Shares of AAPL are up 15% since WWDC (Nasdaq up 3%) in anticipation of Apple Intelligence features increasing iPhone revenue growth over the next couple of years. This means Apple has added $440B in market cap in anticipation of this cycle.

Despite that move, there is a vibrant debate amongst investors regarding iPhone growth rates over the next several years. Currently, the Street is estimating FY25 iPhone growth of 7%, increasing to 8% in FY26. This would represent a meaningful acceleration in growth considering the iPhone business has essentially been down 1% over the past 2 years. In the world of the iPhone, going from from flat to high single-digit growth falls into the category of an accomplishment.

Skeptical investors are largely in agreement that the iPhone will meet Street expectations over the next couple of years. Their bearish view is based on a belief that upside to current Street expectations will be limited at best.

The two central reasons for this muted growth outlook are:

1. Timing of Apple Intelligence rollout: This belief is based on a view that it will essentially take a year before the Apple Intelligence features are rolled out globally. Additionally, it’s unclear what AI features will be enabled in the EU with greater regulatory scrutiny, and in China where the company has yet to reach a deal with a Chinese LLM provider, not to mention the lack of clarity regarding which of Apple’s proprietary small language models (SLM) will be turned on.
2. The AI features are good but not great: Most tech investors recognize AI will make most products, including the iPhone, Mac, iPad, Watch, and AirPods, better. That said, I believe investors’ consensus view is that these features will fall short of the “must have” threshold that will drive more measurable upgrades. Since the utility of these Apple Intelligence features won’t be fully understood until the beginning of next year, calibrating consumer enthusiasm is largely a guessing game.

The reason why there’s debate around the iPhone upgrade pool potential is the company stopped disclosing iPhone unit numbers about a decade ago and has never given hard data around the average life of an iPhone. That said, I believe you can construct an accurate upgrade pool by using Apple’s reported active installed base, average selling price (ASP), historical iPhone growth rates, along with estimating iPhone retention rates.

At the core, I believe the average life of an iPhone is about 5 years. I’ve seen estimates all over the board that range between 3 and 7 years. In other words, there’s little consensus on this important topic. My estimate of 5 years takes into account that Apple retains 90% of iPhone users, ASPs, and historical iPhone growth rates.

Key Assumptions:

1. 5-year average lifespan of an iPhone.
2. In FY24, the ASP hit $817.
3. 90% of iPhone owners eventually buy another iPhone.
4. Annual cohorts are impacted by iPhone growth from 5 years ago.

Building on top of the iPhone pool is an exercise in terms of how many iPhone users will be compelled to upgrade early. I believe it’s realistic that in FY25, 3% of the FY26 upgrade cohort will move into FY25, 2% of the FY27 cohort upgrades in FY25, 2% of the FY28 cohort upgrades in FY25, and 1% of the FY29 cohort upgrades in FY25. This means that 8% of the base jumps forward into FY25. Below is our cohort upgrade estimates for the next 3 years.

Factoring in the cohort upgrade estimates into the iPhone upgrade pool yields 15% iPhone growth in FY25, and 17% in FY26.

It’s often forgotten in the iPhone growth conversation that sales to new customers are a measurable factor. The reason is that global iPhone market share has been stable in the high teens for the past several years.

Our model for the next few years assumes 23m iPhones sold to new customers in FY25, compared to 260m sold to existing customers. Our growth rate assumptions for new sales over the next few years are modest and range between -2% and 5%.

As for ASPs, we’re also expecting modest growth, averaging 1% per year for the next 6 years. In other words, the upside to our model is coming from the upgrade pool, and not coming from new customers or ASPs.

Over the next 2 years, I estimate 22% of the iPhone installed base will be pulled forward (8% in FY25 and 14% in Fy26). This will likely create an “air pocket” in iPhone demand in FY27 and FY28 to the tune of iPhone declining 5% in each of those years. In FY29, I expect iPhone to return to low single digit growth. By FY30, the growth should accelerate given it will benefit from the increased upgrade pool driven by the strength of the iPhone business in FY25 and FY26. I expect investors will be thinking more about FY27 sometime in mid- to late-FY25.

One benefit that will be accelerating in FY27 and beyond is the increased installed base of active iPhones. Over FY25 and FY26, I estimate about half of the traded in iPhones will be resold to new Apple customers, most of which are coming from emerging markets. That, along with what will be about 50m new iPhones sold to customers, results in a 15-20% (~250m) increase in the installed base of active iPhones. This should be a slight positive to Services growth given these users tend to be lower ARPU customers (Average Revenue Per User).

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