iPhone 6 Release – Apple Is Banking on Massive Demand

Is AAPL overestimating demand for an iPhone phablet?

Any time Apple (AAPL) releases a new iPhone, there are lineups. Hundreds of people waiting outside Apple Stores or wireless carriers hoping to be the first to snag one is good PR and great for business. Having an actual shortage leaving would-be customers to grumble and wait for weeks — or give up and buy a Samsung (SSNLF) Galaxy S5 instead — is not good for business.

iphone 6 record orders
Source: Apple

Apple has a lot riding on the upcoming iPhone 6 release and the company clearly thinks there’s huge pent-up demand for a bigger iPhone. According to the Wall Street Journal’s Lorraine Luk, Apple has placed orders with its suppliers for the largest initial run ever for the iPhone 6 models, totaling 70 million and 80 million units.

AAPL investors will be watching nervously and hoping that Apple hasn’t overestimated iPhone 6 demand, because having new iPhones sitting unsold on shelves soon after launch could be a disaster for AAPL stock.

In fact, the iPhone 6 release is shaping up to be one of the most important product releases in Apple history.

Since the initial iPhone established Apple’s presence in the smartphone market, the company has been a leader in the smartphone world. The iPhone is consistently the best-selling smartphone model every year, and iPhone sales are a huge part of AAPL’s meteoric growth.

However, starting last year, there was a feeling that Apple was losing touch with consumer demand. The flagship iPhone 5s stubbornly remained a 4-inch device, dwarfed by virtually every competitor as phablets — smartphones with displays 5-inches or bigger — became the norm. Even BlackBerry (BBRY), a company that had become synonymous with being out of touch with consumers, released a 5-inch smartphone (the Z30).

This year, everyone is looking to Apple to finally join the phablet game, and all indicators are pointing to the fact that the iPhone 6 will actually be two devices: a big one and bigger one.

It may well be that there is considerable pent up demand for an iPhone 6 with a big screen and that the usual round of yearly upgraders and new iPhone buyers will be joined by throngs of people who have been holding onto older iPhones until Apple finally matched competitors like HTC, Samsung and Sony (SNE).

Count me among that group. I’m still using an iPhone 4s after passing on first the iPhone 5 then the iPhone 5s. But if the iPhone 6 is finally a big screen device, I’ll be upgrading as soon as possible.

By ordering in the 70 million-80 million unit range for the iPhone 6 release, Apple obviously doesn’t want to take chances on running out. Previous iPhone launches have seen constrained supplies. Pre-orders for the iPhone 5 sold out in under an hour in 2012. The initial run ordered for last year’s iPhone 5s and iPhone 5c was between 50 million and 60 million.

To put in that perspective, an initial iPhone 6 order for between 70 million and 80 million units doesn’t seem like that big of a gamble. After all, when you can move over 43 million iPhones in a non-launch quarter even as you’re under fire for selling the smallest flagship smartphone in a market that demands big, it’s not a stretch to think you’ll easily sell those big iPhone 6 models in massive numbers.

However, there is some risk…

There’s a lot we don’t know about the iPhone 6. There are also rumors suggesting the bigger of the two iPhone 6 models will carry a $100 price premium.

What if Apple gets something wrong in its upsizing of the iPhone 6 and the new iPhone fails to catch fire with consumers? What if that assumed backlog of demand isn’t really there? Maybe more of those big iPhone die-hards have given up and already switched to an Android phablet.

And that price premium for the Apple phablet — if true — may prove troublesome. The Galaxy S5 is the top seller when it comes to Android phablets — it’s the iPhone’s closest competitor. Verizon (VZ) and other U.S. carriers have dropped its price to $99.99 on contract. An iPhone 6 at the traditional $199 on contract would face a real price disadvantage on those terms, but trying to convince consumers to pay $299 for an Apple phablet compared to just $99 for Android’s top-seller would be an extraordinarily tough sell.

While Apple would rather not see a stock shortage for the iPhone 6, failing to sell out over the opening weekend or having stacks of new iPhones available immediately after launch would actually be worse. Having millions of iPhone 6 boxes accumulating in warehouses would send the message that the iPhone’s reign as the “it” smartphone is finally over, and with Apple stock so closely tied to iPhone success, the results for AAPL would not be pretty.

That being said, the odds are in Apple’s favor. Given the iPhone’s past sales record, the likelihood that a big chunk of those 70-80 million units will be sold on the launch weekend alone. And with the apparent fevered demand for an iPhone phablet, Apple’s record iPhone 6 order seems likely to pay off for the company and AAPL investors.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/07/iphone-6-release-aapl/.

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