The future of smartphones in the United States and most other major nations is 5G, the fifth-generation standard for cell phone networks. For over a decade, phones have run on current 4G networks. 5G networks will run at 20 to 50 times faster upload and download speeds.
There are over 300 million wireless subscribers in America. More than double that figure to get the European Union plus the United Kingdom total. More than triple it for the People’s Republic of China.
That means, over the course of a year or two, between 1.5 billion and 3.0 billion people will need new 5G-enabled smartphones. For companies like Apple and Samsung, the opportunity to add revenue runs into the tens of billions of dollars.
The Apple Inc. (NASDAQ: AAPL) iPhone’s market share varies from country to country. In China, it ranks behind three other companies, which include Samsung and local manufacturers.
In America, the figure is about 45%. The new 5G standard represents two opportunities. One is to hold market share. The other, which is tremendously valuable, is to take share from the competition.
Apple’s Risk and Reward
Apple has not released a 5G-enabled iPhone yet. That is a sign that Apple management does not think the standard will get major adoption until at least the end of the year. Rumors are that the iPhone 11 will be replaced with an iPhone 12 that is 5G compatible.
Samsung already has released what it calls 5G-ready devices. These are part of its Galaxy line of smartphones: “Galaxy 5G is officially rolling out across the country delivering mind-boggling speeds and superior connections.” The wave of the future is better than the present, by far.
Apple sells over 200 million iPhones a year. If 5G iPhones are launched in September, the usual date of new iPhone announcements, Apple could push that sales figure higher. People will no longer be upgrading from an older model to get a better camera. They will upgrade to get the standard of wireless speed that could last for a decade.
5G offers financial benefits to both carriers and phone makers. Presumably, they will pitch higher prices for a faster product. If Apple can pull this off, its gross margins will rise. Gross margins are a critical measure of Apple’s health.
The risk Apple faces is that Samsung may begin a price war to pick up market share. If so, the potential bottom line advantages could disappear or be pressed into the future.
What 5G May Do for Apple’s Financial Results
After a strong fiscal 2019 annual performance, Apple has posted strong fiscal 2020 results so far. Revenue for the second quarter of 2020 was $58.3 billion, up 1% from the same period the year before. Earnings came to $2.55 per share, a gain of 4%. International revenue was 62% of the total. This is a sign of Apple’s 5G potential overseas.
While iPhone sales have dropped as a percentage of Apple’s total revenue, they are still the largest driver of the top line. They were $29 billion of total revenue in the most recent quarter.
If 5G iPhone sales rise to levels higher than what 4G sales were for Apple in the past several years, the iPhone could once again become the primary contributor to revenue growth.
What 5G Does for the Rest of Apple
The iPhone is part of what Apple calls its ecosystem. Owners of the smartphone are more likely to own an Apple Watch, the dominant wearable consumer electronics device. They are also more likely to buy Macs and iPads
Most importantly, the iPhones total installed base and hardware make it more likely people will use Apple’s Services business. This is Apple’s fastest-growing division. It includes Apple’s cloud service, as well as Apple Music and the App Store.
A larger rollout of the iPhone should add revenue across almost all of Apple’s other businesses. It is worth noting that the Apple Watch, Macs and iPads also will run on 5G.
Can 5G Help the Price of Apple’s Shares?
Despite a slowing of Apple iPhone growth in the past several quarters, and the pandemic’s like effect on sales, Apple’s share continues to soar. Apple still is considered one of a handful of tech companies that control their markets. The other tech giants include Amazon.com Inc. (NASDAQ: AMZN), Alphabet Inc. (NASDAQ: GOOGL) and Facebook Inc. (NASDAQ: FB).
Apple’s shares have risen 16% in the past three months, against a 2% rise in the S&P 500. Over the past year, Apple is up 78%, compared to the S&P 500’s 7% advance.
Apple has done two other things to draw and keep investors. Its board of directors has authorized an increase of $50 billion to the existing share repurchase program. It also declared a cash dividend of $0.82 per share of common stock, an increase of 6%.
If Apple gets its share of 5G hardware sales, the stock should stay healthy.
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