed base versus Apple's unit growth.

The Analyst

Analyst Wamsi Mohan maintained a Neutral rating on Apple with a $220 price objective.

The Thesis

Installed base data serves as a key indicator for Apple's growth, Mohan said in a Tuesday note. (See his track record here.)

The analyst pointed to the following factors:

• The size of the global iPhone installed base and its compound annual growth rate over the past two years.
• Future growth in sales.
• An increase in installed base, which should drive serves and sales of incremental devices.
• The expansion of replacement cycle in direct response to installed base growth.
• Secondary market growth, which presents a significant services opportunity.

“As growth migrates to the secondary market, which we view as more price conscious consumers, we view a lower initial services attach. We estimate only 10-20-percent of the 1.5-billion overall installed base is paying for services," the analyst said.

"The positive is that there is large room for upside, but the negative is that the secondary market will likely take a long time to change lower spending patterns.”

China’s contribution remains crucial, as the country's iPhone installed base has grown at a 7-percent CAGR year-over-year, Mohan said.

At the end of this year, the Chinese iPhone installed base will nearly rival that of Europe, he said: "This can likely be explained by the longer replacement cycle in China."

Price Action

Apple shares were down 2.56 percent at $181.10 at time of publication Tuesday.

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Photo courtesy of Apple.