Everyone was looking forward to the new iPhone 8 and 8 Plus from Apple Inc. (NASDAQ:AAPL). After introducing the two phones, AAPL unveiled the iPhone X.
All of them are gorgeous devices, without a doubt. But not everyone is onboard with upgrading. I was like many others, holding onto an iPhone 6, waiting for something to really change my mind. I thought, if the 8 is amazing, I will get it. If it feels “meh” I’ll buy the 7 which will now be at a discount. While demand is “off the charts” for iPhone X so far, the 8 isn’t looking too hot.
Apple’s iPhone 8
Like many others, I thought the 8 and X would lead to an iPhone super-cycle. It still probably will. But in the short-term, there could be some struggle. In the fiscal third quarter, the iPhone 8/8 Plus represented just 16% of sales, according to surveys. Consider that the 7/7 Plus represented 43% of sales in a similar period, while the 6/6 Plus stood at 46%. Because the iPhone X was not available, this could lead to a disappointment in sales, earnings and margins in the short-term.
The jump from the 6 and 6S to the 7 was notable. But the improvements from the iPhone 7 to iPhone 8 aren’t, really. The 8’s processor is faster, supports (but does not come standard) with wireless charging and it has some cool photo software. But the battery life, camera quality, weight and size don’t really improve from the 7. Plus, a lot of people remain skeptical of the 8’s glass back as opposed to the metal backing of the 7.
In all, why pay $699 for an iPhone 8 if you can get the very similar iPhone 7 for $549? Further, for a similar price to the iPhone 8, consumers can get the 7 Plus, or the 7 with more memory.
Decluttr, a technology recycling site, has already noted a sharp increase in iPhone 8/8 Plus trade-ins. This is unusual, given that the device just came out. Admittedly though, Apple also doesn’t typically release a standard, plus and super model in the same cycle, either. It’s good news in that there is obvious pent-up demand for the more expensive iPhone X. It’s bad news in the sense that these consumers are finding that the iPhone 8 (apparently) wasn’t worth the purchase.
While there are risks with the iPhone 8, the iPhone X looks promising. With a starting price target of $999 and obvious demand for the new device, Apple’s average selling price (ASP) should be elevated quite a bit.
The risk here is that the iPhone 8/8 Plus is a dud, from a sales perspective, as consumers opt for either the iPhone X or the iPhone 7/7 Plus. Perhaps between the low-priced iPhone 7 and the high-priced iPhone X, these ASPs will still drift higher over time. In fact, they very well should move higher given that a $999 iPhone (starting price) has never been available.
It might take time to get there, though. According to recent reports, Apple has had production issues with the iPhone X. Those reports suggest AAPL will ship just 20 million units in 2017, half of what it originally planned. That’s bad news for the bulls who were looking for a mega-holiday quarter.
For those who think longer than quarter-to-quarter though, Apple should be just fine.
Impact on AAPL Stock
Given these new realities, strength for the iPhone 7/7 Plus and production issues for the iPhone X, AAPL stock has actually been trading well. AAPL stock price today is just $2 away from its all-time high near $165. However, AAPL earnings are due up on Nov. 2, where investors will get a big look at how iPhone sales are coming along.
Over the short-term, there could be risk to Apple stock. But do keep in mind how this tech behemoth has weathered the storm before. It will sort out any production issues. After all, that was Tim Cook’s specialty before becoming CEO. It still has the iPad, Mac and Apple Watch, all of which should do well through the holidays and ever-important fourth quarter. There’s still the AAPL dividend yield of 1.55% to collect.
Revenue, earnings and cash flow won’t be an issue over the long term. Might it come up a little short or more volatile than investors expect this quarter? Sure. And could AAPL stock find itself back in the $140s? Of course. But long-term investors don’t need to think too hard about whether to buy that dip or not.
The truth is, there’s a massive upgrade cycle and it’s finally here. Whether consumers are buying the iPhone 7, 8 or X, ASPs should increase, along with margins and earnings. Apple will be fine and investors don’t have to worry about Samsung Electronic (OTCMKTS:SSNLF) or Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) taking share.