Why Are We So Sour on Apple All of a Sudden?
Pardon me as I’m still recovering from a bit of whiplash as I work on this bit of commentary. Don’t worry, I’m fine physically—no car accidents were had or anything of that nature. Rather, over the past few days I’ve been reading commentary from industry analysts covering the launch of the Apple iPhone 8 and 8 Plus.
If I’d been born yesterday, my current take on Apple, based on everything I’ve read would have to be that this is a company that’s in a tailspin. If you have stock in Apple, I hope you sold it yesterday, because based on everything we’re seeing and hearing right now, there’s absolutely no hope for this fledgling company. Heck, since the Apple Event concluded, the company has seen its stock price drop roughly 5 percent (a near-record for post iPhone unveils), shedding the overall market valuation by roughly $50 billion, or more than the entire market value of companies like Target, eBay, and Ford…
Thankfully, I have a solid 29+ years on this earth under me and I know how to look beyond the headlines. To be clear, things aren’t necessarily peachy out in Cupertino right now—the company certainly has had some missteps with its new products launched this year. But the way the company has been covered in just the past three weeks alone will leave your head spinning.
This doom and gloom scenario that analysts are painting about Apple has (almost) everything to do with the launch of the iPhone 8 and 8 Plus. The two newest phones in Apple’s lineup went on sale of Friday, and, for all intents and purposes, they might be the biggest flops in the company’s smartphone-making history. Demand for these devices is low, like nearing historical lows. Whereas in years past you might’ve seen long lines at stores and weeks-long estimated ship dates online, this past Friday was rather calm from a retail perspective, and the furthest out ship date I could find on the Verizon Wireless website was October 10th for the Silver and Gold iPhone 8 with 256GB of storage.
The new iPhones might as well be 7s’s considering the lack of true form factor upgrades. Apple did swap out the rear aluminum backing for an all-glass back that allows wireless charging to happen. But other than that and a few camera hardware and internal upgrades , there really wasn’t much else added to these phones from last year’s model.
Meanwhile, Apple did something it hasn’t done with the iPhone in the product’s 10 year history. They introduced an entirely separate version of the device on top of the normal refresh—that being the iPhone X. The flashier pro version of the iPhone comes with the all-screen front, facial recognition technology, a new OLED display, and the street crew of being the top-of-the-line iPhone—with a top-of-the-line price tag.
In the run-up to the Apple Event last week, most analysts (Dealerscope included) seemed to agree that if any device was going to give Apple the biggest amount of trouble it was going to be the X because of its expectedly high $1,000 retail price. How were they going to convince consumers that they should drop that kind of case on a device that only lasts a handful of years and might not even be the most feature-rich on the market?
The way the current state of iPhone affairs reads, it seems to me that Apple did it’s job. They convinced consumers that they should wait for the X to hit the market before upgrading their device. The proof? Low iPhone 8 and 8 Plus preorder numbers.
The Upgrade “Super-cycle”
Thinking back on this past summer, all I can remember reading and hearing about is how this year was going to be one of the biggest years ever for iPhone upgrades. The term upgrade “super-cycle” was tossed around quite frequently because of a number of factors.
First, there’s the fact that a record number of consumers—like tens of millions—have been holding onto legacy devices. According to data from comScore dating back to the start of this year, nearly 22 million members of the iPhone carrying community has an iPhone 5s or older. Another 33.4 million still have the 6 or 6s, and an extra 15 million on top of that have the 6 or 6s Plus. All told, roughly 70 million consumers have an iPhone that’s at least two years old in their pocket right now. That number, according to Forbes estimates, translates to about 82 percent of all iPhone users in the U.S. If all decided to upgrade, we’d be talking record numbers right there.
Second, there’s the excitement factor driven by the fact that this is the 10th year of the iPhone. Apple, looking to capitalize on that moment, decided to release the anniversary edition iPhone X. During the event, CEO Tim Cook touted the device as the future of the iPhone. We may have to wait until next year’s Apple Event to understand what he meant by that, but for right now it means that this is a device that Apple is banking on in order to make some serious bank. Research firm IDC estimated nominal 1.5 percent YoY growth for the iPhone in 2017—a considerable improvement over the 7 percent decline in 2016. However, in 2018 Apple could see growth at around 9.1 percent, according to IDC. And that growth will likely be driven by the iPhone X.
Analysts at Morgan Stanley said they expect a record 245 million iPhones to sell during fiscal 2018—a 13 percent increase over this year, which ends on September 30. That number will be dominated by the iPhone X, which the firm said should account for roughly 45 percent of sales by unit. The iPhone 8 and 8 Plus combined should account for 47 percent.
Lastly, there’s the price factor for the iPhone X. Yes, it’s high, there’s no arguing that. But from a profitability and revenue-driving perspective, Apple is set up to absolutely crush its 2018 fiscal year if everything pans out the way it should with the anniversary device. Supply issues could hold the device and company back from its full potential as FY18 gets under way, but if the Morgan Stanley estimates hold true, the company is set to cash in on a product that should have high return from a revenue perspective.
One estimate places the cost to produce the iPhone X at around $581, which doesn’t account for potential cost savings Apple may have secured through contract negotiations for parts, and so on. The profit margin on the iPhone X is actually lower on a percentage basis than the iPhone 7, which costs around $250 to make, but would still generate a larger revenue total.
Bottom line, the negative coverage over the past few weeks on Apple’s iPhone launch seems rather overblown. If we’re still sitting here six months from now and demand is still this low across the entire iPhone lineup, then there might be cause for concern. But right now, with the iPhone X still a few weeks away from preorder availability, analysts are too eager to publish clickbait headlines.