Analyst: Don’t freak out about iPhone 8 production cuts

An October transition from iPhone 8 to iPhone X was part of Apple’s plan, says Raymond James’ Tavis McCourt.

From a note to clients that landed in my inbox Thursday:

Thoughts On Media Speculation on iPhone 8/Plus Cuts: Although Wall Street wants answers, the uncomfortable truth is that no one, not even Apple, knows exactly what the demand will be like for this iPhone cycle. We do know that Apple’s production plans included manufacturing a disproportionate amount of 8/8 Plus in August-October, and then transitioning production to the iPhone X. Therefore, news stories that indicate iPhone 8/8 Plus production is being cut, are simply not meaningful to understanding iPhone demand in totality.

Based on Verizon results and a few other data points, we suspect iPhone 8/8Plus demand globally is probably ~30% lower than the iPhone 7. Whether this is great or horrible is unknown yet, because no one knows what the demand for the X will be. However, we would say demand levels we are seeing with the 8/8 Plus appear consistent with our assumptions, which assume a ~60/40 split between iPhone 8/8 Plus and iPhone X over the course of fiscal 2018. As a reminder, September and December quarters will be more skewed towards 8/8Plus in terms of apple revenue recognition, and March and June quarters likely more skewed towards the X.

My take: Makes sense. Puts this morning’s headlines in perspective. See Why is Apple down? Let us count the explanations.

5 Comments

  1. Kathy Corby said:
    Oh for heaven’s sake. The “smart money” needed a pullback to be able to close their shorts at a profit. (Actually, so did I– the melt up left me with some short calls almost in the money.) Tomorrow’s “max pain” (the stock price which produces the greatest loss to retail options buyers and sellers) is 155. So expect the sell side analysts to break out the favorable notes on Monday morning, and we’ll be off to the races again. The only real surprise here is that Tavis McCort got out of the gate a little early.

    0
    October 19, 2017
  2. Robert Paul Leitao said:
    It’s likely Apple is transitioning production lines from the manufacture of iPhone 8 series handsets to the iPhone X. The iPhone 8 series handsets represent a 4th year of production of a familiar form. Scaling production of the iPhone 8 models for launch demand is far less problematic than ramping production of the iPhone X to meet initial demand.

    Production capacity is limited and Apple has a well known practice of not contracting for short-term production capacity. Doing so would be very expensive and highly inefficient. The company walks down the cost curve on new iPhone forms put into production but that takes time. Preserving margin is an operational imperative.

    There is absolutely nothing alarming or even newsworthy as Apple shifts production lines from the iPhone 8 to the iPhone X as we approach the release date. This move should have been widely expected by anyone who closely follows the company.

    The smartphone market on a global basis has entered a mature market phase. Responding to market conditions, Apple has the broadest array of iPhone models available for purchase in the product line’s history. There are iPhone models available at just about every price point at which the company can maintain adequate margin. Apple will not capitulate on price or sacrifice margin for the sole purpose of selling more units.

    The so-called iPhone super cycle isn’t a short-term event. The cycle will continue beyond the current fiscal year as the company attracts new customers at different price points, expands margins and takes advantage of the declining value of the dollar.

    If there’s any “news” here it’s that non-news is increasingly becoming “news.” Apple isn’t the most highly valued company in the land by happenstance or by mistake. The company is not in the business of disappointing customers. Anyone who wants an iPhone X will have an opportunity to buy one even if satisfying initial demand takes a few weeks or a fews weeks more than a few weeks.

    2
    October 20, 2017

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