Why Investors Shouldn’t Worry About iPhone X Shipment Forecast Cuts

Apple’s (NASDAQ:AAPL) new iPhone X could see shipments slow down meaningfully after the initial wave of demand from early-adopters and holiday shoppers dies down. A Taiwanese newspaper, Economic Daily News, reported that Apple has cut its sales forecasts for the quarter ended March to 30 million units, while another report from JL Warren Capital indicates that shipments of the device could drop to 25 million units in the first quarter of 2018 from about 30 million units in the fourth quarter of 2017. Although the developments are not entirely surprising, given the device’s high price point and relative lack of breakthrough features, we do not think that it will prove significantly negative for Apple’s stock for multiple reasons.

We have a $180 price estimate for Apple, which is slightly ahead of the current market price.

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Higher ASPs, Apple’s Ecosystem Lock-In 

Firstly, we believe that a ~ 25 million shipment figure for the iPhone X over the Q1 CY’18 would actually be quite respectable. Apple typically ships about 50 to 55 million phones over the quarter, indicating that the iPhone X could make up close to 50% of its sales mix. The $1,000 starting price of the device should enable Apple’s ASP’s to grow meaningfully year-over-year. Moreover, it’s unlikely that iPhone customers will defect to other platforms, even if sales of the iPhone X are lower, considering Apple’s ecosystem lock-in and high switching costs as well as the company’s decision to offer a larger line up of iPhones (two current generation devices and three legacy models) that appeal to buyers at various price points.

Margins Could See Some Improvement As Yield Rates Rise

Apple’s margins on the new device could also improve with time.  The iPhone X is reportedly more difficult to manufacture compared to previous iPhones, on account of its all-screen design and depth-sensing cameras. However, supply-demand balance on the new device appears to have been reached and it’s likely that yield rates have also improved, potentially helping to cut production costs and improve margins. This could give Apple some headroom to offer some discounts via carriers and channel partners if sales slow down over the next few quarters. (related: iPhone X Is More Lucrative To Apple Than Previously Estimated)

iPhone X Helping Apple Regain Some Traction In China

Moreover, interest in the iPhone X appears to be strong in China, a market where Apple has lost ground to local smartphone vendors in recent quarters. According to a survey by RBC Capital Markets conducted in early December, 62% of 646 Chinese respondents were interested in buying the iPhone X, which is more than double the rate of interest for U.S. respondents. The Chinese market could account for roughly a quarter of iPhone demand during Q4 CY’17, according to JL Warren Capital.