Raymond James: Three Reasons Apple Inc. (AAPL) iPhone5 was ‘Dud’

Apple Inc. (NASDAQ:AAPL)’s iPhone 5 will soon be a thing of the past according to Tavis C. McCourt, CFA, of Raymond James. Earlier we noted that Raymond James is bullish on Apple Inc. (NASDAQ:AAPL) even though it predicts short term challenges. Tavis notes the following three reasons for why he thinks the iPhone 5 will soon be replaced:

Apple Inc. (NASDAQ:AAPL)’s iPhone 5 as a flagship is nearer to the end than the beginning: he believes that when the post-mortem is written on the iPhone 5, its sales will have been okay, but certainly disappointing relative to initial expectations. He believes there are at least three reasons for this.

1) iPhone 4S strength impacted upgrade opportunities for iPhone 5: It is easy to forget that the iPhone 4S was a surprisingly strong product for Apple. At the time of launch, most observers viewed it as a very modest upgrade to the iPhone 4, but demand was surprisingly robust and Apple blew through expectations for two consecutive quarters based on much higher upgrade rates from existing customers than was expected.

One of the reasons for this was that Apple Inc. (NASDAQ:AAPL)’s 4S was launched 15 months after the previous model (iPhone 4) and thus there was a larger-than-normal base of iPhone customers waiting to upgrade (12 months between flagship launches has been more normal). The flipside of this logic is that by the time the iPhone 5 launched, many customers had just upgraded to the iPhone 4S which limits the pool of iPhone customers willing to upgrade.

2) LTE not relevant in much of the world: Whereas the 4S had the benefit of a long time between iPhone launches and the interesting new app of Siri to drive upgrades, the primary reason to upgrade to an iPhone 5 has been LTE. However, outside of the U.S., Australia, and perhaps the UK, LTE is virtually non-existent in much of the world. This made the iPhone 5 less than compelling as an upgrade driver internationally. As a proof point to this, Apple’s iPhone sales in the U.S. in calendar 4Q12 were well ahead of expectations, while sales outside the U.S. were broadly disappointing.

Apple Inc. (NASDAQ:AAPL)’s is recognizing the added expense of putting LTE componentry on all its iPhone 5’s, but he suspects likely more than 50% of global iPhone 5 buyers do not have access to an LTE network to use it on.

3) Apple Inc. (NASDAQ:AAPL)’s whiffed on the bigger screen: Apple’s argument for why it stuck with a similar width for the iPhone 5 brought back flashbacks of Nokia justifying “candy bar” form factors in 2004 and Blackberry discussing the physical keyboards in 2009. These companies all had reasonable points about why consumers “should” desire their well thought-out form factors.

However, the consumer is fickle and has the final decision. However, unlike Nokia and Research in Motion, which had to literally re-write operating systems to adjust away from their dominant physical form factors, Apple Inc. (NASDAQ:AAPL)’s simply needs to design a smartphone with a larger display. This is an easy fix to add a larger screen form factor and one that likely comes with a higher ASP.

Form factors in and of themselves have never been a long-term advantage in the smartphone space, and he does not expect larger screens to be a long-term advantage for Android against iOS either. Although Raymond will be performing a large survey in March, their anecdotal conversations with iPhone customers suggest that by far their biggest complaint with their iPhone is that they would like a larger screen. When he asks Android customers why they did not choose an Apple Inc. (NASDAQ:AAPL)’s iPhone, the large screen trumps price as the oft-answered response (at least in the U.S.).

Recent Apple Inc. (NASDAQ:AAPL) iPhone data remains impressive in the U.S., but anemic internationally: All iPhone 5 bashing aside, recent data points in the U.S. remain reasonably strong, while international iPhone demand from the websites Raymond James regularly checks remains relatively anemic.

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