Apple Might Have To Bank On Older iPhones To Drive Holiday Sales

by Trefis Team
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Earlier this month,  Apple (NASDAQ:AAPL) launched the iPhone 8, which is essentially an upgraded version of the iPhone 7, as well as the all-new iPhone X. While the devices look impressive, Apple could find itself in a tricky situation over the holiday quarter amid significant undersupply of the iPhone X – which is apparently facing production issues – and potentially tepid demand for the iPhone 8, which customers view as being very similar to prior iPhones. That said, we still expect the company’s holiday sales to grow year-over-year driven by a larger lineup of iPhones (two current generation devices and three legacy models).

We have a $164 price estimate for Apple, which is slightly ahead of the current market price.

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Early Indicators Point To Weak iPhone 8 Demand

The iPhone 8 hit stores last week. While Apple has stopped releasing first-weekend sales figures, there are multiple indicators that the device is seeing weaker demand compared to prior iPhones. The iPhone 8 carries forward the iPhone 6’s basic design for the fourth consecutive year  (albeit with a glass back) and it’s likely that customers are viewing it as being too similar to older devices. Moreover, Apple has increased base prices on the 8 and 8 Plus (up $50 and $30 over the iPhone 7 and 7 Plus). Carrier promotions have also been weaker (mostly trade-ins) compared to last year. While new iPhone models typically take multiple weeks to ship after they are made available for pre-order, waiting times for the iPhone 8 are significantly shorter, with most models currently shipping in just a few days. The lines outside of Apple’s flagship stores were also reported to be somewhat muted on launch day compared to previous iPhones.

iPhone X Demand Will Be Strong, Supply Likely To Be Limited

While many customers are likely to forgo the iPhone 8 in favor of the iPhone X, which launches on November 3, the device is likely to remain significantly undersupplied.  The Wall Street Journal reports that Apple’s suppliers are facing issues with the production of the 3-D sensing modules that the device employs for its signature face-based unlocking feature. Moreover, Apple’s sole OLED display supplier Samsung is apparently not able to produce enough displays for the new device. KGI Securities estimated that Apple’s contract manufacturers were only able to build about 10k units of the iPhone X per day. Although Apple plans to launch the device in more markets compared to previous iPhones (55 markets for iPhone X versus 29 for iPhone 7), volumes could remain soft through early 2018.

Large Portfolio Of Legacy Devices Could Bolster Sales

That said, we still expect Apple’s iPhone shipments over the holidays to grow year-over-year, driven partly by its older iPhone models. Unlike previous years, when Apple typically nixed the oldest or lowest-spec device in its lineup to make room for new iPhones, the company is offering three legacy devices this year. The iPhone SE now starts at just $350, and the iPhone 6S and iPhone 7 – which are visually quite similar to the iPhone 8 – start at $450 and $550, respectively.  These devices could appeal to many mainstream customers, as they are functionally very similar to the more expensive iPhone 8 and X. Apple may also be willing to sacrifice ASPs in favor of margins, given that both the iPhone 8 and X are fairly expensive to build. For instance, components on the iPhone X could cost Apple between $413 to $581, according to various reports, almost twice as much as typical iPhones. Legacy devices such as the iPhone 6S, which has been in production for close to two years, could have better production yields and lower components costs, translating into relatively healthy margins.

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