Why Apple Investors Shouldn't Panic Over iPhone X Supply Issues
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Version 0 of 1. Since hitting an intraday high of $163.96 on Sept. 12 -- the day of its iPhone event -- Apple Inc. (AAPL) shares have fallen about 5%, even as the Nasdaq has added to its big 2017 gains. Between the iPhone X's later-than-expected ship date and widespread reports of production challenges, it's safe to assume that most Apple investors have some idea as to why this has happened. But for a few different reasons, there's little need for investors to panic over the issue. Especially not at this point in time. To recap: The iPhone X -- edge-to-edge OLED display, TrueDepth face-unlocking camera and all -- won't see pre-orders start until Oct. 27, and won't see deliveries start until Nov. 3. And all signs suggest the phone will be pretty supply-constrained early on. KGI Securities analyst Ming-Chi Kuo and Japan's Nikkei reported in September that only "tens of thousands" of X units were being made daily, and Raymond James had indicated mass-production would only start in mid-October. Various reports have blamed the manufacturing issues on challenges in producing the TrueDepth camera. The Wall Street Journal specifically put the blame on the assembling of infrared dot projector modules used by the camera. Given how much pent-up demand there is for the X, the supply issues raise the risk Apple won't be able to hit September quarter guidance for revenue of $49 billion to $52 billion, which implies 7% to 11% annual growth. There's also downside risk to analyst estimates for the quarter. On average, analysts polled by FactSet still expect September quarter revenue of $50.8 billion, and their consensus EPS estimate for the quarter has only dropped by a penny since Apple's event to $1.87. Though survey numbers have varied, they've generally shown stronger purchase intent for the iPhone X ($999 starting price) than for either the iPhone 8 ($699) or the 8-Plus ($799). Current shipping times for 8 and 8-Plus orders -- they're typically less than two weeks for U.S. models -- also suggest that many iPhone owners are waiting for the X. Kuo has estimated iPhone X pre-orders could be in the 40 million to 50 million unit range. The big risk for Apple: If iPhone X shipping times quickly balloon in late October and major supply constraints last through the end of 2017, a number of would-be buyers could choose to buy something else during the seasonally big holiday season. For now, analysts on average still expect 82 million calendar Q4 iPhone sales, up from 78 million a year earlier. They also foresee the iPhone X helping to lift Apple's iPhone average selling price (ASP) to $746 from $695. But with iPhone X deliveries due to start in early November, Apple still has some margin of safety to meet at least a large portion of Christmas demand. Just as importantly, should a frustrated would-be iPhone X buyer choose to buy something else rather than wait, sky-high iPhone loyalty rates -- a product of high customer satisfaction, a powerful brand and above all else the stickiness of Apple's ecosystem -- make it quite likely that he or she will still get another iPhone. That's not an ideal situation for Apple, given how much more the iPhone X costs than the iPhone 8 or 8-Plus. But it's far from a worst-case scenario. Especially after accounting for how all iPhone users are candidates to be monetized via the burgeoning services businesses that rely on Apple's iOS base. Samsung's Galaxy Note 7 fiasco serves as a good reference case here. Though it gave Samsung a much bigger PR black eye than mere iPhone X supply constraints would give Apple, it looks as if a large portion of Note 7 demand wound up being shifted to other Samsung phones -- in the short-term to the Galaxy S7/S7 Edge, and later to the Galaxy S8/S8+ and Note 8, both of which have sold well. Note 8 pre-orders were about 150% higher than Note 7 pre-orders. Also worth keeping in mind: While the holiday season certainly matters, a large portion of the iPhone X "super-cycle" has long been expected to play out in 2018. On average, analysts expect 160 million iPhones to be sold during the first three quarters of calendar 2018, up from 139 million during the first three quarters of calendar 2017. The odds of Apple being able to meet the iPhone X demand implied by those estimates is pretty good. Lastly, it's worth keeping in mind that while this year's rally has led many tech darlings to be priced for perfection, Apple arguably isn't one of them. Shares currently trade for 14 times a fiscal 2018 (ends in September 2018) GAAP EPS consensus of $10.95. And that's before accounting for the $154 billion ($30 per share) in net cash on Apple's balance sheet (much of it admittedly offshore). Thus, if Apple's iPhone X supply issues lead to an "imperfect" September quarter earnings report, one in which the company misses estimates and offers measured December quarter sales guidance, it's not a given that markets will respond very harshly. Just as long as it's clear that consumer demand for its latest flagship is strong and that those in the market for an iPhone X will still generally be getting some kind of iPhone. More of What's Trending on TheStreet: |