The Reports of iPhone X Order Cuts Make No Sense
For most of 2017, Apple(NASDAQ: AAPL) stock moved steadily higher. However, the iPhone maker stumbled in the last week of the year, due to several reports suggesting that demand for the new iPhone X isn't living up to expectations.
There's bound to be some level of uncertainty about how the iPhone X is doing until Apple releases its next earnings report. (Even then, management isn't likely to report iPhone X sales separately.) Still, the doom-and-gloom claims that captured a lot of media attention last week are almost certainly inaccurate.
Is Apple slashing iPhone X orders?
Last Monday, Taiwan's Economic Daily News spoiled Apple shareholders' Christmas by reporting that the company had cut its iPhone X sales forecast for the upcoming quarter by a stunning 40%. The new forecast is 30 million, down from 50 million, according to the report.
At least two other Asia-based analysts also reduced their iPhone X shipment estimates recently, according to India's The Economic Times. They joined a recent chorus of analysts who have argued that the iPhone X doesn't have enough innovative technology to justify its high price point.
Several publications have claimed recently that iPhone X demand is fading. Image source: Apple.
However, other analysts have cast doubt on these bearish reports. The week before Christmas, prominent analyst Katy Huberty of Morgan Stanley named Apple her top pick for 2018, based on rising demand for the iPhone X in China. Meanwhile, Jun Zhang of Rosenblatt Securities stated that the Taiwanese media reports may have erroneously referred to the iPhone X, and that the cuts actually related to the cheaper iPhone 8 and iPhone 8 Plus models.
Less to these reports than meets the eye
The recent reports alleging that Apple is slashing its sales projections for the iPhone X are based on supply chain data, which is notoriously unreliable as a predictor of iPhone sales. Yet the most widely covered report -- the one stating that Apple had cut its iPhone X sales forecast from 50 million to 30 million -- is particularly suspicious.
To be quite blunt, the idea that Apple might sell 50 million iPhone X units next quarter is highly implausible. Given that the model has a starting price point of $999, unit sales of 50 million would translate to more than $50 billion of revenue. Including the rest of Apple's iPhone models and its other product lines, this would imply quarterly revenue of close to $100 billion, up from $53 billion a year earlier.
For comparison, even the most bullish analyst on Wall Street expects Apple's revenue to hit "only" $83 billion next quarter. The average revenue estimate is around $69 billion. Thus, it's extremely unlikely that Apple ever expected to sell 50 million iPhone X devices next quarter. This in turn suggests that the sources for this report aren't reliable.
The downside scenario investors fear wouldn't be so bad
Shipping about 30 million iPhone X units next quarter would actually be a solid result for Apple, given that other models are also selling reasonably well. Indeed, the X accounted for only 30% of U.S. iPhone sales in its first month of availability, according to a recent report from research company CIRP.
That figure was probably depressed due to supply constraints. It's also possible that the iPhone X represents a higher percentage of iPhone sales outside the U.S., especially in status-conscious China. Yet even if the iPhone X accounts for 40%-50% of the mix next quarter, it would imply 60 million-75 million total iPhone shipments -- assuming that Apple does ship 30 million iPhone Xs -- up significantly year over year.
Thus, the reports that Apple shareholders seem to have panicked about aren't very worrisome. iPhone sales may not be meeting the most bullish pundits' forecasts, but iPhone X usage has been rising at a steady rate, according to analytics company Mixpanel.
Usage statistics also indicate that combined sales of the three new models are roughly in line with the level of iPhone 7/iPhone 7 Plus sales last year. With older models selling better this year (due to higher price tags for the 2017 models), average selling prices rising, and non-iPhone revenue increasing strongly, there's potential for strong revenue and earnings growth at Apple.
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Adam Levine-Weinberg owns shares of Apple and is long January 2018 $90 calls on Apple, short January 2018 $140 calls on Apple, and short February 2018 $160 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
