Apple Inc. (NASDAQ:AAPL) is not enjoying the fall 2017 iPhone launch bonanza the company and its investors had been hoping for. With iPhone 8 sales looking weaker than expected, hope had shifted to the iPhone X.
However, rumors won’t go away that continued production issues will constrain availability. And now, there is a report that Apple has cut component orders with iPhone X suppliers, suggesting the company may be anticipating lower demand for its $999 ultra-premium flagship. Amid the uncertainty, AAPL stock is now down over 8% from its Sept. 1 pre-iPhone event high.
Going into the September Apple event, many analysts had been calling for an iPhone upgrade “super cycle.” Apple’s iPhone sales have been slowing, but part of that effect may be because the previous three iPhone releases looked virtually identical to each other. In other words, an iPhone 6 from 2014 looks almost the same as the iPhone 6s and 2016’s iPhone 7.
With no visual cue that the new iPhones are the latest and greatest, the theory goes, many Apple fans have been holding onto their existing iPhone instead of upgrading.
The iPhone X was meant to goose sales in a big way. While the iPhone 8 would capture the usual upgrade cycle, the iPhone X — which looks completely different than any iPhone before — would spur many long-time holdouts into not only buying a new iPhone, but paying a big premium.
Problem 1: iPhone 8 Sales Appear to be Lower Than Expected
Apple is not releasing iPhone 8 sales numbers, but last week when the iPhone 8 officially hit store shelves, there were worrying signs. Lineups at Apple Stores were smaller than usual, and the new iPhone remained readily available online. AAPL stock continued the slide from where it began at the start of the month.
Lower iPhone 8 sales would not be a problem — in fact, they’d be great news — if the higher priced iPhone X was stealing those sales. But with iPhone X pre-orders still a month away, no-one knows for certain if that’s the case.
Problem 2: iPhone X Production Issues
The rumors simply won’t go away that Apple is having production challenges with the iPhone X. For months, there has been concern that ongoing problems would result in constrained iPhone X supply at launch and into 2018. The latest reports on that matter are pointing to the TrueDepth camera system that powers the new iPhone’s face ID security as being the problem.
Until Apple resolves the production issues, low iPhone X availability can de-rail that upgrade super cycle. Frustrated customers might pick the iPhone 8 instead or simply wait out this year altogether and delay their purchase until the 2018 iPhones are announced. Both scenarios wreak havoc with the upgrade super cycle concept.
With Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google about to announce the next generation of its highly regarded Pixel Phone, there’s a bigger risk than ever that some frustrated customers may actually jump ship to Android if they can’t get their hands on an iPhone X.
Problem 3: Apple Reportedly Cutting Orders from iPhone X Suppliers
Adding to the concern over the iPhone X, reports began emerging on Monday that Apple has told iPhone X suppliers to cut their shipment of components to just 40% of the original order volume.
There are two ways to read this, one bad and one worse.
In the first scenario, that TrueDepth camera is causing such a bottleneck that Apple doesn’t anticipate being able to ramp up to full production volume any time soon. In that case, iPhone X availability remains constrained for an extended time and we’re back to the risk of potential buyers giving up.
In the second scenario, Apple has read the tea leaves and decided that the demand just isn’t there. It’s telling iPhone X suppliers to cut component shipments because it expects to sell far fewer iPhone X smartphones than it originally planned.
Whatever is going on with the iPhone 8 and iPhone X, the hoped for upgrade super cycle seems to be in jeopardy at this point. If it happens at all, it may be stretched over multiple quarters as Apple works to keep up with iPhone X demand. In the meantime, the uncertainty is reflected in AAPL stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.